Even those who are relatively new to the insurance industry cannot help but be
exposed to continual references to products liability or completed operations
coverage. Unfortunately, any type of coherent explanation as to how this
coverage actually works is it too often misleading or lacking.
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?"1
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 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 how products and completed
operations coverage works.
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 the cost
of about $1,000 per year. Dave's CGL policy always included coverage for
the products-completed operations hazard.
Dave has done well financially and has decided to retire. He sends his
policy back to his insurance agent for cancellation on July 1, 2018; the policy
is terminated on that date as Dave has requested.
The Deck Collapse and Resulting Bodily Injury
Unfortunately, Mary, one of Dave's customers, is seriously injured when
the deck she is standing on collapses on August 31, 2018. It is later found
that in May 2018, 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 sues Dave for her injuries.2 In turn, Dave
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! Nevertheless, 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? After all, Dave
did purchase products-completed operations coverage for all 10 years he was in
business.
CGL Coverage Trigger
Here is the point—the CGL insuring agreement promises to pay
only if bodily or property damage occurs during the policy
period.3 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 trigger requirement—even if the bodily injury or property damage
does arise 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. (But
see also "The
Montrose Endorsement—15 Years Later" [September 2014].)
The “Wrong” Tail
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.
Discontinued Products-Completed Operations Coverage
What if Dave continued to purchase a CGL policy for some 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.
However, as seasoned practitioners know, purchasing coverage for a business
that is no longer operating is not that simple. While continuing Dave's CGL
policy would provide the needed protection, insurers may refuse to provide a
CGL policy once the insurer understands that Dave has stopped building decks.
Even the insurer that has provided Dave with CGL insurance for 10 years may not
want 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's Decks will likely have to
seek CGL coverage in the nonadmitted marketplace, usually at a cost that is
greater than the premium paid when Dave was actively building decks.
Nonetheless, CGL coverage must continue in force for Dave to have
coverage.4
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 policy) 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 aggregate 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.5 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 alleged liability 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 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. The OCIP usually includes
extended completed operations,6 providing
only completed operations coverage for an additional period beyond the
policy expiration date (usually 36 to 120 months, depending on several factors,
including the applicable statute of repose). As everyone enrolled in the OCIP
program (e.g., 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—See Products-Completed Operations Hazard
Redefined—CG 24 07). 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.7
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:
- Warranty
- 2. Contracts. An express or implied promise that something in
furtherance of the contract is guaranteed by one of the contracting parties;
esp. the seller's promise that the thing being sold is as represented or
warranted.
Breach of warranty is a contract theory of liability, not a tort theory.
Claims that allege a product caused bodily injury or property damage (to other
than to the product itself) 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 is a breach of contract. The CGL policy has, for over the last 45
years,8 plainly intended to provide coverage for
claims alleging bodily injury or property damage arising out of products (or
completed work), even if the theory of liability is a breach of warranty. 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 the use of others but not sold is not
considered to be your product. For example, a hardware store rents chainsaws to
home owners for their personal use. If the hardware store failed to properly
maintain the equipment, and the home owner was injured using the chainsaw, the
home owner's claim against the hardware store is not considered by the
hardware store's CGL insurer to be within the products-completed operations
hazard. The bodily injury did not arise out of the hardware store's product
as defined in the CGL policy.
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
completed by the policy definition earlier of the following.
-
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 of the above involves an elevator maintenance contractor.
In this example, the contractor, Lyle’s Lift Service, has a multiyear
contract with a building’s property manager to maintain the building’s
elevators. After performing maintenance work on a particular elevator,
Lyle puts the elevator back into service for use by patrons and
tenants.
Any bodily injury or property damage caused by the recently
maintained elevator is within the products-completed operations hazard
from Lyle’s standpoint—despite the fact that the contract for
maintenance of the elevators remains ongoing for all elevators in the
building. Because the elevator was put back into service and thus put
to its intended use, the elevator causing the bodily injury falls
within the definition of the products-completed operations hazard found
in Lyle's CGL policy.
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. Here is another example: Bill's
Builders is constructing a 3-story building that is 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—meaning
these three units have been put to their intended use.
If Bill's Builders is called back to repair one of the sold units to fix
doors that are not properly hung, the CGL policy 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.
Performing work on completed work—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 an injury
arising out of the complete work itself.
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.
Dangerous conditions caused by loading or
unloading—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.
If a Christmas tree lot ties trees to the top of the customer’s autos and
that tree flies off the auto because the tree was not properly tied down, any
bodily injury or property damage that results is within the products-completed
operations hazard of the tree lot.
Tools and equipment—Bodily injury or property damage that
is caused by the existence of tools, uninstalled equipment or
abandoned or unused materials are not included within the
products-completed operations hazard.
Included in general aggregate limit—Certain CGL
classifications (ISO Commercial Lines Manual or CLM—ISO Classification Table)
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.9 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 of the CLM also requires that an endorsement is attached to the CGL
policy for certain classifications, such as 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 takes 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).
The above are two examples of the few instances in which the applicable CGL
classification affects how the coverage is to apply.
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 properly understood can
the more specific issues that surround the "products-completed operations
hazard" be appreciated—such as how policy exclusions and other coverage
endorsements affect the products-completed operations hazard.