Expert Commentary

The 2004 ISO CGL Policy

In March 2004, Insurance Services Office, Inc. (ISO), began filing a revision of the standard commercial general liability (CGL) insurance coverage form, scheduled for implementation with policies written or effective on or after December 1, 2004. This article looks at the most significant revisions.

Liability Insurance
April 2004

In March 2004, Insurance Services Office, Inc. (ISO) began filing a revision of the standard commercial general liability coverage form, other miscellaneous general liability coverage forms, and endorsements for use with these forms. The changes are scheduled for implementation with policies written or effective on or after December 1, 2004. This article will look at the most significant revisions to the CGL form itself; a subsequent IRMI Insights article will examine the new or revised miscellaneous coverage forms and endorsements.

Mobile Equipment and Statutory Insurance Requirements

Although the CGL policy excludes liability arising out of the use of owned "autos," that exclusion does not apply to vehicles that meet the policy’s definition of "mobile equipment." Mobile equipment comprises vehicles incapable of operation on public roads (heavy construction cranes, for example); vehicles that are designed for use off public roads but can nevertheless be driven on public roads (farm tractors, bulldozers); and vehicles that would ordinarily be considered "autos" except that they are "maintained for use solely on or next to" the named insured’s premises (a farm pickup truck that is never driven off the farm). The operation or use of any such vehicle is a general liability—rather than an auto liability—exposure, and is covered under standard commercial general liability policies.

In some states, certain vehicles in the last two categories mentioned above—and particularly certain kinds of farm or construction equipment—are subject to motor vehicle registration requirements and to the state’s financial responsibility or compulsory insurance laws. Historically, general liability insurers have been willing to tailor the CGL policy to meet any statutory insurance requirements to which covered mobile equipment was subject. A standard endorsement, CG 99 01, was developed specifically for that purpose.

The scope of compulsory insurance and financial responsibility laws has expanded significantly during the last couple of decades, now encompassing in most states such coverages as uninsured motorists and personal injury protection, which applies without reference to conventional principles of legal liability. As a result of these changes, many insurers have come to regard the operation of registered mobile equipment as an auto rather than a general liability exposure. Recognizing that fact, ISO has decided to remove coverage in connection with these vehicles from the CGL policy, leaving them, by default, as an exposure to be insured by a business auto or other commercial automobile policy. To accomplish this move, three changes to the CGL coverage form have been necessary.

The policy’s definitions of "auto" and "mobile equipment" have been modified to state that land motor vehicles subject to any motor vehicle insurance law are not "mobile equipment" —even if they otherwise fall within one of the defined "mobile equipment" categories—but have the status of "autos" under the policy. The primary result of this change is to bring such vehicles within the policies "aircraft, auto or watercraft" exclusion.

The "aircraft, auto or watercraft" exclusion has been modified to preserve coverage for the operation of equipment attached to vehicles that no longer qualify as "mobile equipment" under the revised definitions discussed above. This is in keeping with the traditional coordination of coverage between general and auto liability policies with respect to equipment attached to vehicles. The "over-the-road" exposure falls under the auto policy, while the operation of the equipment remains a general liability exposure. For example, a truck with attached cherry picker or air compressor is an "auto," and operation of such a truck is excluded under the CGL; but liability arising out of the operation of the cherry picker or compressor itself is not excluded.

In the same way, the "aircraft, auto or watercraft" exclusion of the 2004 CGL will make an exception for machinery or equipment "attached to, or part of, a land vehicle that would qualify under the definition of ‘mobile equipment’ if it were not subject to" a motor vehicle insurance law. In other words, a backhoe that is subject to its state’s compulsory insurance law will be an "auto," and its operation will be excluded from CGL coverage. But the operation (e.g., at a job site) of the arm and bucket will still be covered by the CGL policy.

Regarding the operation of mobile equipment that is subject to motor vehicle registration, the CGL policy extends insured status to anyone operating such equipment "along a public highway" with the named insured’s permission. (In this respect, the current CGL policy provides the same permissive-user coverage found in commercial automobile policies.) Since the operation of such vehicles will not be covered at all under the 2004 revision, this section of the "Who Is an Insured" section of the policy is being deleted.

"Other Insurance," Additional Insureds, and Completed Operations

A perennial challenge for CGL insureds who also have coverage under someone else’s policy as an additional insured has been making sure that the additional insured coverage will respond first to a loss covered by both policies. The current CGL "Other Insurance" condition addresses this problem by stipulating that the policy is excess over "any other primary insurance available to you covering liability for damages arising out of the premises or operations for which you have been added as an additional insured by attachment of an endorsement." That language is a specific reference to a standard additional insured endorsement (like ISO’s CG 20 10) that provides coverage to an additional insured for the named insured’s "ongoing operations," but not for products or completed operations.

Last year a new endorsement—CG 20 37—was introduced by ISO, by means of which the additional insured may also be covered for claims that arise out of the named insured’s work and fall within the products-completed operations hazard. To avoid any suggestion that the additional insured’s own policy is not excess over that products-completed operations coverage as well, the "Other Insurance" condition is being revised to make reference both to premises and operations, and to products and completed operations.

The Pollution Exclusion

The CGL pollution exclusion contains an exception which preserves coverage for bodily injury caused by fumes from building heating equipment (e.g., carbon monoxide from a defective furnace). Without the exception, the policy’s definition of "pollutants," which specifically includes "fumes," would be broad enough to eliminate coverage for such claims. Since the introduction of the heating equipment exception, questions have arisen regarding the policy’s coverage intent with respect to air-conditioning equipment, and at least one bodily injury claim resulting from fumes emitted by a defective water heater has resulted in a high-profile coverage dispute ultimately decided by a federal circuit court: Admiral Insurance Co. v Feit Management Co., 321 F3d 1326 (11th Cir 2003). That decision held that the exception for "equipment used to heat a building" was not broad enough to apply as well to a water heater, even if the toxic fumes were carried through the building by heating ducts.

In light of these coverage disputes, ISO is rewriting the building heating equipment exception to make specific reference to equipment that is used "to heat, cool or dehumidify the building, or equipment that is used to heat water for personal use, by the building’s occupants or their guests."

Electronic Data Exclusion

For several years, the issue of liability for damage to or loss of electronically stored data was a contentious one under general liability policies. For insureds whose businesses created the possibility of damaging or destroying another entity’s computerized records or software, a number of exclusions were developed for use with the CGL policy. These endorsements specifically addressed errors and omissions exposures for software developers and manufacturers, programmers, data processing services, and consultants—the businesses that were perceived at the time to have the greatest liability exposure for damaging a third party’s electronic data.

With the advent of the Internet, which effectively created the possibility of links between any two computers (and any two databases) in the world, the liability exposure increased astronomically. Any person or business with a Web site is now subject to claims that an interface or download with another computer caused damage to the latter’s data or software.

In response to this dramatically increased exposure, ISO developed a CGL coverage option—electronic data liability endorsement CG 04 37—and at the same time modified the CGL "property damage" definition to stipulate that "electronic data is not tangible property." The result of that revised language was to eliminate coverage for direct damage to electronic data and coverage for the loss of use of data that are not physically injured, by removing such losses from the scope of "property damage."

As part of the 2004 CGL revision, ISO has now introduced additional language intended to restrict coverage in connection with loss of electronic data. The new language becomes exclusion "p" of the policy’s Coverage A, and eliminates coverage for "damages arising out of the loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data." Whether this new exclusionary language eliminates any coverage not already eliminated by the stipulation that "electronic data is not tangible property" (and therefore not a subject of "property damage" coverage) remains unclear. Does it, for example, address one possible basis for a computer-based liability claim that is not addressed by the "property damage" definition alone—a claim for loss of use of computer hardware resulting from damage to electronic data? Such a loss would clearly result in "inability to access" data. More questions of this kind are raised than answered by the presence in the CGL policy of two separate yet apparently overlapping provisions, both of which have the aim of restricting coverage for loss of electronic data.

Whatever the scope of the new electronic data exclusion, the gap it creates can be filled by a new coverage form also being introduced as part of the 2004 multistate revision, CG 00 65, Electronic Data Liability Coverage Form. That new form covers an "electronic data incident" that causes "loss of electronic data." The latter term is defined in language that reproduces precisely the exposure now excluded from CGL coverage: "damage to, loss of, loss of use of, corruption of, inability to access, or inability to properly manipulate electronic data."

Medical Payments and "Athletics"

CGL medical payments coverage does not apply to "a person injured while taking part in athletics." Dictionary definitions of the term "athletics" have been cited as grounds for limiting the scope of that exclusion to organized sports and other "serious" athletic endeavors. For instance, Webster’s Collegiate Dictionary defines "athletics" as "exercises, sports, or games engaged in by athletes"; the same source then defines "athlete" as "a person who is trained or skilled in exercises, sports, or games requiring physical strength, agility, or stamina."

Strict application of the term athletics in that sense would arguably not include the occasional sporting activities of most "weekend athletes," impromptu softball or basketball games at company picnics, children’s athletic instruction, etc., since none of those activities involves people who are "trained or skilled in … sports." To restore the exclusion to the scope that ISO says was always intended for it, it is being revised to apply to "a person injured while practicing, instructing or participating in any physical exercises or games, sports, or athletic contests."

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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