When Is an Insured Not an Insured?
June 2003
The first step in accurate coverage interpretation
of the commercial general liability (CGL) insurance policy is identifying who
is an insured and when protection applies. There is an important distinction
between a named insured specifically listed on the policy Declarations and a
person or organization that is granted insured status based upon their relationship
to the listed named insured. The named insured has broad rights and coverage
under the CGL policy, the additional insured has qualified or limited coverage
as an insured. It is crucial to recognize the difference.
by Craig
F. Stanovich
Austin &
Stanovich Risk Managers, LLC
To properly comprehend the workings of any liability policy, it is critical
to understand not only what events or activities are covered but also who is
insured by the policy. Whether the liability coverage is an auto, umbrella,
CGL, or even a homeowner’s policy, a firm grasp of exactly who is receiving
protection is essential to accurate coverage interpretation. But identifying who is an insured is only the first step—knowing
the activities or events for which a person is protected and
when that protection applies is just as vital.
Who Is an Insured—Section II
Identifying those receiving protection
as an insured person or organization under the 2001 Insurance Services Office,
Inc. (ISO), commercial general liability policy is relatively straightforward.
Section II of the CGL policy, entitled “Who Is an Insured,” is divided into
four sections and lists each person or organization that receives insured status
and the activities for which each is insured.
At the outset, it is crucial to recognize a distinction between a named insured
specifically listed on the Declarations (referred to in the policy is “you”
or “your”) and a person or organization that is granted insured status based
upon their relationship to the listed named
insured. The former has broad rights and coverage under the CGL policy, the
latter has qualified or limited coverage as an insured.
Category One—Type of Organization
The first category of an insured is determined by the form of business or
organization of the named insured designated on the policy Declarations page.
Sole Proprietors and Spouses. If a named insured
is designated on the Declarations as an individual (sole proprietor), he or
she is personally protected as an insured,
as is their spouse, but only for activities
on behalf of the business of which the named insured is the sole owner. Coverage
does not extend to any personal activities of either the named insured or spouse
not related to that business. Any non-business personal risk is more appropriately
covered by personal liability insurance,
usually by a homeowner’s liability and/or personal umbrella policy. If the spouse
owns a separate business, that spouse needs to be listed as a named insured
on another CGL policy to obtain liability protection.
Partnerships and Joint Ventures. A partnership
or joint venture designated as a named insured receives protection as an insured
organization. In addition, the partners of the named insured partnership (and
their spouses) or members of a named insured joint venture (and their spouses
as well) are also personally insured, but only with respect to the conduct of
the business of the named insured partnership or joint venture.
Any other activities, either business or personal, that are not conducted
on behalf of the named insured partnership or joint venture leave the partners
or members without the protection of the CGL.
Limited Liability Companies. Limited liability
companies, a form of organization that is a hybrid between a partnership and
corporation, are protected if the limited liability company is designated as
a named insured on the Declarations page. Members (owners) of a named insured
limited liability company are granted personal protection but only for conduct
of business on behalf of the named insured limited liability company.
Managers (executives) are also personally insured, but only for their duties
as managers of the named insured limited liability company. No automatic coverage
is granted for spouses of members or managers of a limited liability company
(unless the spouse is found to have acted as either an employee or volunteer
worker of the named insured).
The importance of correct, complete, and timely listing of a partnership,
joint venture, and limited liability company as a named insured cannot be overemphasized.
The last paragraph of Section II, Who is an Insured, spells out why:
No person or organization is an insured with respect to the conduct of
any current or past partnership, joint venture or limited liability company
that is not shown as a Named Insured on the
Declarations. [Emphasis added.]
Other Organizations. For other organizations
designated as a named insured (often corporations), insured status applies to
the organization itself. A named insured corporation’s executive officers (defined
as a person holding any officer positions created by the named insured’s charter,
constitution, by-laws, or any other similar governing document) and directors
are also personally insured by the CGL, but that protection is restricted to
their duties as officers and directors of the named insured.
Stockholders are personally protected for their liability as stockholders
of the named insured.
As every person is personally liable
for their own torts, even if the torts are business torts committed while acting
solely on behalf of a corporation, this protection is extraordinarily important
to owners of small corporations. An all too common misunderstanding of business
owners is that the “corporate veil” shields the owner from all tort liability.
For all of the above, any liability that may arise out of nonbusiness personal
activities must be covered by personal liability insurance.
Trusts. If a trust is designated on the Declarations,
the trust is granted insured status. Any trustee is also an insured, but only
with respect to their duty as a trustee for the named insured trust.
Category Two—Insured in Any Organization
For any form of organization, volunteer
workers, employees, real estate managers (who are not employees), a person with
temporary custody of the named insured’s property if a named insured dies as
well as their legal representative all have limited insured status under this
category.
Volunteer Workers and Employees. Volunteer
workers are personally protected while performing duties related to the conduct
of the named insured’s business; employees are also personally protected, but
only for acts within the scope of their employment for the named insured or
while performing duties related to the conduct of the named insured’s business.
Protection is further restricted in that insured status does not apply to either a volunteer worker
or an employee because of bodily injury or personal and advertising injury:
- To the named insured, partners, members, co-employees (while the other
co-employee is in the course of the named insured’s employment or while
performing duties related to the conduct of the named insured’s business)
or other volunteer workers (while the other volunteer worker is performing
duties related to the conduct of the named insured’s business);
- To the spouse, child, parent or brother of the co-employee or volunteer
worker that is a consequence of the injury to the co-employee or volunteer
worker;
- To the obligation to share or repay damages someone else must pay because
of the injury to the co-employee or volunteer worker;
- Arising out of or failing to provide professional health care services;
Similarly, volunteer workers and employees are not granted protection as
an insured for property damage to property:
- Owned by, occupied by, used by;
- Rented to, in the care, custody or control of, or over which physical
control is being exercised for any purposes by the named insured or any
of the named insured’s employees, volunteer workers, partners or members.
Real Estate Managers. Non-employee (independent
contractors) who are real estate managers of the named insured are automatically
protected with insured status, but only while acting as the named insured’s
real estate manager. Protection does not extend to the real estate manager’s
own activities if unrelated to the named insured.
Persons with Temporary Custody. If the named
insured dies, anyone with proper temporary custody of the named insured’s property,
such as a relative maintaining a rental property while affairs of that business
are being wound up, is an insured. Coverage is limited to liability arising
out of the maintenance or use of the property and ceases when a legal representative
is appointed.
Legal Representative. If the named insured
dies, the named insured’s legal representative is an insured with respect to
his or her duties as legal representative of the deceased named insured. Also,
the legal representative does acquire all of the named insured’s rights and
duties under the policy.
Category Three—Mobile Equipment Registered under MV Laws
Status as an insured extends under this category to any person (non-employee)
who the named insured permits to drive mobile equipment on a public highway
if that mobile equipment is registered to the named insured under a motor vehicle
registration law. Also included as an insured is anyone responsible for the
permissive user (such as the employer of the permissive user) if the responsible person does not have
any other insurance available.
The insured status granted to such a permissive user does not apply to bodily
injury to a co-employee of the permissive user or property damage to property
owned by, rented to, or in the charge of or occupied by the named insured or
the employer of the permissive user.
Category Four—Newly Acquired or Formed Organizations
Finally, limited named insured status
does extend to organizations a named insured
acquires or forms as long as those organizations do not have similar insurance
available. However, no automatic coverage applies to partnerships, joint ventures,
or limited liability companies—these forms of organization must immediately
be listed on the policy as a named insured to receive any protection.
This named insured status of newly acquired or formed entities is also limited
in time—named insured status applies from the date of formation or acquisition
and ends in 90 days or the end of the policy period, whichever occurs first. Further, no coverage
applies to bodily injury or property damage that occurred or to personal or
advertising injury offenses committed before the named insured formed or acquired the organization.
When Protection Applies
Determining when protection applies to
an insured can be an infinitely more challenging task. The following are a couple
of examples that illustrate some of the issues faced by those who provide advice
or interpret coverage.
Retirement—Sole Proprietor. A sole proprietor
(individual) carpenter decides to retire and ceases operations after 30 years
of business. The carpenter, who has carried continuous liability insurance for
the last 10 years, informs his agent of his retirement and requests cancellation
of his liability policy and a return of any unearned premium. The agent complies
with this request.
A year after the policy is canceled, a wooden deck the carpenter had built
2 years ago collapses, injuring 4 people, one seriously. An investigation reveals
the carpenter did not use the right nails to fasten boards on the deck, which
was the cause of the collapse. A lawsuit is brought against the carpenter, alleging
negligence and demanding damages for the resulting bodily injury. Upon receipt
of the lawsuit, the carpenter immediately calls the agent to report the claim
and is stunned to learn that no coverage exists for this lawsuit.
An Unwelcome Surprise. The general rule is
that the occurrence-based CGL policy in effect at the time the bodily injury or property damage occurs is the policy
that must respond to the above situation. Although exactly when bodily injury
or property damage takes place has often been litigated, particularly when environmental
damage or injury is involved, the policy in force when the carpenter negligently
built the deck does not generally respond. In other words, despite the fact
that the carpenter was a named insured and
was protected by the CGL when the deck was built,
the carpenter will receive no protection for future injuries or damages arising
out of past work.
Discontinued Operations. A solution that could
have been offered to the carpenter was for the carpenter to continue to purchase
a CGL policy for several years after his retirement. Such a policy, usually known as a discontinued operations CGL
policy, will protect the carpenter against injury to others or damage to the
property of others that may take place after retirement arising out of work performed prior to retirement. While the last thing the carpenter might have wanted to do was
to continue to buy insurance, an explanation as to the risk he was taking by
terminating his insurance would have been a prudent action by his insurance
agent.
A Lead Parachute. ABC Corporation, Inc. manufactures
products (machines) and is managed by their chief executive officer, Jack Doe.
ABC’s CGL policy, a standard unendorsed ISO CGL occurrence policy (2001 edition),
has a calendar year effective date. Jack Doe decides to completely retire from
ABC Corporation, Inc., on July 1, 2002. As of his retirement date, Mr. Doe is
no longer an employee, director, or officer of ABC Corporation, Inc.
A product made by ABC on February 2, 2002, malfunctions on June 15, 2003,
and causes fatal injuries to a consumer. The consumer’s estate files a complaint
with the trial court alleging liability on the part of ABC Corporation, Inc.
under the theory of negligent manufacture of the product. The complaint also
names Jack Doe personally for his liability resulting from his alleged breach
of duty as chief executive officer to use due care in overseeing the manufacture
of the machine that caused the fatality.
The insurer answers the complaint and agrees to defend the named insured,
ABC Corporation, Inc., but denies that any coverage could possibly apply to
Jack Doe and refuses to defend or consider paying on his behalf. Their reasoning—Jack
Doe is not an executive officer at the time of
the bodily injury and therefore has no insured status under the CGL on
June 15, 2003.
When Does an Executive Officer Lose Insured Status? Professional liability policies usually address this issue—insured status is
often specifically granted to past, present, or future directors and officers.
Some professional liability policies determine the status of an insured (particularly
employees) at the time the wrongful act was committed—rather than at the time
of the claim or when damages occur, which may be months or years later. The
CGL is simply silent on this issue.
An insurer has the option to clearly and unambiguously restrict insured status
to apply exclusively to current directors
or officers. Another approach is for the insurer to clearly grant insured status
to only to those persons holding officer
or director positions at the time of bodily injury
or property damage. The insurer elected to add neither restriction to
the CGL policy. The only restriction that
applies to insured status of an executive officer is that liability must be
with respect to the duties as an officer or director of the named insured.
In the above, the plaintiff is alleging breach of Jack Doe’s duty as an officer of ABC Corporation, Inc.,
the named insured. That the bodily injury took place at a date later than Jack Doe’s alleged breach of
duty as an officer of the named insured does not affect in any way his status
as an insured. While the date of the bodily injury is what triggers this CGL
policy (and not the alleged breach of duty), a plain reading of the policy does not direct or permit the insurer to
equate the coverage trigger with insured status. Jack Doe has insured status
for the June 15, 2003, injury claim.
A Compelling Interpretation? The determining
factor is that Jack Doe was an insured at the time
he was alleged to have breached his duty as an officer of the named insured.
Therefore, Jack Doe is an insured in this situation and is protected by the
CGL. The elements of negligence call for the breach of a legal duty owed which
causes injury resulting in damages. It is certainly foreseeable that a breach
of duty—an act of an insured person—might not result in injury or damage until
months or years after the act.
Similar Situations—Arising from Acquisitions, Mergers,
or Change of Job. For example, suppose Jack Doe’s owned 100 percent of
the shares of ABC and sold them on July 1, 2002. Would he have insured status
for acts as a chief executive of ABC if committed prior to the sale but which
result in injury after the sale? What if
the purchaser agreed to protect Jack Doe in their CGL—would Jack be covered
by their policy after the sale?
Suppose a quality control manager (non-executive officer employee) at ABC
took a job with another employer on July 1, 2002? Would the quality control
manager have insured status under his former employer’s policy even though he
is not an employee of ABC at the time of the bodily
injury if personally sued?
Because of the possible time lag between a careless act and the resulting
bodily injury or property damage, the insured status of sole proprietors, executive
officers or employees is a potential risk issue that is often overlooked. The
failure to identify and properly handle such risk is particularly true when
operations cease, when people retire, or businesses are sold, acquired, or merged.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does 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.