Cross liability and severability of interest are clauses in commercial insurance contracts. These clauses mean that the insurance policy applies separately to each insured party. However, the total policy coverage usually applies collectively to all the insured parties. Insurance policies may also contain severability clauses for directors and officers to limit their collective liabilities if there is a claim against one of them.
A cross-liability clause provides insurance coverage for claims of one of the insured parties against another. For example, if there is a conflict between the two founding partners of a business and one decides to sue the other, cross liability in their company's insurance coverage should protect both partners. This clause is usually standard in a commercial general liability policy. However, some policies may contain insured-versus-insured exclusions that eliminate certain types of situations, such as one director suing another, internal disputes and lawsuits brought by a company against its directors.
Severability of Interest
A severability-of-interest clause stipulates that the insurance policy clauses apply separately to each insured entity. It is similar to the cross-liability clause in that a claim by one of the insured parties against another is covered. The International Risk Management Institute explains that some insurance policies may specify separate coverage limits for each insured party. For example, a chief executive officer may have a different, and possibly higher, insurance coverage than any of the other executive officers or board members.
Severability for Directors and Officers
Severability clauses exclusively for directors and officers protect them from liability if one of them knew that the application for insurance coverage contained material errors. In other words, this clause means that when a company applies for insurance coverage for its directors and senior executive officers and one of the officers or board members knows that the financial data provided with the application is materially false, the insurer cannot bar the other directors and officers from coverage.
Severability of Exclusions
A severability-of-exclusions clause means an exclusion that applies to some insured parties under an insurance policy does not necessarily apply to others. For example, an insurance policy for directors may contain exclusions for fraudulent and other criminal acts, which means that if a director commits one of these acts, he loses coverage. The severability-of-exclusions clause indicates that exclusion would not automatically extend to the other directors on the board.