Going Separate Ways
Consider this scenario: One of your employees assaults a customer, and that customer sues the employee, the company and you. But your liability coverage excludes intentional bad acts. Does this mean you are on the hook for legal fees and damages? Not necessarily, says attorney Richard Zevnik, an associate with Berger Kahn in Irvine, California.
Most business policies contain a "severability" or "separation of insureds" clause, which means that if there are multiple defendants in a lawsuit, the insurance company could deny or limit coverage on one and not on others. So you and the company could be covered for vicarious liability, but the employee who committed the assault may be denied coverage.
"You've got to analyze your coverage under the policy as to each insured who has been made a defendant in a lawsuit as if they were the only insured," says Zevnik.
A similar clause is standard in directors and officers (D&O) policies. The language protects innocent insureds if another director or officer made a misrepresentation on the application or engaged in wrongful conduct that would result in a denial of coverage.
Considering that most lawsuits these days include multiple defendants, a clear understanding of severability will help you manage your risk more effectively.