Not that this is always bad; many of us would not be employed if we had to
start at the absolute beginning. There are, however, certain costs to starting
in the middle. One potential cost is that we may have failed to lay a proper
foundation for what we have learned. Because this can result in gaps in our
ability to fully understand, it is beneficial to take a step away from the trees
and look at the forest—the oft-mentioned bigger picture.
A Complex Policy
That the commercial general liability (CGL) policy is a complex insurance
policy is not seriously disputed. Rather than digging deeper into such complexities,
this article takes the opposite approach: a high-level view intended for insurance
and risk management personnel or insurance buyers who seek a grasp of the basics,
either to just get started or to help solidify a foundation for what they have
already learned. Certainly, such simple explanations should never be the sole
source for interpreting coverage. Nonetheless, a general understanding of the
fundamental workings of the CGL policy has substantial practical value. Therefore,
the purpose of this article is to be a primer of sorts and is intended to provide
a plain, straightforward explanation of certain portions of the CGL policy.
Coverage A—The Promise
As most CGL claims, disputes, and questions fall within Coverage A—Bodily
Injury or Property Damage, this article will focus on the Coverage A insuring
agreement and its exclusions. The Insurance Services Offices, Inc. (ISO), December
2007 edition of the "occurrence" (CG 00 01 12 07) CGL policy starts with a broad
promise.
Legal Obligation To Pay Damages for Bodily Injury or Property Damage
The broad promise, which is the insuring agreement, is a pledge by the insurer
to pay if an insured is legally liable for damages because of bodily injury
or property damage. Bodily injury and property damage are defined terms. Bodily
injury usually means physical harm (including sickness or disease) and property
damage means physical injury to tangible
property as well as damages for the loss of use of the
tangible property that has been physically
injured.
Property damage also includes loss of use of
tangible property that has not been
physically injured. Electronic data (information stored electronically) is not
considered tangible property (more on this later).
Coverage Trigger
For the policy to respond (the trigger), the bodily injury or property damage
must be caused by an occurrence (it does
not matter when the occurrence takes place)
and the bodily injury or property damage
must occur during the policy period (remember,
this is an "occurrence" policy).1
Defense
Sometimes referred to by courts as "defense insurance," the insuring agreement
also includes a separate promise by the
insurer to defend suits against an insured which demand damages potentially
covered by the insuring agreement.2
Foreshadowing Exclusions
Because the Coverage A insuring agreement is so broad, the CGL policy is
defined to a great extent by its numerous exclusions. The series of exclusions
that follows is foreshadowed by the phrase found in the insuring agreement "…
to which this insurance applies." In other words, the CGL policy does not apply
to all bodily injury or property damage. This may come as a shock to those businesses
that advertise as "fully insured."
While there is undoubtedly a great deal more to the insuring agreement than
noted above, keep in mind our focus is on the basics.
Coverage A—Exclusions
The Coverage A exclusions are intended to restrict or narrow the insurers'
obligations to pay claims which may have been promised within the Coverage A
insuring agreement. Put another way, the purpose of the exclusions is to eliminate
what might otherwise be covered.
The reasons for exclusions to any policy, including the CGL policy, are varied.
For example, an exclusion may take away coverage because the coverage is provided
by another policy (workers compensation or commercial automobile), or require
purchase of another policy (liquor, pollution, etc.). Other exclusions are added
because the claims are considered uninsurable (business risks) or might be against
public policy (intentional injury). Of course, the insurer is free to add, by
endorsement, exclusions to the CGL policy because the insurer may just not want
to provide some types of coverage.
Here are the exclusions to Coverage A that are included or "built into" a
CGL policy. Additional exclusions may be, and often are, added by endorsement.
a. Expected or Intended
In most cases, if an insured intentionally causes property damage or bodily
injury, that insured is not covered.
Example: An employee argues with and punches
a customer. If the employee is sued by the customer, the employee is not covered.3
b. Contractual Liability
There is no bodily injury or property damage coverage for an insured held
liable for damages by virtue of assuming the liability
of another in a contract or agreement.
Example: If an insured agreed to assume
the liability of a railroad in a construction agreement with the railroad,
the insured's obligation to indemnify the railroad for the
railroad's liability to others is not
covered.
There are two major exceptions to this exclusion: there
is coverage if the insured would be liable
anyway (meaning the insured would be liable under the law even if the agreement
or contract did not exist) or the insured
has assumed the liability of another person or organization as part of an "insured
contract." To understand this exclusion, it is highly recommended that the defined
term "insured contract" be examined.4
c. Liquor Liability
If the named insured is in the business
of making, selling, serving, or furnishing alcohol, the CGL excludes any liability
the insured may have because of bodily injury or property damage resulting from
the alcohol.
Example: The local tavern does not have
coverage in its CGL for a claim against the tavern brought by a pedestrian
who was struck by a patron while the patron was driving away from the tavern
after the patron was "overserved" by the tavern.
CAVEAT: Many (if not most) insurers add an exclusionary endorsement to the
CGL policy that substantially expands the
reach of the liquor exclusion. The liquor exclusionary endorsement eliminates
coverage for not only those "in the business" but also anyone who
sells alcohol for a charge or if the serving
of alcohol requires a license, even if no
charge is made. A not-for-profit sponsoring a fund raiser in which the cost
of dinner includes two drink tickets may well be considered to have sold alcohol
for a charge and thus have no coverage under its CGL for the serving of liquor.5
d. Workers Compensation
Statutory workers compensation benefits required to be paid by any insured
are not covered by the CGL.
Example: If an insured employer failed
to purchase workers compensation coverage, the CGL policy would not pay
on behalf of the insured employer statutory workers compensation benefits
due an injured employee.
e. Employers Liability
If an employee is injured while working for the insured employer, any suit
against the insured employer brought by the employee, brought by the employee's
family, or brought by an unrelated party claiming the insured employer must
share in payment of damages for the employee's injuries, is not covered. The
exclusion applies even if the insured employer is characterized in the suit
as having a capacity in addition to that of an employer—the employee may allege
it is suing its employer as a product manufacturer and not as an employer.
Example: An employee of the insured employer
suffers a work-related injury when using a machine that the insured employer
modified by removing some of its safety devices. The employee may bring
a suit against the machine manufacturer that, in turn, brings claim against
the insured employer, alleging the employer was negligent in removing the
safety device that resulted in the injury to the employee. The suit by the
machine manufacturer against the insured employer, which demands the insured
employer share in payment of damages to the injured employee, is not covered
by the insured employer's CGL policy.
This exclusion does not apply if the insured employer is obligated to
indemnify another for damages resulting
from work related injuries to the insured employer's
own employees, provided the obligation of
the insured employer to provide indemnity is due to
liability assumed in an "insured contract."
f. Pollution
If bodily injury or property damage is caused by the release or discharge
of pollutants from the premises (including a former
premises) of an insured, the CGL excludes coverage. It does not matter whether
the release of pollutants was sudden or gradual—coverage
is excluded. In addition, coverage for bodily injury or property damage resulting
from the release of waste is completely
excluded, regardless of where the release occurs.
Example: The local high school has an
underground heating tank that ruptures and releases almost 10,000 gallons
of petroleum into the neighbor's soil, well, and basement. The damages claimed
against the school by the neighbor are not covered by the high school's
CGL policy.
There are some limited exceptions to the premises pollution portion of the
exclusion. For instance, if the heating system malfunctions, releasing fumes
within the building which cause sickness to others, the exclusion does not apply.
Bodily injury or property damage caused by the release or discharge of a
pollutant is also excluded at any site at which the insured (or the insured's
subcontractor) is working if the pollutants are
brought to the site by the insured or
the insured was at the site performing environmental work, such as testing for
pollutants in the groundwater.
Example: A building cleaning contractor
brings chemicals to clean the outside of a customer's building. While setting
up to start the job, one of the workers knocks over a drum of the cleaning
chemicals, which splashes on and burns a patron attempting to enter the
building. As the insured brought the pollutants to the site, the contractor
has no coverage for bodily injury to the patron.
As with premises pollution, there are some limited exceptions to the exclusion
applicable when pollutants are brought to the site. For instance, if the adhesive
used by a carpet installer to put carpets in an office building releases toxic
fumes within the building that make some of the building's tenants ill, the
carpet contractor is covered for this bodily injury because of the exception
to the exclusion.
Finally, the cost of the cleanup of pollutants is excluded. The cleanup exclusion
does not apply if the costs are considered
property damage and the insured would have
been liable in the absence of cleanup demands
of an environmental authority or liable because of an environmental regulation
or law applicable to the cleanup.6
g. Aircraft, Autos, and Watercraft
Bodily injury or property damage that may result from the use of aircraft,
watercraft, or autos that are owned, operated, or rented or loaned to any insured
is excluded.
Example: While using a truck the insured
borrowed from a friend, the insured backs into a ladder, causing the employee
of another contractor to fall and suffer
injury. The claim by the employee of the other contractor against the insured
is not covered by the CGL—the bodily injury was caused by the use of an
auto loaned to the insured.
There are numerous exceptions to this exclusion. For instance, even though
a truck-mounted cherry picker (a bucket truck) is considered an auto, and the
bucket truck is owned and operated by the insured, the CGL provides coverage,
by exception to this exclusion, for bodily injury or property damage that takes
place while operating the equipment on the
bucket truck.
Exception Example: While up in the bucket
of the cherry picker, an employee trimming trees loses control of a large
branch, which falls on a passing motorist, damaging the motorist's auto
and injuring the motorist. Even though the cherry picker is an auto, this
bodily injury and property damage is covered by the CGL because of the exception
to the exclusion.
CAVEAT: The CGL policy has been changed (starting with the December 2004
edition) to redefine an "auto" to include what would otherwise be mobile equipment
(such as a backhoe) if the mobile equipment
is subject to compulsory insurance or financial responsibility. Put another
way, if mobile equipment is deemed to be an "auto," because the vehicle was
found to be subject to compulsory insurance law, automobile liability coverage
needs to be arranged to avoid a gap in coverage, as the CGL will not cover bodily
injury or property damage resulting from an accident that takes place while
the backhoe is being operated as an "auto."7
h. Mobile Equipment
While the use of mobile equipment (subject to the change noted above) is
understood to be covered by the CGL, any bodily injury or property damage that
results when the mobile equipment is being transported or while the mobile equipment
is being used in a prearranged speed or stunting activity is excluded.
Example: If a bulldozer that is being
transported on a flatbed trailer rolls off because the driver of the truck
pulling the trailer took the corner too sharply, any bodily injury or property
damage that may result, such as the bulldozer damaging several cars parked
along the road, would be excluded by the CGL.
j. Damage to Property
There is no coverage for property damage to the following types of property:
- Property owned, rented to, or occupied by the named insured.
Example: A tenant allows water to damage
the portion of the landlord's building occupied by the tenant for the past
3 years. The CGL excludes coverage for property damage to property occupied
by the tenant, who is the named insured in this example.
Important exceptions to this exclusion should be noted—the exclusion for
property damage to premises occupied or rented to the insured does not apply
to damage by fire. Further, if the premises
are rented to the named insured for 7 or fewer
consecutive days (such as renting a hotel room), this exclusion does
not apply to the premises and the contents of the premises. In both cases, a
sublimit (Damage to Premises Rented to You) applies.8
Premises sold, given away, or abandoned by the named insured
if the property damage is caused by a condition
of the premises.
Example: After a distributor sells a warehouse,
it burns down. The fire marshal determines that the cause of the fire was
faulty wiring installed several months before the sale by the distributor/seller.
The claim made against the distributor/seller by the buyer is not covered
by the CGL of the distributor/seller.
- Property loaned to the named insured.
Example: A contractor negligently damages
scaffolding that was borrowed from the general contractor. The CGL policy
will not pay the contractor's liability for property damage to the general
contractor's scaffolding as it is property loaned to the named insured.
- Personal property in the care, custody, or control of the insured.
Example: An auto repair shop has a fire
that was caused by an employee's careless smoking, destroying 10 customers'
cars being held by the shop pending repair work. As the customers' cars are
in the care, custody, or control of auto repair shop, the CGL provides no coverage
to the repair shop for its liability for property damage to the customers' cars.9
- That particular part of
real property if the property damage
takes place while the named insured (or a subcontractor of the named insured)
is in the process of performing work
on the part of the property that is damaged.
Example: A masonry contractor is engaged
to perform some minor repairs to the chimney of a commercial building. While
using a scissor lift, the contractor accidentally extends the lift too fast,
colliding with and knocking down the chimney. The property damage to the
chimney is not covered by the masonry contractor's CGL as that particular
part of real property (the chimney) was damaged while performing work on
the chimney.
- That particular part of
any property (real or personal) that
must be fixed because the named insured's work (or the work of the named
insured's subcontractor) was incorrectly performed on the property. If the
job is finished when the property damage takes place, this exclusion does
not apply.
Example: Halfway through the job of replacing
a floor, the contractor discovers that the new wooden floor panels have
been installed upside down, requiring tearing out and replacing the floor
panels with new panels. The cost of repair, including the property damage
to the wooden floor tiles that have to be ripped out as well damage to the
subflooring caused by the improper installation, is not covered by the flooring
contractor's CGL.
k. Damage to Your Product
If the named insured's product damages itself, the property damage to the
named insured's product is excluded.
Example: A defect causes several billboard
video displays to completely fail due to a short circuit, resulting in total
loss to the billboard. The billboard manufacturer does not have coverage
in its CGL for the property damage to the billboards (the named insured's
product) that are damaged by the short circuit.
l. Damage to Your Work
If the named insured's completed work
damages itself, the property damage to the completed
work is excluded. However, this exclusion does not apply if the named
insured subcontractor's completed work suffered property damage or if the completed
work that suffers property damage is the result of the named insured subcontractor's
completed work.
Example: A general contractor completed
the construction of a 10-story office building for the owner. After the
building is occupied, the building experiences an abrupt settling, resulting
in a virtual total loss to the building. The building inspector determines
that the iron and steel work, performed by the general contractor's employees,
was deficient and buckled when several defective welds gave away. The owner's
suit against the general contractor for the property damage to the building
(the general contractor's work) is not covered by the CGL as the property
damage arose out of the general contractor's completed work—the defective
welds.
Exception Example: If in the example above,
the general contractor engaged a subcontractor
to perform the iron and steel work, then the exclusion would
not apply to the owner's suit against
the general contractor for property damage to the building. Even though
the building is still the general contractor's completed work, the property
damage arose out of the completed work of a
subcontractor. Thus, the property damage to your completed work exclusion
does not apply to the general contractor.
m. Damage to Impaired Property or Property Not Physically Injured
This exclusion applies to property damage to property that has
not suffered actual physical injury or to
property that is considered impaired property. Impaired property is a defined
term, and generally means the property of another
that cannot be used (or its use is limited)
because of a problem with the named insured's
product or work that was made a part of the impaired property
or if the named insured did not complete the
job on time.
Remember, the definition of "property damage" includes the loss of use of
tangible property that has not been physically
injured. Taking into account this portion of the "property damage" definition
helps to explain the purpose of this exclusion—to restrict coverage for
specific types of loss of use claims that
may result even if no physical injury to
the property of another has taken place.
The specific types of loss of use claims
excluded are either those caused by incorporating the named insured's
defective product or
faulty work into the property of another
or those loss of use claims caused by the
named insured failure to finish a job on time.
This exclusion does not apply if the loss of use is caused by sudden and
accidental physical injury to the named insured's property or work, and then
only if the physical injury takes place after the product or work has been put
to its intended use.
Example: A heating, ventilation, and air-conditioning
(HVAC) contractor is hired by a hotel to replace the cooling system before
July 1. After installation, it is found that new cooling system is defective
as it does not properly cool the hotel. The hotel is forced to cancel a
large convention scheduled for July 4, resulting in a substantial loss of
revenue to the hotel. The hotel brings a claim against the HVAC contractor
alleging the hotel cannot be used (loss of use) due to the defective cooling
system installed by the HVAC contractor (the named insured's work). The
HVAC contractor is not covered by its CGL for the loss of use claim by the
hotel (the hotel is impaired property and was not physically injured) as
the loss of use was caused by the defective work incorporated into the hotel
by the HVAC contractor.10
n. Recall of Products, Work, or Impaired Property
Any costs or damages claimed against an insured for recalling known or suspected
defective products or known or suspected defective work are not covered. Excluded
costs include, but are not limited to, the costs of inspecting, adjusting, or
removal of the defective products or work.
Example: A defect causes several billboard
video displays to completely fail due to a short circuit, resulting in a
total loss to the billboard. If the billboard manufacturer suspects that
other video billboards might have the same defect, any costs to recall or
withdraw from use any of its billboards, such as inspecting, adjusting,
or removing the defective billboards, are excluded by the manufacturer's
CGL.
o. Personal and Advertising Injury
If bodily injury is caused by a personal injury offense, such bodily injury
is excluded by Coverage A.
Example: A patron sues a major retailer
after the retailer pressed criminal theft charges against the patron (the
personal injury offense alleged in this instance is malicious prosecution).
Subsequently, the patron suffers a heart attack which is found to have been
the direct result of the criminal prosecution. While the retailer would
likely have coverage for the malicious prosecution claimed against it by
the patron under Coverage B—Personal and Advertising Injury, any claim by
the patron for damages resulting from the heart attack (bodily injury) are
excluded under Coverage A.
p. Electronic Data
The CGL does not provide coverage for loss of electronic data as such data
is not tangible property and thus not considered property damage. This exclusion
buttresses the Coverage A insuring agreement by excluding any damages arising
out of the loss of, loss of use of, damage to, corruption of, or inability to
access or manipulate electronic data.
Example: A tenant in a mall overloads
the electrical circuits with its advertising display, causing a power surge
that corrupts the customer information stored electronically by several
other retailers located in the mall. The claim by the other retailers to
restore the corrupted customer information is not covered by the CGL policy
of the tenant that caused the power surge.
q. Distribution of Material in Violation of Statutes
If an insured violates certain statutes, the CGL provides no coverage for
damages that may result from such claims.
Example: After being told repeatedly not
to fax advertising material to prospective customers, an accounting firm
is sued by several recipients of fax advertising, alleging loss of use of
its fax machines (the fax machines were clogged with advertising faxes)
and the violation of the state's "do not call" statute. The accounting firm
is not covered for the property damage claimed against it by recipients
of the advertising faxes because the acts of the accounting firm were in
violation of a statute prohibiting such fax transmissions.
Conclusion
Simplifying complex coverage issues does carry with it the risk that an appreciation
of the full complexity of coverage might be lost. However, provided that such
distilled explanations are viewed as a way to better understand the
basics of coverage, straightforward descriptions
of the Coverage A insuring agreement and its exclusions have substantial value
as a starting point for learning or to fill in the foundations upon which further
learning can be more solidly based.