Who (Else) is Covered Under Your Professional Liability Policy?

Sarah Nau | Phelps Dunbar

When does a Professional Liability policy cover individuals that work for an insured, an insured’s related entities (such as subsidiaries), and/or the insured’s contracting partners?

  • Individuals working for an insured and an insured’s related entities are not always automatically covered, meaning review of the policy’s Declarations and/or definition of “insured” is crucial.
  • Professional Liability policies do not typically provide coverage for an insured’s contracting partners, but an insured may accomplish this by requesting coverage via endorsement for a risk-transfer obligation (such as an agreement to defend and indemnify) between the insured and its contracting partner, or (albeit rarer in the Professional Liability context) naming the contracting partner as an additional insured.

How are an insured’s related individuals and entities covered under a Professional Liability policy?

  • The first named insured is listed on the Declarations page. An insured may also request that other related entities be scheduled as named insureds. Typically, this is accomplished by attaching an endorsement to the policy that lists these entities as named insureds in addition to the first named insured. The policy’s definition of “insured” may also include an insured’s subsidiaries and other related entities.
  • With respect to individuals who work for the insured, it is very common for past and present employees, partners, members, officers and directors to be included in the definition of “insured,” with the caveat that those individuals’ liability must arise from work performed for the insured.
  • Automatic insured status for an independent contractor performing work on behalf of the insured is uncommon. While some “insured” definitions include these independent contractors, many do not—and will not—unless the policy is specifically endorsed to cover them.

How are an insured’s contracting partners covered under a Professional Liability policy?

  • In General Liability policies, a subcontractor’s policy commonly includes additional insured endorsements, under which a general contractor will be covered as an additional insured if: (1) the subcontractor agreed in writing to name the general contractor as an additional insured and/or the general contractor is specifically scheduled as an additional insured; and (2) the general contractor’s liability arises out of the subcontractor’s work. An additional insured has all of the same rights under the policy as any other insured.
  • Conversely, Professional Liability policies rarely have additional insured provisions, and especially not “blanket” ones. Thus, if an insured professional contracts with an owner, general contractor or developer on a project, one cannot assume that those entities will receive coverage under the insured’s Professional Liability policy. In part, this is because, given the specific nature of a professional risk, those underwriting such a policy are unable to extend coverage to an entity whose risk exposure is unknown to them.   
  • Most Professional Liability policies exclude from coverage liability assumed by the insured under contract (including hold harmless and indemnity agreements) unless the insured would have been liable in the absence of the contract. While also uncommon, some Professional Liability policies will provide coverage for an insured’s contractual agreement to defend/indemnify a contracting partner if the contracting partner is sued; that would typically be accomplished by endorsement. 
  • Before determining whether a policy provides coverage for any risk-transfer provision, an insured must confirm whether the risk-transfer provision is valid. Many states have rules prohibiting an insured from agreeing to defend and indemnify a contracting partner for claims arising out of the partner’s own negligence unless the agreement to do so is sufficiently clear and conspicuous. Some states also have statutes prohibiting risk-transfer provisions entirely (a common example is anti-indemnity statutes for the oil and gas industry). Thus, careful review of a state’s laws regarding risk-transfer provisions is important before determining whether the policy may potentially cover the risk transfer.

In Brief: Commercial General Liability Policies in USA

Mary Beth Forshaw | Simpson Thacher

Standard commercial general liability policies

Bodily injury

What constitutes bodily injury under a standard CGL policy?

CGL policies generally provide coverage for bodily injury or property damage sustained by third parties (rather than the policyholder) as a result of an occurrence.

Insurance coverage litigation frequently centres on whether the underlying claims against the policyholder allege bodily injury or property damage within the meaning of the applicable insurance policy, and whether the events giving rise to the injury or damage were caused by an occurrence.

The phrase ‘bodily injury’ in insurance contracts generally connotes a physical problem. However, a number of courts have ruled that the term also encompasses non-physical or emotional distress, either standing alone or accompanied by physical manifestations.

The question of whether bodily injury exists may also arise where an underlying complaint alleges non-traditional or quasi-physical harm, such as biological or cellular level injury or medical monitoring claims. Courts addressing these and other analogous bodily injury questions have arrived at mixed decisions. Bodily injury determinations are often case-specific, turning on the particular factual record presented.

Property damage

What constitutes property damage under a standard CGL policy?

Property damage typically requires injury to or loss of use of tangible property. Therefore, the mere risk of future damage is generally insufficient to constitute property damage. Similarly, it is generally held that the inclusion of a defective component in a product, standing alone, does not constitute property damage. Numerous other allegations of harm or potential harm to property have generally been deemed to fall outside the scope of covered property damage, including the following:

  • injury to intangible property (such as computer data);
  • injury to goodwill or reputation;
  • pure economic loss; and
  • diminished property value.

However, although economic loss is not equated with property damage, courts may use a policyholder’s economic loss as a measure of damages for property damage where physical damage is found to exist.

Occurrences

What constitutes an occurrence under a standard CGL policy?

Virtually all modern-day general liability insurance policies provide coverage for an occurrence that takes place during the policy period. The insurance term ‘occurrence’ is typically equated with or defined as an accident or an event that results in damage or injury that was unexpected and unintended by the policyholder.

Insurance litigation frequently involves several issues relating to the occurrence requirement:

  • whether intentional conduct that results in unexpected or unintended harm constitutes an occurrence;
  • whether negligent conduct that results in expected or intended harm constitutes an occurrence;
  • whether an event or series of events constitutes a single occurrence or multiple occurrences;
  • whether the occurrence falls within a given policy period (ie, what is the operative event that triggers a policy?); and
  • how insurance obligations should be divided among multiple insurers (or the policyholder) when an occurrence spans multiple policy periods (ie, allocation).

Although it is a widely accepted principle that insurance policies provide coverage only for fortuitous events, and cannot insure against intentional or wilful conduct, it is less clear whether (and under what circumstances) intentional conduct that results in unexpected and unforeseen damage can constitute a covered occurrence. This question has arisen in a multitude of factual contexts, including claims arising out of faulty workmanship, pollution and fax blasting in violation of federal statutes. In evaluating the occurrence issue, some courts focus on the initial conduct of the policyholder, while other courts look to whether the resulting harm was unexpected or unintended.

How is the number of covered occurrences determined?

The determination of whether damage or injury is caused by a single occurrence or by multiple occurrences has significant implications for available coverage. The number of occurrences may impact both the policyholder’s responsibility for deductible payments and the per occurrence policy limits that are available. Thus, it is a hotly contested issue in insurance litigation. Most courts utilise a cause-based analysis to determine the number of occurrences. Under the cause-oriented approach, if there is one proximate cause of the injury, there is one occurrence, regardless of the number of claims or incidents of harm.

In contrast, under an effects-oriented analysis, the focus is on the number of discrete injury-causing events.

A number of occurrences disputes arise in virtually all substantive areas of insurance litigation, including claims arising out of asbestos, environmental harm, natural disasters, and the manufacture or distribution of harmful products.

Coverage

What event or events trigger insurance coverage?

Litigation that centres on whether a given policy period has been implicated by an occurrence is generally referred to as a ‘trigger of coverage’ dispute. ‘Trigger’ describes what must happen within the policy period for an insurer’s coverage obligations to be implicated. In cases involving ongoing or continuous property damage or personal injury, the question of what triggers policy coverage may be complex. From a legal perspective, courts employ several different methods to resolve trigger disputes. For bodily injury claims, the operative trigger event has been held to be:

  • at the time of exposure to a harmful substance;
  • at the time the injury manifests itself;
  • at the time of actual ‘injury in fact’; or
  • a combination or inclusion of all of the above.

Property damage claims have also given rise to multiple trigger approaches, some of which focus on the initial event that set the property damage into motion, while others look to the time that physical damage became evident. From a factual perspective, parties are often required to submit voluminous evidence in support of their position as to when property damage or bodily injury actually occurred. Expert witnesses are often retained to address trigger issues.

How is insurance coverage allocated across multiple insurance policies?

When an occurrence triggers multiple policy periods, disputes frequently arise as to how indemnity costs should be allocated among various insurers. The emerging trend in courts in the United States is a pro rata approach, which apportions loss among triggered policies based on insurers’ proportionate responsibilities. In applying pro rata allocation, courts have considered:

  • the time that each insurer is on the risk;
  • the policy limits of each triggered policy;
  • the proportion of injuries during each policy; or
  • a combination of these and other factors.

Pro rata allocation also typically contemplates policyholder responsibility for periods of no coverage or insufficient coverage. The pro rata allocation approach stems from policy language that limits insurers’ obligations to damage ‘during the policy period’. Some jurisdictions that utilise a pro rata approach recognise an ‘unavailabilty’ exception. The unavailability exception provides that apportionment to the insured for uninsured periods is not warranted if insurance was unavailable in the marketplace during the relevant time frame. If this unavailability is established, losses during the uninsured periods are allocated among the insurers.

A minority of courts endorse a joint and several liability approach, under which a policyholder is entitled to select a single policy from multiple triggered policies from which to seek indemnification. This approach stems from common policy language requiring an insurer to pay ‘all sums’ that the policyholder becomes legally obligated to pay. Notably, even courts that endorse all sums allocation typically allow a targeted insurer to pursue contributions from other triggered insurers.

Law stated date

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18 December 2019

Does a CGL Policy’s “Business Description” or “Class Code” Limit Coverage?

Farrell Miller | Cozen O’Connor

One way a CGL insurer can narrow otherwise broad bodily injury and property damage coverage is by activity. Activities that face similar risk can be grouped using an activity classification code, which can be incorporated into the policy through a class limitation endorsement.

For instance, a policy issued to an individual (for any business of which he is a sole owner) could include an “accounting” class code and a class limitation endorsement, effectively narrowing coverage to accounting activities. Courts routinely enforce such endorsements.[1]

Suppose that, instead of a class limitation endorsement for accounting, the policy’s declarations page merely said “business description: accounting” and “Class Code: 7619—Accounting.” Now suppose the individual also owns a non-accounting business and is sued for liability in connection with that business. Would that be covered? In other words, what effect should a court give to a class code or business description that isn’t incorporated into the policy by endorsement? This question underpins two divergent Circuit Court decisions.

In Smith v. Burlington Ins. Co., Smith owned and operated a courier service and a security service.[2] One of Smith’s armed security guards shot an unarmed teen while on duty at an Oklahoma apartment complex. The teen later died. His mother brought a wrongful-death action against Smith d/b/a Smith and Son Security. On Smith’s CGL policy with Burlington, the declarations designate “Form of Business” as “Individual,” and “Business Description” as “Courier Service.” The Policy section defining “who is an insured” says “If you are designated . . . as [a]n individual, you and your spouse are insureds, but only with respect to the conduct of a business of which you are the sole owner.” Within the policy was a “Schedule of Classification and Rates” listing “94099—Express Companies” (i.e. a Class Code).

Burlington denied coverage, saying that the policy was intended to cover Smith only for his courier service business. The district court sided with Burlington and the Tenth Circuit affirmed.[3] The district court held that two standard policy provisions effectively incorporated the business description into the policy itself. The first provision, a merger clause, says “declarations together with the common policy conditions and coverage form(s) and any endorsement(s), complete the above numbered policy.”[4] The second provision, in the “Representations” section, says “By accepting this policy, you agree: (a) The statements in the Declarations are accurate and complete; (b) Those statements are based upon representations you made to us; and (c) We have issued this policy in reliance upon your representations.”[5] The district court also held that using the Class Code “94099—Express Company” “rather than a code that could conceivably cover any armed security guard business confirms that there was no intent to cover Smith’s security business.”[6] The court concluded by stating that it refused to adopt a “strained interpretation that the ‘courier service’ policy covers any business Smith might choose to pursue.”[7]

In Mount Vernon Fire Ins. Co. v. Belize NY, Inc., a general contractor (GC) hired Belize NY, Inc. to perform demolition work at a church in Harlem. A few months later, the GC again hired Belize solely to supervise a subcontractors’ work at the church.[8] Months later, a person entered the church, shot and killed several people, and started a fire before taking his own life. A wrongful death suit was commenced against Belize, alleging that the GC unlawfully shut off the church’s sprinkler system and “bricked over” or eliminated several church exits.[9] On Belize’s CGL policy with Mount Vernon, the declarations designated Belize’s “Form of Business” as “Corporation,” and “Business Description” as “Carpentry.”[10] Two classifications were listed under “Premium Computation” on the Declarations Page: “Carpentry-Interior-001” and “Carpentry-001.”[11]

Mount Vernon denied coverage for the wrongful-death action, arguing that Belize was acting in a supervisory capacity rather than performing carpentry work at the time of the shooting.[12] The district court sided with Belize and the Second Circuit affirmed. The Second Circuit held that under New York law, exclusions “must be set forth clearly and unmistakably.”[13] But the policy didn’t do that, since there was no “specific language indicating that the classifications [or the business description] determine the scope of the coverage.”[14] “Were we to accept [Mount Vernon’s] argument, insurers would be permitted to argue for limitations of all kinds by invoking the stand-alone words of classification not otherwise referred to in a policy. If Mount Vernon wished to limit coverage based on classifications, it should have done so specifically.”[15]

The Smith and Mount Vernon courts appear to disagree about whether a standalone business description or class code can narrow coverage. Can Smith and Mount Vernon be harmonized? Here’s some guidance. If an insured has a CGL policy with a business description and/or class code suggesting a small risk, and seeks coverage for an activity that involves a completely different, larger, and perhaps more exotic risk (e.g. armed security service), then a court is likely to find that the insurer did not intend to cover the larger risk. To decide otherwise would unfairly blindside the insurer. On the other hand, if the insured has a policy with a business description and/or class code that suggest a risk that is similar to the actual claim (e.g. carpentry vs. construction supervision) then a court is likely to say “close enough” and find coverage. To decide otherwise would be unfair to the insured, since the policy wouldn’t clearly and unmistakably limit coverage. In the end, the safest course is to ensure that the policy accurately reflects both parties’ understanding of the risk.


[1] See, e.g.Evanston Ins. Co. v. Heeder, 490 Fed. Appx. 215 (11th Cir. 2012) (no coverage where classification limitation endorsement narrowed coverage to residential roofing, and claim arose from a commercial roofing project); Ruiz v. State Wide Insulation & Constr. Corp., 269 A.D.2d 518 (N.Y. App. Div. 2000) (no coverage where classification limitation endorsement narrowed coverage to painting and the insured party was hurt during a roof repair); Princeton Excess and Surplus Lines Ins. Co. v. US Global Security Incorporated, et al., Case 4:18-cv-02705 (S.D. Tex. Sept. 24, 2019) (no coverage where designated operations exclusion narrowed coverage to exclude injuries arising out of any work at or in bars, restaurants, taverns or other establishments selling or providing alcoholic beverages, and exception to exclusion did not apply as there were no allegations of an injury arising out of parking lot security operations).

[2] 2019 U.S. App. Lexis 19175, 2019 WL 2635725, at *1 (10th Cir. 2019) (interpreting Oklahoma law).

[3] Smith v. Burlington Ins. Co., 2018 U.S. Dist. Lexis 54403 (N.D. Okla. 2018), aff’d 2019 U.S. App. Lexis 19175, 2019 WL 2635725 (10th Cir. 2019).

[4] Id. at *11

[5] Id.

[6] Id. at *7.

[7] Id. at *15.

[8] 277 F.3d 232, 235 (2d Cir. 2002) (interpreting New York law).

[9] Id.

[10] Id. at 234.

[11] Id.

[12] Id. at 236.

[13] Id. at 237.

[14] Id.

[15] Id. at 239.

Are Untimely Repairs an “Occurrence” Triggering CGL Coverage?

Christopher G. Hill | Construction Law Musings

All Class A commercial contractors in Virginia are required to have a minimum level of Commercial General Liability (CGL) coverage.  As a general rule, this insurance is there for damage to property or persons arising from an “occurrence” that is covered by the policy.  Many cases that are litigated relating to coverage for certain events under a CGL policy turn on the definition of “occurrence” and whether the event leading to a request for coverage constitutes an “occurrence.”

A recent case in Fairfax County, Virginia, Erie Insurance Exchange v. Spalding Enterprises, et al., is just such a case.  In the Spalding Enterprises case, the Court considered the following scenario.  A homeowner, Mr. Yen contracted with Spalding Enterprises to fix some fire damage at his home.  Spalding promised the repairs would be complete in October of 2019.  However, after Mr. Yen paid a $300,000.00 deposit, Spalding Enterprises stated that the work would not be completed until November of 2019.  Yen then fired Spalding Enterprises and sued for breach of contract, constructive fraud, and violation of the Virginia Consumer Protection Act.  Spalding Enterprises sought coverage from Erie Insurance for the claim and Erie denied coverage and sought a declaratory judgment that the events alleged in the Complaint by Mr. Yen did not fall under the definition of “occurrence” in the CGL policy held by Spalding Enterprises.

After discussing the definition of occurrence in the policy and the law in Virginia that generally precludes intentional acts from that definition where the result of the intentional act is a natural or probable consequence of that intentional act, the Court stated:

Here, Mr. Yen’s detrimental reliance is unquestionably a natural or probable consequence of the misrepresentations made upon which Mr. Yen was intended to rely. It follows that any alleged constructive fraud in the complaint is not an occurrence under Spaulding Enterprise’s CGL policy with Erie.

Because the fraud allegations (set out in more detail in the opinion) stated that the damages directly arose from the actions of Spalding Enterprises, the Court agreed with Erie and stated that the allegations in the factual allegations found in the Complaint did not constitute an “occurrence” under the policy.

The takeaways (aside from having an experienced Virginia construction attorney assist with any of these tricky issues) are 1. CGL policies do not cover everything and 2. be sure to carefully read any policy documents because the Virginia courts will look at the specific language very carefully in determining if coverage applies.

Disagreement Does Not Mean Ambiguity

Michelle Gaston | Steptoe & Johnson

West Virginia Supreme Court Upholds Water Backup Exclusion

The Supreme Court of Appeals of West Virginia recently found an exclusion for loss or damage caused by “water that backs up or overflows from a sewer, drain, or sump” pump clear and unambiguous.  The Court overturned the policyholder’s award of summary judgment and found there was no coverage under the commercial property insurance policy.

In Motorists Mut. Ins. Co. v. Zukoff , the building where the Zukoffs’ business, Accessories Ltd., was located in Moundsville, West Virginia was flooded by sewage.  An employee of the Moundsville Sanitary Board was advised that a resident heard a “gurgling” in the basement, indicative of a clogged line.  The employee injected water into the line to clean it out, and the level returned to normal.  A few minutes later, the employee was advised that sewage was coming out of the clean outs in front of Accessories Ltd.  When inserting a hose to clean out the line did not work, the employee and his supervisor located the blockage and the employee used his hands to remove it.  By the time the line was unclogged,  however, Accessories Ltd. had suffered damage for which it sought coverage under its commercial property policy issued by Motorists Mutual Insurance Company.  The insurer denied coverage pursuant to the water backup exclusion.  The policyholder filed a declaratory judgment action and the circuit court awarded it summary judgment finding that because the phrase “backs up” was not defined, the policy was ambiguous and the doctrine of “reasonable expectations” was to be applied.  Although the circuit court held that it was not reasonable to expect coverage if the source of the water and sewage backup was on the premises, the court found that it was reasonable to expect coverage if the source was off of the insured premises.  Because the source of the subject back up was external, the court found the water backup exclusion inapplicable.

The West Virginia Court reversed.  The Court stated that simply because the insurance policy did not define the phrase “backs up,” the policy was not ambiguous.  The Court cited a 2006 decision from the Kanawha County Circuit Court, Sylvania Props., LLC v. S. Putnam Pub. Serv. Dist. where the trial court held that a similar insurance policy exclusion was clear and unambiguous.  

Additionally, the Court noted that the Motorists Mutual exclusion applied to water that “overflows,” which was also an unambiguous term.  The Court stated “no matter how the entry of water into the premises from the sewer was described, a plain reading of the policy language clearly shows that a person would understand that coverage for this loss would be excluded where water “back[ed] up” and “over flow[ed]” into the Accessories Ltd. premises.”

Click here to read the full Motorists Mut. Ins. Co. v. Zukoff decision.