Expert Commentary

More Coverage Misconceptions of the CGL Policy

In January 2004, I identified and described eight misconceptions that commonly arise when interpreting and applying the coverage found in the Insurance Services Office, Inc. (ISO), Commercial General Liability (CGL) Coverage Part (October 2001 edition), including the scope of coverage afforded in the 2001 ISO additional insured endorsements.


Liability Insurance
September 2018

While the commentary regarding the 2001 additional insured endorsements no longer applies to additional insured endorsements with later ISO edition dates (2004 and 2013), all of the other commentary is as sound today as it was in 2004. As the coverage misconceptions identified in the article persist, for a refresher, it may be worth revisiting the January 2004 article "Some Common Coverage Misconceptions of the CGL Policy."

Here are a few more areas of coverage that may be a bit more complex but nonetheless seem not to be well understood and too often interpreted based on misconceptions.

The CGL Pays Only for Damages during the Policy Period

This misconception stems from the failure to recognize that the CGL policy pays sums as damages because of bodily injury, property damage, or personal and advertising injury. In other words, the CGL policy does not pay for bodily injury, property damage, or personal and advertising injury but rather pays for the damages resulting from bodily injury, property damage, or personal and advertising injury. The Coverage A and Coverage B insuring agreements of the CGL have been very clear on this matter for over 30 years: "to pay as damages because of" wording has been in the ISO CGL since the 1985 edition.

While the CGL policy is triggered only if bodily injury or property damage occurs during the policy period (Coverage A) or the personal and advertising injury offense was committed during the policy period (Coverage B), what is important here is to distinguish between the injury or damage itself and the damages that result from that injury or damage.

Damages Are Not the Coverage Trigger

Here is the key concept—the time at which the damages are incurred by the claimant/plaintiff is not the trigger of coverage for the CGL policy. The obvious implication is that damages are payable under the CGL policy, regardless of when the damages are incurred, provided damages resulted from injury or damage that did take place during the policy period.

Bodily Injury

The CGL policy states as much under Coverage A relative to bodily injury:

e. Damages because of "bodily injury" include damages claimed by any person or organization for care, loss of services or death resulting at any time from the "bodily injury".1 [Italics added]

Bodily Injury—An Illustration

A policyholder has a calendar year CGL policy from January 2018 to January 2019. A product made by the policyholder seriously injures the purchaser when the product explodes in August 2018. As the bodily injury to the purchaser has occurred during the policy year, the injury triggers the January 2018 to January 2019 CGL policy. The purchaser files suit against the policyholder for damages arising out of his injuries.

The injuries are so serious that the purchaser dies from the injuries in March 2019. The estate of the purchaser files an amended complaint, now demanding additional damages for wrongful death.

Even though the wrongful death damages will be incurred after the policy expired, the above CGL wording makes clear that those damages will be covered by the January 2018 to January 2019 CGL policy (subject to the policy limits). All of the damages resulting from the injury caused by the explosion, including wrongful death damages, are "damages because of bodily injury." The CGL insurer cannot escape paying for the wrongful death damages by arguing the damages took place after the policy terminated.

Property Damage

As with bodily injury, property damage must occur during the policy period to trigger the CGL policy. Once the CGL policy has been triggered by property damage taking place during the policy period, damages because of that property damage are also covered regardless of when those damages are incurred.

The definition of "property damage" rather than the insuring agreement dictates this outcome. For tangible property physically injured, the definition of property damage states that all loss of use resulting from the damaged property occurs at the time of the physical injury. For property damage that involves tangible property not physically injured, the definition of property damage states all loss of use occurs at the time of the occurrence that caused the loss of use.

Property Damage—An Illustration

Using the same scenario, the product not only injured the purchaser but the explosion caused so much damage to the purchaser's home that the purchaser's family could not occupy the home for over 9 months. For the 9-month period, the policyholder was liable to pay lodging and other related expenses for the family of the purchaser until the home could be repaired.

Even though the loss of use damages—payment of lodging expense—continued for 4 months after the policy expired, the insurer was required (subject to the policy limits) to pay the damages continuing beyond the policy period "as damages because of … property damage." In other words, because the property damage that resulted in the loss of use expenses occurred during the policy period, the insurer was obligated to all damages resulting from the loss of use, even for damages for which the policyholder is liable beyond the policy expiration.

Cumulative Injury or Progressive Damage

This concept of how damages is addressed in the CGL policy becomes far more complicated for cumulative injury or progressive damage claims in which the bodily injury or property damage occurs over several successive policy periods. If injury or damage triggers multiple CGL policies,2 the court's allocation of damages by "time on risk" that is often applied to such situations3 may brush aside this concept entirely.

The presumption underlying the "time on risk" approach seems to conflate bodily injury and property damage with the damages that result from such bodily injury or property damage. "Time on risk" assumes that damages occur at precisely the same time and for no longer than when the bodily injury or property damage took place.4

While it is certainly conceivable that a person may incur damages long after exposure to certain toxins such as asbestos fibers, for example, premature death decades after exposure, it may not be medically or scientifically feasible to determine when the bodily injury actually ended, if the bodily injury ever ended. Nonetheless, automatically applying the "time on risk" allocation in all cumulative injury or progressive damage claims at the expense of the CGL policy's distinction between bodily injury and property damage and the resulting damages is unwarranted.

Personal and Advertising Injury Must Be Caused by an Occurrence

This conclusion can only be the result of a failure to read the Coverage B insuring agreement. Coverage B—Personal and Advertising Injury of the CGL policy requires only that the offense arose out of the named insured's business and that the offense was committed in the coverage territory and during the policy period. Further, the limit applying to Coverage B is not an "each occurrence" limit but rather a separate limit that applies to all damages sustained by one person or organization. The word "occurrence" does appear anywhere in relation to Coverage B.

Intentional Torts

The very nature of the covered offenses as enumerated in the CGL policy definition of personal and advertising injury should also shed light on this matter. The covered offenses are the result of intentional acts—and are generally intentional torts.5 Conversely, an occurrence must be an accident. For example, the act of arresting someone is not an accident—whether the arrest was wrongful and thus a false arrest6 is another matter. 

Exclusions

Of course, none of this means Coverage B pays damages for intentional infringement or violation of the rights of another. Coverage B is subject to 16 exclusions, including an exclusion that eliminates coverage for a knowing violation of the rights of another and an exclusion that eliminates coverage for publishing material known to be false. While demonstrating knowledge may be a challenge for the insurer, if proven, these exclusions take away coverage. Using the arrest example, Coverage B excludes coverage for damages demanded against an insured who arrested another if the insured had the knowledge that they had no legal authority to do so.

Establishments That Allow Customers To Bring Alcohol to Their Premises

Starting with the April 2013 edition of the ISO CGL policy, the liquor liability exclusion, which applies only if the named insured is in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages, was changed.

The change states that permitting a person to bring alcoholic beverages to the named insured premises for consumption on the premises is not, by itself, the business of selling, serving, or furnishing alcoholic beverages. Even if the named insured charges a fee (such as a corking fee) or the named insured is required to have a license to allow patrons to bring in their own alcohol to consume on the premises, this establishment is not in the business, and thus the exclusion does not apply. It bears repeating that this bring your own (BYO) exception to the liquor exclusion is only in the April 2013 edition of the ISO CGL and is not in prior ISO editions.

Caution Urged

An establishment might be involved with other activities that insurers would consider the business of manufacturing, distributing, selling, serving, or furnishing alcohol. Take, for example, a microbrewery that has been brewing and distributing beer for years. Observing the popularity of competitors' retail locations, the microbrewery opens its own retail location. While awaiting approval of its liquor license, it allows patrons to bring their own beer into the new location.

The liquor exclusion would likely apply to the new location—the microbrewery is in the business of manufacturing and distributing alcohol—the exception states that BYO is "not by itself" considered to be in the business. Clearly, the microbrewery is more than a BYO operation.

Amendment of Liquor Liability Exclusion (CG 21 50 or CG 21 51)

It is always necessary to review the entire policy, including all endorsements, before determining the scope of coverage provided. Be warned—many insurers will not wish to provide any liquor liability coverage with the CGL policy. Accordingly, insurers commonly (but not universally) attach the Amendment of Liquor Liability Exclusion endorsement (CG 21 50 or CG 21 51) to the CGL policy.

The import of these exclusionary endorsements is that both explicitly remove coverage for any BYO. In addition to removing BYO coverage, these exclusions expand the liquor exclusion of the CGL to apply to any alcohol served or furnished for a charge and expand the liquor exclusion to apply to the serving or furnishing of liquor if a license is required to do so if no charge is made for the liquor.

For more on the Amendment of Liquor Liability exclusion, see "The 2013 Edition of the CGL Policy" (March 2013).  

CGL Contractual Liability Exclusion and Breach of Contract Claims

The "assumption of liability in a contract or agreement" wording placed in the Coverage A Contractual Liability exclusion does not equate to an exclusion for failing to perform the terms of a contract. Despite the obvious differences between assuming liability and failing to perform, this exclusion is too often cited as applying to all contract claims. For more on liability assumed by contract, see "Contractual Liability and the CGL Policy" (April 2018).

Coverage B—Two Contract Exclusions

While it may come as a surprise to many, the answer to the difference between breach of contract and liability assumed by contract is found in the CGL policy itself. When reading the entire CGL policy, it is apparent that Coverage B has two exclusions involving contracts. The first exclusion—titled Contractual Liability—excludes coverage "for which the insured has assumed liability in contract or agreement."7 Immediately following the Contractual Liability exclusion is another exclusion titled Breach of Contract. The Breach of Contract exclusion makes clear that Coverage B does not apply to "liability arising out of a breach of contract."8

A Clear Distinction

Drafters of the ISO CGL have made clear the distinction between liability assumed in a contract and breach of contract. Stated differently, if the drafters of the ISO CGL policy understood liability assumed by contract was tantamount to an exclusion for breach of contract, the Breach of Contract exclusion in Coverage B would be unnecessary and serve no purpose. Of course, any interpretation of an insurance policy that renders words or phrases redundant and with no purpose is not the approach taken by most courts.9

Coverage B of the CGL policy includes a Contractual Liability exclusion and a separate Breach of Contract exclusion because the two exclusions are not the same and eliminate different types of claims. Liability assumed in a contract exclusion is simply not a breach of contract exclusion.

State Law Is Always Applied To Interpret the CGL Policy

The law applicable to the interpretation of an insurance policy is a complex legal determination, in some cases controlled by statute. The presumption that the state in which the claim has occurred is always the state's law that applies to the interpretation of the CGL policy is common but often mistaken. Further, the ISO CGL policy does not address this matter—as the policy contains no choice-of-law condition, consulting the policy conditions will not decide the question.

A few states follow lexi loci contractus, which means the state in which a contract is made governs the dispute, while other states follow a more complicated "most significant relationship test," following the American Law Institute's Restatement (Second) of Conflict of Laws.10

Here is an example. California corporation A sued Massachusetts corporation B in federal district court in California, alleging the violations of the rights of A by B took place in California. Corporation B's insurer's California claims office handled the claim for months, reciting California insurance code, including the insurer's right to seek reimbursement for defense costs under California case law and California insurance code as applicable to B's policy. Because there was a material difference between California's and Massachusetts's laws on several disputed matters, a conflict of laws existed. In this example, it was ultimately agreed that Massachusetts, and not California law, applied to the interpretation of corporation B's CGL policy.11

The choice of law can matter greatly.

The substantive law governing a particular dispute can have a significant impact on the outcome of insurance litigation. Rules regarding policy interpretation and rights and obligations of interested parties can vary significantly from jurisdiction to jurisdiction.12 

The point here is that even though policyholders and insurance professionals are not capable of making a legal determination of the state's law that applies to interpretation of a CGL policy, everyone involved should at least be aware that the law of the state in which the claim occurs may not always apply to interpretation of the CGL policy.

Conclusion

As with the January 2004 article, the purpose of this article and its potpourri of issues is to help debunk myths about the CGL policy and to aid in bringing about a better understanding of the workings of it.


CG 00 01 04 13 © Insurance Services Office, Inc. 2012

Multiple consecutive CGL policies are often triggered for cumulative injury or damage claims when the courts follow "Exposure, Injury-in-Fact, or Continuous Trigger" theories. For more on coverage triggers, see "Trigger Theories and the CGL" (December 2008).

For more on allocation of damages, see "Coverage Gaps Created by Exclusionary Endorsements" (April 2017).

"The most reasonable reading of these provisions is that the Century policies provided coverage for that portion of Boston Gas's liability attributable to the quantum of property damage occurring during a given policy period. Our reading of this policy language is consistent with that of other courts that have construed CGL policies with similar provisions limiting the applicability of a policy to property damage that occurs during the policy period." Boston Gas. Co. v. Century Indem. Co., 454 Mass. 337 (2009) at 359.

Intentional tort—A tort committed by someone acting with general or specific intent. Examples include battery, false imprisonment, or trespass to land. Black's Law Dictionary (Eighth edition).

False arrest—An arrest made without proper legal authority. Black's Law Dictionary (Eighth edition).

CG 00 01 04 13 © Insurance Services Office, Inc. 2012

The Breach of Contract exclusion includes an exception and does not apply to "an implied contract to use another's advertising idea in your 'advertisement.'" CG 00 01 04 13 © Insurance Services Office, Inc., 2012

"However, the general rule is that every provision of an insurance contract is to be given effect, if possible, and no word or clause eliminated as meaningless, or disregarded as inoperative, if any reasonable meaning consistent with other parts of policy can be given to it." 2 Couch on Ins. § 21:17, December 2016 update

10 Randy J. Maniloff and Jeffrey W. Stempel, General Liability Insurance Coverage—Key Issues in Every State, (Third edition) Matthew Bender & Company, Inc., a member of LexisNexis, p. 20.

11 "Whether, however, there is a duty to defend or to indemnify under a nationwide comprehensive general liability policy as to such a claim should not depend on the law of the jurisdiction governing that particular claim but rather should be determined by the law governing the interpretation of the insurance policy and its issuance." W.R. Grace & Co. v. Hartford Acc. & Indem. Co. 555 N.E.2d. 214 (Mass. 1990) at 586.

12 New Appleman on Insurance Law Library Edition, § 1.01 Release No. 3, September 2010.


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