Cross-Liability Coverage: Examples in Insurance

What Is Cross-Liability Coverage?

Cross-liability coverage is a clause in a commercial insurance contract. When an insurance contract covers multiple parties, cross-liability provides coverage for both parties if one makes a claim against the other.

Cross-liability coverage treats the different parties—covered under the same contract—as if they have their own separate policies.

Key Takeaways

  • Cross-liability means that one insured party can sue another insured party when both parties are under the same policy.
  • Cross-liability clauses are typically standard in a commercial general liability policy.
  • However, some policies may exclude certain situations—one company director suing another, for example, or lawsuits brought by a company against its directors.

Understanding Cross-Liability Coverage

When two covered parties secure cross-liability coverage, one insured party can sue another insured party even when both parties are under the same policy. Standard liability insurance typically includes a cross-liability clause known as a "Separation of Insureds" agreement.

An insurance contract that includes cross-liability coverage will typically have phrasing similar to this: “Every insured claimed against under this policy will be treated, at the time of the claim, as if they were the only insured under the policy.”

Commercial insurance contracts typically have cross-liability coverage. The clause allows the different parties included in the contract to be treated separately in certain situations (while in other situations, they are treated the same).

In a case where the parties are treated separately during a claims suit, they are not all given a separate coverage limit. This difference means that an aggregate limit still applies to the total coverage provided by the policy. Business liability insurance policies may exclude coverage for intercompany lawsuits, thus eliminating the "Separation of Insureds" feature in some cases.

For example, the founding partners of a law firm may sue each other for damages or injuries that each party insists that the other caused. Companies that want to insure against this type of risk will have to purchase an intercompany product suit exclusion.

Many commercial general liability insurance policies already have language addressing cross-liability coverage and do not have exclusions for this type of event. Since no exclusion is involved, a separate endorsement is unnecessary. However, some liability policies contain insured-versus-insured exclusions that effectively eliminate cross-liability coverage.

Example of Cross-Liability Coverage

Suppose there is an automobile company that shares a liability policy with its subsidiaries, which manufacture various parts. The parent company is responsible for assembling the vehicle, while the subsidiaries make the components. Because of a faulty part in one of the cars that the automobile company manufactures, a number of road accidents occur. This results in claims made against the automobile manufacturer. Under the Separation of Insureds feature of the cross-liability coverage policy, the parent company sues one of its subsidiaries.

The cross-liability endorsement is one reason general liability insurance is so important to protect the financial assets of any business.