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Liability Insurance

The 2001 ISO CGL Revision

Jeffrey Woodward | January 1, 2002

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A new edition of the Insurance Services Office, Inc. (ISO), commercial general liability (CGL) policy was implemented in December. This article summarizes the significant changes in coverage, particularly as respects coverage for Internet exposures.

A new edition of the Insurance Services Office, Inc. (ISO), commercial general liability (CGL) policy was filed in 2001 with implementation beginning in December of that year. The revised occurrence form—CG 00 01 10 01—and its claims-made counterpart—CG 00 02 10 01—contain a number of significant changes in coverage pertaining to liability for Internet activity, vicarious liability for criminal acts of others, insured status of trusts and volunteer workers, negligent supervision and employment in connection with aircraft, autos, and watercraft, and repair of owned property undertaken to prevent third-party liability. The occurrence form was also revised to incorporate into its insuring agreement the "known loss" provisions that were previously made a part of the policy by use of endorsement CG 00 57.

In addition to changes in the CGL coverage form itself, the 2001 ISO revision also includes a number of new standard endorsements that can be used to modify coverage in various ways. Among the most important of these are the following.

CGL Coverage for Internet Exposures

The most extensive revisions in the 2001 CGL coverage form are aimed at clarifying or in some cases restricting coverage in connection with the insured's Internet activities. Liability arising from use of the Internet is still a new and quickly evolving area of the law. For the most part, ISO has chosen to apply general liability coverage to Internet activity in the same way that the policy responds to advertising, communications, and publishing activities conducted through older and more traditional media.

For example, personal and advertising injury coverage has traditionally excluded liability of insureds in the advertising, publishing, and broadcasting businesses. The same underwriting considerations have led, in the 2001 policy, to an exclusion of insureds in "corresponding" Internet businesses: (1) those that design or determine the content of other entities' websites; (2) those that act as Internet service providers (ISPs); (3) those that provide Internet search services; and (4) those that own, host, or exercise control over electronic chatrooms and bulletin boards.

Personal and advertising injury coverage applies, in part, to the insured's liability in connection with certain offenses committed in an "advertisement." The definition of that term is expanded in the 2001 CGL to include "material placed on the Internet or on similar electronic means of communication." Internet ad banners, in other words, are "advertisements." But a company's entire website may not necessarily be deemed an "advertisement. The new definition specifies that

regarding web-sites, only that part of a web-site that is about your goods, products or services for the purposes of attracting customers or supporters is considered an advertisement.

In light of the fact that Internet activity takes place, from one point of view, in an almost non-geographical "cyberspace," and that a personal and advertising injury offense committed on the Internet would be difficult to pinpoint to a particular country, city, or state, the 2001 CGL redefines the policy's coverage territory. The worldwide feature of CGL coverage, which up until now was restricted to products liability and short-term travel on the insured's business, applies also to "personal and advertising injury offenses that take place through the Internet or similar electronic means of communication." In other words, the location of an occurrence or offense that causes covered injury or damage is irrelevant, in practical terms, when the injury or damage takes place over the Internet.

Another 2001 CGL revision that was prompted in large part by the growth of Internet activity is the expansion of the policy definition of "property damage." That definition now specifies that, "electronic data is not tangible property." Damage to electronic data caused by the insured's Internet activity therefore would not produce a covered property damage claim under the CGL, since property damage consists of physical injury to tangible property, resulting loss of use of that property, and loss of use of tangible property that has not been physically injured. In any of these three cases, the property damage must be to tangible property. Since the definition does not apply in the new CGL to electronic data, the meaning of that term is also explained. Electronic data consists of:

information, facts or programs stored as or on, created or used on, or transmitted to or from computer software, including systems and applications software, hard or floppy disks, CD-ROMS, tapes, drives, cells, data processing devices or any other media which are used with electronically controlled equipment.

Other CGL Coverage Form Revisions

Two of the CGL Coverage A exclusions undergo substantial revision in the 2001 edition of the form. The "aircraft, auto or watercraft" exclusion (exclusion g) of the CGL is modified to include language addressing the issue of negligent supervision. In a number of jurisdictions, courts have recognized such claims as constituting separate causes of action, even when the injury or damage directly results from the ownership or operation of an auto, watercraft, or aircraft by an insured.

For instance, an employer may be sued in connection with automobile accident injuries caused by the reckless driving of an employee on company business. If the allegations against the employer go beyond vicarious liability for actions of the employee to claim that the employer was negligent in hiring someone with a poor driving record (for instance), does that separate allegation of negligence come within the CGL auto exclusion? A number of appellate court decisions have said no—that negligent supervision of a driver is a separate source of liability from the ownership or operation of the vehicle and is, therefore, not excluded by exclusion g. (See, for example, Home State Insurance Co. v Continental Insurance Co., 726 A2d 1289 (NJ 1999), and Thomas Milfred Pablo v Scott Allen Moore, 995 P2d 460 (Mont 2000).)

The position of ISO and the insurance industry is that negligent hiring, supervision, or monitoring are not intended to be separate—covered—loss exposures in connection with the ownership or operation of aircraft, autos, or watercraft by an insured. To clarify this intent, the following language has been added to CGL exclusion g.

This exclusion applies even if the claims against any insured allege negligence or other wrongdoing in the supervision, hiring, employment, training or monitoring of others by that insured, if the "occurrence" which caused the "bodily injury" or "property damage" involved the ownership, maintenance, use or entrustment to others of any aircraft, "auto" or watercraft that is owned or operated by or rented or loaned to any insured.

The other Coverage A exclusion affected by the 2001 CGL revision is "damage to property" exclusion j. The portion of that exclusion pertaining to damage to owned property has been expanded to apply to an indirect "liability" exposure. Some claims for the cost to repair the insured's own property have been successfully brought under general liability policies, on the basis that the repair was necessary to avoid third-party property damage or bodily injury—repair to the insured's building, for example, when the damage poses a threat to the public at large. The revised version of exclusion j makes clear that such preventative repairs are not considered covered property damage. The exclusion now specifically applies to:

any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another's property.

One Coverage B exclusion has also been revised. Exclusion d, which removes personal and advertising injury coverage in connection with the commission of criminal acts, previously applied to such acts committed by or at the direction of "any insured." The 2001 revised version applies to criminal acts committed by or at the direction of "the insured." The revised exclusion, in other words, only affects coverage for the insured directly involved in the criminal act. Other insureds, who may incur liability vicariously for the criminal act of another insured, would still have coverage despite the exclusion.

Two changes are made to the policy's "Who Is an Insured" section. A separate category for trusts is added to the list of possible named insureds. When the named insured under a CGL is a trust, trustees are also insureds with respect to their duties as such. Also added to the list of automatic insureds (i.e., employees, real estate managers, legal representatives of deceased named insureds, etc.) are "volunteer workers" of the named insured. The term "volunteer workers" is defined in the revised policy as:

a person who is not your "employee", and who donates his or her work and acts at the direction of and within the scope of duties determined by you, and is not paid a fee, salary or other compensation by you or anyone else for their work performed for you.

In other respects, "volunteer workers" are provided insured status on a basis comparable to that given to the named insured's employees—for example, they do not have insured status with respect to bodily injury or personal and advertising injury to another employee or volunteer worker.

The 2001 ISO CGL revision affects two of the policy's conditions. Previous versions of the condition pertaining to "Legal Action Against Us" acknowledged a third party's right to sue the insurer for recovery of an agreed settlement or judgment "obtained after an actual trial." Since the CGL definition of "suit" now includes arbitration proceedings and other forms of alternative dispute resolution, it is possible that judgment could be rendered against an insured in a forum other than "an actual trial." Therefore, that phrase has been dropped from the "Legal Action Against Us" condition.

In compliance with guidelines issued by the National Association of Insurance Commissioners (NAIC) regarding due dates for audit and retrospective premiums, the 2001 CGL has been revised to specify such a due date. The change affects Condition 5 of the policy, "Premium Audit," which had previously stipulated that audit premiums are due upon notice to the first named insured. The revised language provides that "the due date for audit and retrospective premiums is the date shown as the due date on the bill." This language accomplishes technical compliance with the NAIC ruling, which considers uncollected audit premiums to be nonadmitted on the insurer's income statement if no due date is specified in the policy.

New Endorsements

In addition to changes in the CGL coverage form itself, the 2001 ISO revision also includes a number of new standard endorsements that can be used to modify coverage in various ways. Among the most important of these are the following.

Damage to Work Performed by Subcontractors on Your Behalf—Two new optional endorsements (CG 22 94 and CG 22 95) eliminate coverage for damage to the named insured's work when the damaged work or the work out of which the damage arises was performed by a subcontractor. CG 22 94 imposes this additional exclusion absolutely; CG 22 95 allows it to be targeted to specific work sites or operations. (See Pat Wielinski's article, "Full Circle Regression: The New ISO 'Your Work' Endorsements.")

Additional Insureds—Completed Operations—Standard endorsements CG 20 10 and CG 20 33, which extend insured status to project owners and contractors on either a scheduled or blanket basis, are revised to make more explicit the fact that such additional insured coverage does not include completed operations. At the same time, a new additional insured endorsement also designed for construction risks—CG 20 37—specifically provides the additional insured with completed operations coverage.

Product Withdrawal Expense—A new coverage option, provided by using endorsement CG 04 36, reimburses certain product withdrawal expenses when the withdrawal is prompted by a defect in the product or an incident of product tampering. Coverage provided by the endorsement is subject to an aggregate limit and deductible.

Employee Benefits Liability—An employer's liability arising out of errors or omissions in the administration of its employee benefits program has for some time been insurable by means of endorsements to the CGL policy. These endorsements were developed and filed by individual insurers. ISO has now introduced a standardized version of employee benefits liability coverage. The new endorsement is CG 04 35.

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