CGL—Covered Locations
December 2004
Everyone has heard this one: the three most
important considerations in real estate are location, location, location. While
some have observed that whoever lives by this mantra can't count, it seems to
me they have missed the point. Location is all important—in real estate. Does
location hold the same importance in today's CGL policy? Let's take a look.
by Craig
F. Stanovich
Austin &
Stanovich Risk Managers, LLC
In the days of yesteryear, before fax machines, e-mail, and cell phones,
there once was a general liability policy known by it's acronym of OL&T. For
those who remember carbon paper (how many youngsters using e-mail realize that
"cc" stands for carbon copy?), you may also remember that the initials stood
for owners, landlords, and tenants. You guessed it—a general liability policy
intended for use by owners of property, including those who are landlords and
those who are tenants. So why the history lesson?
In the OL&T policy, location was of critical importance. Liability coverage
only applied if bodily injury or property damage arose out of the "the ownership,
maintenance or use of the insured premises and all operations necessary or incidental thereto." To have the honor of being
an "insured premises," the location had to be designated on the declarations
for coverage to apply. Put another way, coverage did not apply to locations
not listed. In the OL&T policy, location was indeed all important. And it seems
a few in our business somehow have not forgotten the restrictiveness of the
OL&T when they interpret today's CGL policy.
Commercial General Liability Policy
There is no location restriction written into today's CGL, without endorsements
added. Of course, an insurance company can amend the CGL to add the Limitation
to Designated Premises Endorsement, which requires the bodily injury, property
damage, or personal and advertising injury to "arise out of the ownership, maintenance
or use of the premises shown in the Schedule and operations necessary or incidental
to those premises." This is just about the same location restriction as the
OL&T.
CGL Declarations Page
It is worth noting that the CGL Declarations Page (CG DS 01 10 01) does contain
a section to list "All Premises You Own, Rent or Occupy." This list should accurately
reflect premises a named insured owns, rents, or occupies. But if the location
schedule is wrong, does this negate coverage for claims that may arise from
the missing location?
Representations Condition
The commercial general liability Conditions section does contain a short,
seemingly innocuous clause entitled "Representations." The essence of this condition
is that the named insureds understand that the Declarations Page is based on
representations made to the insurer and that the insurance company has relied
on these representations, which the named insureds agree are complete and accurate
when they accept the policy.
Does this mean that not listing a location or locations will automatically
result in no coverage for injury or damage that arises out of the undisclosed
location? Not necessarily.
Misrepresentations
For an insurance company to be able to deny coverage because of a misrepresentation,
the misrepresentation has to be a fact that is material. Although it varies
by jurisdiction (state statutes may apply), material usually means the insurance
company would have acted differently if the fact was known. Materiality is usually
measured by how much, if any, the fact would have influenced the insurance company.
For example, if the fact was known previously, might the insurance company have
declined to provide coverage or might the insurance company have provided coverage,
but with more restrictive policy terms or greater premiums?
Of course, what the insurance company says they would have done is not the sole factor—in most cases, the insurance company
would have to demonstrate that their underwriting action would be applied to
similar accounts (and not just to the policyholder whose loss they don't want
to pay). Underwriting guides or rating plans are often used to illustrate standard
underwriting policies. By contrast, if the policyholder said the building was
black, but it was really grey, it is unlikely any court would find this to be
a material fact.
Location as a Material Fact
Could an insurance company justifiably consider failure to provide a complete
and accurate list of locations to be a misrepresentation of a material fact?
It is certainly possible—provided the insurance company can demonstrate it would
have acted differently had it known.
For example, assume a business is looking to purchase CGL coverage from a
certain insurer, but knows the insurer will not write locations in a specific
state because it is an oft-mentioned "judicial hellhole." To obtain the coverage,
the business decides to omit from the application the locations in that state.
This type of misrepresentation is probably fraud: an intent to deceive calculated
to induce the insurance company to provide coverage that the insurance company
would not otherwise provide. Courts would likely consider such a misrepresentation
legitimate grounds to void the CGL policy, relieving the insurer of any obligation
to pay claims.
However, careless or even innocent mistakes in providing information to the
insurance company when applying for coverage may have the same effect. Some
courts might find the policyholder has engaged in material misrepresentation,
using the same or similar measures of materiality.
At Time of Loss
Usually the issue of misrepresentation arises when a claim or suit is filed
against an insured on the CGL. For instance, an injury occurs at a location
the named insured owns that is located in a "judicial hellhole" state, but the
location is not listed on the Declarations. The insurance company looks at the
Declarations Page, sees the location is not listed, and denies coverage.
The Insurance Company's Remedy
As mentioned earlier, the CGL policy wording does not restrict coverage to
a location, despite the Declarations Page list of locations. Therefore, the
denial of coverage in the above example cannot be approached by the insurer
as if they were citing a policy exclusion. Instead, an allegation by the insurance
company of material misrepresentation in a CGL policy as a reason for claim
denial is a contention not that the policy does not provide coverage (in this
case, it does), rather it is a contention that the policy does not legally exist!
Refusing to pay an otherwise covered CGL claim because of material misrepresentation is a big deal. An insurance company that
takes this position is (whether it knows it or not) attempting to void the CGL policy. The insurer is claiming
that, during the formation of the contract, important factual information was
falsely represented by the insured and further the insurer would not have agreed
had it known the true facts.
Put another way, the insurance company is stating that there was never a
"meeting of the minds" and the contract—in this case, the CGL policy—cannot
be enforced against the insurer and is a legal "nullity." Some jurisdictions
require the insurer to obtain a court ruling to void a policy and further require
the insurer to tender the entire annual premium to the insured. Failure to return
the premium may be considered a waiver of the insurance company's right (presuming
they have such a right) to void the policy.
It is also important to keep in mind that the CGL is valid unless and until
the material misrepresentation is properly demonstrated and the policy is voided.
For example, the insurer may have to continue to defend the insured against
a suit until the policy is found to be void.
Location, Location, Location
How does this relate to coverage on the unendorsed CGL policy for locations
not on the Declarations Page? Coverage exists for any location (within the policy
territory) of the named insured, whether or not listed on the CGL Declarations,
unless the insurance company can demonstrate material misrepresentation and
moves to void the policy.
A Somewhat Made-up Story
A national insurer (licensed in all 50 states) is told during the CGL policy period that its named
insured is going to open a location in another state. The insurer does not like
that state and informs the CGL policyholder it has no coverage for claims at
the new location. The national insurer's CGL policy contains no endorsement
that limits coverage to listed locations.
The policyholder continues on and begins operations at the new location.
Should the policyholder pursue CGL coverage with another insurer for that location?
If an injury occurs at the new location, can the national insurer move for material
misrepresentation and successfully deny coverage under their policy?
The short answer is, "No." The CGL insurer is providing coverage for the
new location, whether it admits it or not. First, no misrepresentation was made—the
policyholder provided the insurer with accurate factual information: a location
in another state. Second, while the situation changed for the insurer, the changes
occurred after the policy was provided. Claims of misrepresentation of a material
fact are usually made at the time of policy formation.
This is reinforced by the Representations Condition of the CGL, which states
the insurer has issued the policy in reliance
on the named insured's representations. As the policy was already issued when
the named insured announced the new location, the Representations condition
does not apply to locations acquired during the policy period.
Can the national insurer now amend the CGL policy mid-term to exclude the
unwanted location from the policy? The answer is usually that it cannot—insurance
policies cannot normally be unilaterally changed; policy changes require the
consent of both parties. However, the insurer does, subject to state statute,
have a right to cancel the policy with the appropriate advance written notice
to the first named insured. When confronted with a notice of cancellation, the
policyholder may then agree to a reduction in coverage, such as excluding a
location from the policy.
Conclusion
An unendorsed commercial general liability policy is neither location nor
state specific; unlike the old OL&T policy, there is no location restriction
within the policy wording. Although coverage can be reduced by various endorsements,
the CGL is subject to its actual terms and conditions, including the policy
territory. Nonetheless, a policyholder should carefully obtain information about
their operations, locations, and activities and provide it to their insurer
(or the insurer's agent) regularly.
Although denial of an otherwise covered CGL claim based on material misrepresentation
is not as easy as citing a policy exclusion, insurers have successfully voided
CGL policies.
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