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.


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.


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.

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18 December 2019

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.

Liability Insurance Coverage: Basic Principles

Peter Selvin | Ervin Cohen & Jessup

There are certain core principles that must be applied in analyzing coverage under a liability insurance policy.

This two-part article sets out those principles. It also explores some counter-intuitive situations in which such coverage may come into play.

Insurance Liability

  • Hidden opportunities to obtain coverage in liability cases
  • Sometimes counter-intuitive
  • Often obscured by jargon and complexity
  • What strategies will assist in uncovering these opportunities?

The 8 Key Points

1. Law Tilted in Favor of Policyholders

Liability insurance provides protection (i.e., indemnity) in respect to a claim, but also funding for the insured’s defense to litigation. It also imposes a duty on the insurer to settle the case for its insured. The law heavily favors policyholders. In this regard, grants of coverage are construed broadly, whereas exclusions are construed narrowly. In addition, an insurer must give as much consideration to its insured as its own interests.

Where the policy provides a duty to defend, there are three important features: (1) the duty to defend is extremely broad; (2) where there is a duty to defend, the carrier is obligated to defend both covered and uncovered claims; and (3) a carrier that breaches the duty to defend may face huge penalties for doing so. California courts have repeatedly found that remote facts buried within causes of action that may potentially give rise to coverage are sufficient to invoke the defense duty. Thus, California law does not require that the insured’s conduct proximately cause the third-party claim in order to trigger the defense duty.

2. The specific causes of action in a complaint do not define or limit the scope of coverage.

The duty to defend is not limited by the causes of action that are pled by the plaintiff. “…That the precise causes of action pled by the third party complaint may fall outside policy coverage does not excuse the duty to defend where, under the facts alleged, reasonably inferable or otherwise known, the complaint could be fairly amended to state a covered liability.” Scottsdale Ins. Co. vs. MV Transportation, 36 Cal.App.4th 643, 654 (2005); Hartford Casualty vs. Swift Distribution, 59 Cal.4th 277 (2014).

3. The duty to defend has surprising breadth.

Under California Civil Code § 2778(4), the duty to defend is in all liability insurance contracts unless the policy clearly and unambiguously excludes such a duty. One of the most basic cornerstones of modern insurance law is that the duty to defend is broader than the duty to indemnifyAn insurer must provide a complete defense to its insured even where some causes of action may be outside coverage. Thus, if any claims in a third party complaint against a party insured under a CGL policy are even potentially covered by the policy, the insurer must provide its insured with a defense to all claims.

4. An insurer may be obligated to fund the prosecution of affirmative claims

Insurer responsibility for funding the prosecution of affirmative claims of an insured usually arises in the context of cross-complaints initiated in response to the underlying liability claim. Thus, in some instances, an insurer may be obligated to fund the prosecution of an insured’s counterclaim for affirmative relief where the request for that affirmative relief is inextricably intertwined with the defense of the covered action.

5. Opportunities for securing coverage are enhanced by the penalties flowing from an insurer’s wrongful failure to defend.

Consequences of an Insurer’s Wrongful Failure to Defend:

Waiver of Exclusions to Coverage. Where the carrier wrongfully fails to defend, it will be deemed to have waived any exclusions to coverage under the policy that it otherwise would have had with respect to its obligation to indemnify. If a carrier denies the insured a defense and it is ultimately determined that a defense was owed, the carrier can be subjected to a claim of bad faith and may ultimately be required to provide indemnity even where no duty to indemnify exists

Waiver of Right to Reimbursement for Defense of Uncovered Claims. An insurer that breaches its duty to defend is liable for the costs incurred in the insured’s defense and is precluded from pursuing a reimbursement claim or otherwise allocating between covered and non-covered fees and costs.

Waiver of Right to Insist on “Panel” Rates. An insurer that breaches the duty to defend is precluded from arguing that Civil Code § 2860 should limit its insured’s recoverable fees. “If [a] plaintiff is able to establish breach of the duty to defend, its damages are not limited by California Civil Code § 2860.” Atmel Corp. v. St. Paul Fire & Marine, 426 F. Supp. 2d 1039, 1047 (N.D. Cal. 2005).

Unreasonable Delay By Carrier In Paying Defense Costs Can Constitute Breach Of The Duty To Defend As Subjecting Carrier To Claim For Bad Faith

In Travelers lndem. Co. of Connecticut v. Centex Homes, 2015 WL 58369 47, at *4 (N.D. Cal. 2015), the court held that “[a] failure to provide counsel or to guarantee the payment of legal fees immediately after an insurer’s duty to defend has been triggered constitutes a breach of the duty to defend, even if the insurer later reimburses the insured.” Id. at *5. In Okada the court found that the specific language in the policy required the insurer “must make contemporaneous payments for legal defense on claims covered by the policy.” Okada v. MGIC lndem. Corp., 283 (9th Cir. 1986).

Public Policy Reasons Supporting The Imposition Of Penalties on Insurers That Breach The Duty to Defend

These seemingly harsh results advance the policy of incentivizing insurers to vigorously search the underlying claim for the purpose of finding a duty to defend. “If the insured elects to proceed in tort, recovery is possible for not only all unpaid policy benefits and other contract damages, but also extra-contractual damages such as those for emotional distress, punitive damages and attorney fees”. Archdale v. American International Specialty Lines Ins. Co., 154 Cal. App. 4th 449, 467-68, n. 19 (2007).

Recent Developments in Bad Faith Liability

Recent case authority suggests that an insurer may be liable for bad faith even if it offers up its full policy limits to settle a third party liability claim. In that case the Court held that notwithstanding its offer of full policy limits, the insurer was unreasonable in refusing to agree to the inclusion of language in the settlement agreement which would have preserved the insured’s right, without offset, to court-ordered restitution from the tortfeasor. In those circumstances, the court allowed the insured’s bad faith case to proceed.

6. The “leverage” created by the duty to settle.

Once the duty to defend attaches, the insurer also has an obligation to settle the claim within policy limits. If the carrier rejects a reasonable settlement offer from the claimant that is within policy limits, it may be liable for any judgment that is in excess of the policy limits. Importantly, in rejecting such a settlement offer, the carrier may not take into account or consider any defenses it may have to coverage for the claim. In order to establish a claim for bad faith, the insured must demonstrate that the policy obligated the insurer to indemnify the insured for the underlying loss. Liability carrier has affirmative duty to negotiate toward a settlement on behalf of its insured, even in the absence of an offer or demand by the claimant.

7. Amounts ostensibly paid as restitution for “ill gotten gains” may in fact represent covered “damages”.

Whether amounts paid by policyholders to fund settlements are covered under an insurer’s duty to indemnify is often a contested issue. See, e.g., TIAA-CREF Individual & Institutional Services, LLC, et al. v. Illinois National Insurance Company, et al., Case No. N14C-05-178 JRJ (Delaware Superior Court, October 20, 2016) (finding that settlement amounts paid to settle class actions alleging unfair business practices did not represent uninsurable disgorgement). See also U.S. Bank v. Indian Harbor Insurance Company, 2014 WL 3012969 (D. Minn. 2014) (bank was entitled to coverage under its professional liability insurance for restitutionary amounts it paid in settlement of an overdraft fee overcharge class action).

8. Unexpected coverage opportunities in IP and commercial disputes

Utilizing coverage for “personal injury” or “advertising injury” in business disputes. In lawsuits involving claims of infringement, misappropriation or the violation of the right of privacy, the key portion of a CGL policy is the “personal injury” or “advertising injury” coverage found in Coverage B. That coverage section will typically contain language providing as follows:

1. We will pay those sums that the insured becomes legally obligated to pay as damages because of “personal and advertising injury” to which this insurance applies. We will have the right and duty to defend any “suit” seeking those damages…

2. This insurance applies to “personal and advertising injury” caused by an offense arising out of your business but only if the offense was committed in the “coverage territory” during the policy period.

“Accidental” conduct is not required for coverage for personal or advertising injury. Coverage for personal or advertising injury does not depend on the existence of an “occurrence,” which typically is defined in terms of “accidental” conduct. Thus, coverage for personal and advertising injury is not limited to negligence and may even cover intentional torts.

Another Record Wildfire Season: Check Your CGL Policy

Matthew R. Divelbiss and Peter D. Laun | Jones Day

With election season dominating the news cycle, it’s easy to miss the headlines from California and other Western states. “Record Wildfires on the West Coast Are Capping a Disastrous Decade.” “Global warming driving California wildfire trends – study.” “As wildfires rage, climate experts warn: The future we were worried about is here.” And the issue is not limited to the West: “Climate change could shift Pennsylvania’s wildfire season.”

But even before this record-breaking fire season (which is still underway), there was an ominous warning for policyholders: “As Wildfires Get Worse, Insurers Pull Back From Riskiest Areas.” That pullback includes attempts to restrict coverage under commercial general liability (“CGL”) policies, a central part of most companies’ insurance and risk management programs. 

CGL policies provide coverage when a policyholder accidentally causes bodily injury or property damage to a third party. Simply put, if a policyholder accidentally starts a fire that burns down someone’s house, the policyholder would look to its CGL insurer for coverage. But the new concern is that an accidental fire burns thousands of homes and businesses.      

Insurers are running from that risk in the form of “wildfire” exclusions, added as endorsements to both primary and excess CGL policies. For example, one exclusion filed with an insurance commissioner intended for use in policies issued to energy companies states: “This policy does not apply to damages, losses, costs, or expenses arising out of, resulting from or in connection with ‘wildfire’ or ‘wildfire injury’, including any cost the insured becomes legally obligated to pay as reimbursement for fighting, suppressing or bringing under control any ‘wildfire’.”

Here are three issues to think about when faced with a wildfire exclusion:

1. What is your company’s wildfire risk? Insurers are concerned about both products and operations. Do you sell products that could start a wildfire, including products that may be installed in locations that present wildfire risk? Do you perform work (such as power line or pipeline maintenance, railroad maintenance, energy development, or construction) that could somehow cause a wildfire? If a policyholder has limited risk, it may be able to negotiate to remove the exclusion. But if a policyholder’s activities pose risk, getting rid of the exclusion may be difficult. In such a circumstance, the policyholder may need to look to other insurers or insurance markets to obtain coverage, or may have to accept high deductibles and/or sublimated wildfire coverage. Alternatively, companies may need to consider more creative methods of providing for this risk, such as captives. Ultimately, policyholders may need to join together to demand federal and/or state legislative solutions to this problem.

2. Even if your company is stuck with the exclusion, should the exclusion be clarified? As written, the exclusion above purports to apply to any losses “in connection with” a wildfire. Insurers will argue that this is very broad. For example, if a policyholder were sued because its product failed while being used to fight a wildfire, the insurers may point to “in connection with” to deny coverage. Policyholders should negotiate with their insurers to clarify any exclusion and leave no doubt that any exclusion is limited to circumstances where the policyholder is allegedly responsible for causing a wildfire. That’s the risk insurers are trying to avoid. 

3. What about contractual obligations to provide wildfire insurance? Many contracts—for example, for companies that provide right-of-way services to utilities—require that the contractor maintain insurance against wildfires. Whether you’re the “contractor” or the “utility” in this or any analogous scenario, the lack of wildfire insurance presents a problem. For the “contractor,” it could be in breach of its contractual obligations if it cannot provide the agreed upon insurance. For the “utility,” it may not have the financial protection it is counting on the contractor to provide in the event of a wildfire, but the contractor’s work may very well be key to limiting wildfire risk. In such circumstances, the parties will need to work cooperatively to find a solution that protects both parties.

Insurance issues surrounding wildfires will continue to evolve in the years ahead. As they undoubtedly arise in future policy renewals, policyholders should look to their coverage counsel and brokers to navigate this area and make sure that wildfire exclusions, if they can’t be avoided, are both clear and limited.