After all, liability coverage for products liability and completed operations
liability insurance has been included in both the occurrence and claims-made
Insurance Services Office, Inc. (ISO), commercial general liability (CGL) form
for over 20 years—everyone knows it is there. So why pay it much heed?
Consider this—the most common reaction of an insurance professional who finally
grasps the limitations of how the coverage applies is, "What good is it?" The
second most common reaction is denial: "My companies don't pay claims that way."
Even more interesting is the reaction of many clients' attorneys or accountants,
or even of the clients themselves, when the fundamentals of this coverage are
presented to them—some go as far as to suggest (or demand) a "tail." Others
point out the how insurers try to weasel out of paying covered claims. Sorry,
please try again!
Here is a litmus test that measures a basic understanding of what bodily
injury or property damage will be covered within the products-completed operations
hazard. Failure to grasp this deceptively simple concept will likely result
in a fundamental misunderstanding of products and completed operations coverage.
An Example Illustrating the Harsh Reality
Consider an example. Dave's Decks has been installing high quality residential
decks for the past 10 years. He is a sole proprietor with no employees and has
done all the work himself. For the past decade, Dave has purchased through his
insurance agent an occurrence-based ISO CGL policy (1985 edition or later) with
no unusual endorsements. The policy has been in force continuously with the
same insurance company for the past 10 years at a cost of about $1,000 per year.
Dave's CGL policy always included coverage for the products-completed operations
hazard.
Dave has done quite well financially and decides to retire. He sends his
policy back to his insurance agent for cancellation on July 1, 2006; the policy
is terminated on that date as Dave has requested. Unfortunately, Mary, one of
Dave's customers, is seriously injured when the deck she is standing on collapses
on August 31, 2006. It is later found that in May 2006, when Dave built the
deck, he forgot to properly fasten it to the wall. The collapse is the direct
result of Dave's failure to fasten the deck to the wall. Mary's injuries are
found to have been caused by the deck's collapse.
Mary brings suit against Dave who in turn submits the complaint to his insurer.
Surely there is coverage, at least defense, for this mishap? Bear in mind, Dave
has always purchased coverage for the products-completed operations hazard!
But the harsh reality is that Dave's CGL insurer has no obligation to defend
or respond in any way to the suit by Mary—Dave has no insurance for this claim.
Why? Didn't Dave purchase products-completed operations coverage for all 10
years he was in business?
Here's the point—the CGL insuring agreement promises to pay only if bodily or property damage occurs during the policy period. While Dave
did purchase products-completed operations coverage as part of his CGL policy,
the injury to Mary occurred about 2 months after
his policy was terminated. Products-completed operations coverage of
the CGL is subject to and does not override this timing requirement—even if
the bodily injury or property damage arises from the named insured's product
or completed operation. Put another way, products-completed operations coverage
does not extend the policy period—the policy must be in effect when the bodily injury
or property damage occurs. It does not matter that, or even if, a CGL policy
was in effect when Dave designed, built, or sold the deck. An occurrence-based
CGL policy applies to the completed deck only if the bodily injury or property
damage takes place during the policy period.
The supplemental extended reporting period (SERP) or "tail" that is sometimes
offered as the solution to Dave's coverage gap simply doesn't work. First, the
SERP or tail is not available on an occurrence CGL policy. Second, even if it
was available, or if Dave had purchased a claims-made CGL policy and purchased
the SERP, the SERP does not apply to bodily injury or property damage that occurs during the tail or reporting period.
As the name suggests, the SERP only extends the CGL policy to include claims
made against an insured during the extended reporting period that result from
bodily injury or property damage that took place
when the policy was in effect.
What if Dave continues to purchase a CGL policy for a period of time after
retirement? As now may be obvious, this or a similar approach will close the
coverage gap, at least for as long as Dave continues to renew his CGL policy.
But, as seasoned practitioners know, purchasing coverage for a business that
is no longer operating isn't that simple. While continuing Dave's CGL policy
would provide the needed protection, insurers generally refuse to provide a
CGL policy once it is disclosed that Dave has stopped building decks. Even the
insurer that has provided Dave with CGL insurance for 10 years may decline to
continue providing coverage for Dave's Decks once the business closes down.
This is in part due to ISO's withdrawal of the "Discontinued Operations"
classification formerly available to insurers. Even though the exposure for
Dave's Decks is actually decreasing during
his retirement, the practical result is that Dave Deck's will likely have to
seek CGL coverage in the nonadmitted marketplace, usually at a cost that is
multiples of the premium paid when Dave was actively building decks. Nonetheless,
CGL coverage must continue in force for Dave to have coverage.
The Products-Completed Operations Hazard—Important Considerations
Now that we have established a baseline understanding of the workings of
products-completed operations coverage, it is important to consider several
other situations in which a better understanding of exactly what is included
in the "products-completed operations hazard" (which is a defined term in the
CGL) is necessary.
Policy Limits One of the six CGL limits is the products-completed operations aggregate
limit. Knowing the types of claims that fall within and therefore reduce or
exhaust this limit is critical.
Policy Exclusions Several exclusions included within the
CGL policy are tied directly to the products-completed operations hazard. For
example, property damage exclusion j.(6), which eliminates coverage for the
cost of restoring, repairing, or replacing the named insured's work that was
incorrectly performed, does not apply to
property damage that is included within the products-completed operations hazard.
Exclusion l. eliminates property damage to your work if the property damage
arises out of your work and is included
within the products-completed operations hazard. In either case, whether the
exclusion applies is dependent on whether the claim falls within the products-completed
operations hazard.
Even certain bodily injury claims are eliminated if they fall within the
products-completed operations hazard. Specifically, medical payments coverage
expressly excludes any bodily injury included within the products-completed
operations hazard.
Endorsement Excludes Products-Completed Operations Coverage Based on the type of business or organization being provided CGL coverage,
an insurer may exclude or the policyholder may choose not to purchase coverage
for any bodily injury or property damage that falls within the products-completed
operations hazard. In circumstances like these, it is crucial to understand
precisely what coverage is being removed from the policy.
For example, in litigation that alleged liability on the part of handgun
manufacturers and distributors for contributing to market overflow, the question
before the court was whether such allegations fell within the products-completed
operations hazard, as the policyholder's CGL policy excluded products-completed
operations coverage. Market overflow was an assertion that manufacturers and
distributors of handguns negligently created and supplied an unlawful national
market in firearms, the source of the handguns that killed and wounded plaintiffs
and their loved ones.
The policyholder asserted that the liability being alleged was covered even
with the products-completed operations hazard exclusion because: (1) the products-completed
operations hazard was intended to apply only to defective products claims; and
(2) the actions do not allege actual injuries from the distributor's products
but rather injuries from the company's management and strategy, thereby rendering
the exclusion inapplicable.
The appeals court concluded that the allegations arose out of the policyholder's
products and fell directly within the products-completed operations hazard exclusion.
The court looked closely at the definition of the products-completed operations
hazard and observed that wording applied to "all bodily injury and property damage occurring away from your premises and arising
out of your product…," and that the proximate cause of the plaintiffs' injuries
was firearms.
Only Products-Completed Operations Coverage Is Provided For liability policies that are written specifically for a construction project,
such as a consolidated insurance program (CIP) or "wrap-up," it is common to
provide full CGL coverage for the period
of the construction and then to provide products-completed operations only coverage for some period of time after construction is complete. For example,
in an owner controlled insurance plan (OCIP) (a type of CIP or wrap-up), the
full CGL policy may be provided for a period of 24 months—the anticipated life
of the construction—followed by extended products-completed operations only coverage for some additional period
of time (36 to 120 months, depending on several factors, including the applicable
statute of repose). As everyone enrolled in the OCIP program (owner, general
contractor, and subcontractors) is relying on the OCIP liability policy to provide
them protection for the entire project, including liability that may result
from injuries or damage arising out of completed work, fully comprehending the
specifics of what is included within the products-completed operations hazard
is vital.
The Products-Completed Operations Hazard—An Overview
As previously mentioned, products-completed operations hazard is a defined
term and is found in the definitions section of the CGL policy.
Must Occur Away from Your Premises. To
be included within the products-completed operations hazard, the bodily injury
or property damage must occur away from premises owned or rented by the named
insured and arise out of "your product"
or "your work." Said differently, bodily injury or property damage that takes
place on the named insured premises is not within the products-completed operations
hazard (this can be amended by endorsement, however). Second, the bodily injury
or property damage must arise out of "your product" or "your work," terms also
defined in the CGL.
Your Product. A broadly defined term, this
includes goods or products manufactured, sold, handled, distributed, or disposed
of by the named insured, others trading under the named insured's name, and
includes a person or organization whose business assets a named insured has
acquired. Your product includes containers (but not vehicles), materials, parts,
or equipment used or furnished in connection with goods or services, but does
not include any real property.
Your Product—Warranties. For those insurers
who routinely break out the boilerplate "the CGL never provides coverage for
any breach of contract claim," take note—the definition of your product specifically
includes warranties and representations made with respect to the fitness, quality,
durability, performance, or use of your product.
Black's Dictionary (Seventh Edition)
states:
Breach of warranty is a contract theory of liability, not a tort theory.
Claims that allege a product caused bodily injury or property damage because
of a breach of warranty are asserting a breach of contract claim. Breach of
warranty claims, while subject to other policy terms and conditions, cannot
be dismissed simply because the theory of liability being put forth is breach
on contract. The CGL policy plainly intends to include breach of warranty claims
in the definition of your product. In addition to warranties, your product also
includes providing or failing to provide warnings.
Not Your Product. Vending machines or other property rented to or located for
use of others but not sold are not considered your product. For example, a hardware
store rents chainsaws to homeowners for their personal use. If the homeowner
is injured when using the chainsaw because the hardware store failed to properly
maintain the equipment, the homeowner's claim against the hardware store is
not considered a claim that will fall within the products-completed operations
hazard as the injury did not arise out of your product.
Your Work. Similarly, "your work" is a
broadly defined term and includes operations performed by the named insured
or on the named insured's behalf, including material, parts, or equipment in
connection with the operations. Operations or work performed on behalf of the
named insured means that work done by a subcontractor is still considered your
work.
Also similar to your product, the definition of your work includes warranties
and representations made with respect to the fitness, quality, durability, performance,
or use of your work as well as providing or failure to provide warnings or instructions.
The breach of contract issue raised above applies in the same manner to your
work as it does to your product.
Not Products-Completed Operations Hazard
Physical Possession. Products still in
the named insured's possession are not included in the products-completed operations
hazard. In other words, for a claim to be within the products-completed operations
hazard, the named insured has to have given up physical possession and the injury
or damage must take place away from the named insured's premises. In most cases,
bodily injury or property damage caused by a product that takes place on the
insured’s premises or that takes place while the product is still within the
possession of an insured would be considered a premises or operations claim.
Completed Work. The products-completed
operations hazard does not apply if the work has not yet been completed or abandoned.
The work is considered by the policy definition to be completed the earlier of:
-
When all the named insured's work
as required in a contract has been finished.
-
When all the work at a job site has been completed if the named insured's
contract requires work under the same contract but at another job site.
For example, Chris's Cooling has a contract to repair the air-conditioning
systems for The Real Estate Group at three different office buildings. Once
Chris has completed the repair of the air-conditioning equipment at the
first location, that job is considered to be complete. Thus, any bodily
injury or property damage that may arise from that first location is included
within the products-completed operations hazard, even if the other two jobs
are not finished.
-
When that part of the work done at a job has been put to its intended
use by someone other than another contractor or subcontractor working on
the same project.
An example: Bill's Builders is constructing a 3-story building that is
intended to be sold as 20 residential condominium units. Even though construction
is still ongoing for a majority of the units, three units are sold and occupied
by the owners. Bodily injury or property damage that may arise out of the
three occupied units would be considered to fall within the definition of
products-completed operations hazard as the units have been put to their
intended use—residential housing. The remainder of the condominium project
would not be considered completed as all the work has not been completed
and there is only one site for this project.
Service or Repair Work. An important and
often confused clarification of what constitutes completed work follows the
above three-part completed work test. The CGL policy states that work is considered
complete even if the completed work (as defined above) may need subsequent service,
maintenance, repair, or replacement. For instance, if in the above example,
Bill's Builders has to go back and repair one of the occupied units to fix doors
that are not properly hung, the CGL makes clear that the unit is still considered
completed work. Bodily injury or property damage that arises from the finished
unit will be included within the products-completed operations hazard.
It is, however, important to point out that the products-completed operations
hazard does not apply to an injury to the
unit owner that occurs while Bill is actually in the unit adjusting the doors.
Say Bill's ladder falls over and hits the unit owner while Bill is working on
the doors—this injury to the unit owner is an operations claim and not a products-completed
operations claim. In other words, this paragraph does not mean (as is too often
assumed) that performing operations on completed work is the same as completed
work.
While this may seem inconsequential, it can become a major coverage issue
when the only coverage provided to a contractor
is products-completed operations coverage, which is commonly the case in consolidated
insurance programs or wrap-ups. Insurers who regularly provide wrap-up liability
coverage generally recognize that a contractor or subcontractor may have a warranty
period in which they are obligated to go back to perform service or repair work
and thus amend their CGL policy accordingly. For example, an insurer may extend
the policy term to provide limited operations liability coverage beyond the
policy expiration for bodily injury or property damage that takes place while
certain contractors are performing required repair work during the warranty
period.
Other Situations Not Considered Included within the Products-Completed Operations
Hazard
Transportation of Property. Transporting
property is generally not considered to fall within the products-completed operation
hazard. An illustration: a manufacturer of plastic resin engages a common carrier
to transport its product (the plastic resin) to distributors. During the trip,
some of the resins escape from the common carrier's trailer onto the highway,
causing very slippery conditions that result in auto accidents and injuries
to motorists. As the resin is the product of the manufacturer, resulting claims
against the manufacturer would otherwise be within the products-completed operations
hazard. To keep such claims within the general aggregate limit, the policy removes
from the definition of products-completed operations hazard the transportation
of property.
A noted exception to the above is a claim that is caused by the improper
or negligent loading or unloading of a vehicle that is not owned or operated
by the named insured. In this instance, the loading or unloading (and not the
transportation) of the property is considered a completed operation. For example,
a contractor overloads a common carrier's truck with sand and gravel, resulting
in the small stones flying out of the truck and injuring pedestrians. This bodily
injury claim would be considered to fall within the products-completed operations
hazard from the standpoint of the contractor who overloaded the truck.
Tools and Equipment. Bodily injury or property
damage that is caused by the existence of tools, uninstalled equipment or abandoned or unused materials
is not included within the products-completed operations hazard.
Included in General Aggregate Limit. Certain
CGL classifications specifically note that products and completed operations
are included, such as the classification Buildings or Premises—Office—Not-for-Profit
Class Code: 61227 NOC (not otherwise classified). No separate premium charge
is made for products-completed operations hazard for such businesses or organizations
(any charge is included within the premises and operations premium) and thus
any claims that would otherwise be considered products or completed operations
claims are considered premises and operations claims and thus reduce the general
aggregate limit.
On occasion the "products/completed operations included" classification seems
to cause confusion; some insurers contend that the intent of this classification
wording is to eliminate coverage entirely for any claim that arises out of your product or your work. Of course, this
wording does not reduce coverage; it merely states that the products-completed
operations hazard does not include such claims—it does not say that no coverage applies to such claims.
Restaurants and Other Food Vendors. The
ISO Classification Table requires that an endorsement be attached to the CGL
policy for certain classifications, such a restaurant, to change the definition
of products-completed operations hazard. The required endorsement is the Products-Completed
Operations Hazard Redefined (CG 24 07) which changes the definition by removing
the requirement that bodily injury or property damage take place away from the named insureds' premises for
the claim to be included within the products-completed operations hazard. The
intent is to consider food consumed on the premises to be included within the
products-completed operations hazard (and within the products-completed operations
aggregate limit). Therefore, a claim by a customer alleging food poisoning resulting
from a meal consumed at Chef's Best Restaurant will be included within the restaurant's
CGL products-completed operations hazard despite the fact the bodily injury
from food poisoning took place on the restaurant's premises.
As with the "products/completed operations included" classifications, some
insurers wrongly contend that the Products-Completed Operations Hazard Redefined
endorsement eliminates coverage for any bodily injury or property damage that
arises out of the restaurant's products. A careful reading of the endorsement
reveals that the definition of products-completed operations has been expanded
to include bodily injury or property damage that arises out of your products,
even if the bodily injury or property damage takes place on the premises of
the insured (in this case the premises of the restaurant).
Conclusion
The coverage provided for products and completed operations in the standard
CGL policy seems to get short shrift. Too little attention is paid to the basics
of how the coverage works within the context of the entire policy—including
the requirement that any bodily injury or property damage, even if caused by
an insured's product or completed work, must take place during the policy period
for coverage to apply. It is only after this deceptively simple concept is fully
understood can the more specific issues that surround the "products-completed
operations hazard" be appreciated—such as how the products-completed operations
hazard affects policy exclusions and restricts coverage endorsements.