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.

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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.

Plaintiffs’ Bar Hits A Wall When It Comes to “Access” Damages

Jorge Cruz-Bustillo | Chartwell Law

In Florida, for years, the plaintiffs’ bar has been filing first-party property law suits for ensuing water damages caused by the failure of cast-iron pipes. In those cases, in which there is no evidence of interior water damages, the plaintiffs’ bar has been claiming repair costs associated with “access” (i.e., tear out and replacement) through the flooring to repair a plumbing drain line. Of course, with this “access,” the plaintiffs’ bar seeks recovery for damages based on matching which could include continuous flooring, baseboards, drywall, painting, etc.

A typical homeowner’s insurance policy in Florida will have a “perils insured” provision similar to the following:

“We insure against risk of direct loss to property described in Coverages A and B only if that loss is a physical loss to property; however, we do not insure loss:***

2. caused by:***

h. (1) wear and tear . . . deterioration; ***

If any of these cause water damage not otherwise excluded, from a plumbing . . . system . .., we cover loss caused by the water including the cost of tearing out and replacing any part of a building necessary to repair the system or appliance. We do not cover loss to the system or appliance from which this water escaped.”

The last paragraph of the “perils insured” provision is referred to as the “ensuing loss” exception. This “ensuing loss” exception provides coverage for any resulting water damage caused by the discharge of water from a plumbing system or household appliance, that is not otherwise excluded under the policy. This “ensuing loss” exception also includes “the cost of tearing out and replacing any part of the building necessary to repair the system.”  The latter provision is known, in first-party property litigation, as “access.”  

In Homeowners Choice Property & Casualty v. Maspons, 211 So. 3d 1067,1069 (Fla. 3d DCA 2017) the Third District Court of Appeal clarified that a homeowner’s insurance policy does not cover “access” through the flooring unless the plaintiff can prove that there are ensuing water damages caused by a back-up covered under the Policy.

In Maspons, supra, the plaintiff furnished a video showing a “break” in the drain line. The insurance carrier retained a plumbing company that inspected and found a “large hole” in the drain line. The trial court entered summary judgment in favor of the insureds. Id. at 1068 (“Based upon this state of there cord, the trial court found there was no coverage under the insurance policy for the repair and replacement of the pipe, but that Homeowners Choice was responsible for the greater cost of tearing out and replacing the slab to make the repair.”)

The Third District reversed and remanded directing the trial court to enter summary judgment in favor of Homeowners Choice. Id. at 1070. The Third District held: “At the time of the summary judgment proceeding . . . There was no evidence that the water exiting the pipe had caused any damage to its surrounding.”  Id. Based on the plain language of the “perils insured” provision, the Third District concluded that ensuing water damages was a necessary condition precedent to coverage for “access” through the flooring (even though the camera inspection did in-fact show that the drain line was broken).

The Third District’s analysis is important for the defense bar to understand. Specifically, the Third District wrote: “Any analysis must begin with the language of the insurance contract.” Id. at 1069. “We give the undefined words of an insurance contract their ordinary meaning, just as we would with any other type of contract.” Id. “‘Direct’ and ‘physical’ modify loss and impose the requirement that the damage be actual.” Id. “Examining the plain language of the insurance policy in this case, it is clear that the failure[i.e. break and/or large hole identified in Maspons] of the drainpipe to perform its function constituted a ‘direct’ and ‘physical’ loss to the property within the meaning of the policy.” Id. The Third District continued:

“However, the last paragraph of the “perils insured” provision, often referred to the “ensuing loss” provision of the policy, cautions that we not prematurely abort our inquiry. That clause provides the homeowner with coverage for an‘ ensuing’ loss that is not specifically excluded. Thus, while the exclusion for“[w]ear and tear” or “deterioration” might mean, and this case does mean by virtue of the Maspons’ concession that Homeowners Choice is not obligated to compensate the Maspons for their corroded drain pipe, if the Maspons suffered consequential loss as a result of the corroded pipe and that consequential or “ensuing” loss is not excluded under another provision of the policy, the loss is covered.” (emphasis added) [citations omitted]. Id. at 1070.

“Happily, for us, we can quickly conclude the interpretative gymnastics in which we are engaged at this point.” Id. “There was no evidence that the water exiting the pipe had caused any damages to its surroundings.” Id. “Thus, the trial court erred by entering judgment against Homeowners Choice for the cost of the repair and replacement of the slab necessary to reach the broken pipe at this time.” Id. “For this reason, we reverse and remand this case for entry of judgment in favor of Homeowners Choice Insurance Company, but without prejudice to the Maspons filing another claim of loss at a later date, if appropriate.” Id.

In Maspons, ensuing water damages were covered. The Third District, however, found that there was no evidence of ensuing water damage. Since the necessary predicate condition precedent did not exist, the Third District directed the trial court to enter summary judgment in favor of Homeowners Choice. For those Florida policies which contain a “water back-up” exclusion, under Maspons “access ”damages would never be covered.

Federal District Court Finds Coverage Barred Because of Lack of Allegations of Damage During the Policy Period and Because of Late Notice

Robert Dennison | Traub Lieberman

In American Bankers Ins. Co. of Florida v. National Fire Ins. Co. of Hartford, 2020 WL 5630017 (Sept. 21, 2020), the Northern District of California of the United States District Court had occasion to consider whether allegations in an underlying complaint triggered a duty to defend and a late notice defense to coverage.

The underlying actions were a suit against the City of Walnut Creek for damages from flooding allegedly caused by the City’s failure to develop and maintain its storm drains.The City settled the cases then sued its liability insurers who issued its coverage in the period 1968 to 1986 for indemnification of the amounts spent to defend and settle the cases.The published decision involved three Travelers’ policies issued to the City between 1968 and 1976, as to which Travelers sought summary judgment as to the lack of coverage in its policies.

The district court first found that the definition of an “occurrence” in the policies, in one policy “an event or a continuous or repeated exposure to conditions which causes injury to person or damage to property during the policy period” and in the other two “an accident, including injurious exposure to conditions, which results during the period this policy is in effect, in bodily injury or property damage,” fell within the rule of Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, that injury or damage during the policy period must occur in order for the policy to be triggered.The court agreed with Travelers that while there were allegations of flooding for many years, the only claims/allegations of property damage were for the period 2000 and later.Therefore the property damage coverage in the policies was never triggered.

Alternatively, the district court considered whether the City failed to give timely notice to Travelers, unduly prejudicing it.The policies required the City to give notice “as soon as practicable” and to forward to the insurer every demand notice or summons received by the City.The City stated that it did not know of the existence of the policies before it gave notice in 2017, fourteen years after the first suit was filed.The court stated that no evidence was provided as to the City’s diligence in looking for its insurance coverage.It also credited Travelers’ evidence that the City had given notice of a different suit in 1993 so the City was aware of at least one of the policies.

Mere delay is insufficient to bar coverage as under California law which requires the insurer to prove that it was prejudiced by the undue delay in order for coverage to be barred.Travelers argued that it was prejudiced by the inability to select defense counsel and because it was denied the opportunity to participate in settlement negotiations.The court cast doubt that the evidence was sufficient to show Travelers would have paid less for the defense or achieved a better result if it had controlled the defense, but it did find particularly significant that the insurer could not participate in settlement discussions.Based on that, it agreed that Travelers was substantially prejudiced by the delay, so coverage was barred on that grounds as well.

Water Damage: Construction’s Often Unnoticed Threat

Yaron Dycian | Construction Executive

Fire damage to commercial buildings might get headlines, but water damage, whether to projects under construction or completed buildings, delivers massive financial blows to owners, developers and contractors. The impact is massive, reaching many billions of dollars per year. One water leak on the 19th floor at a construction site of a high-end apartment building in New York City resulted in $30 million in property damage and millions in delayed delivery penalties.

Imagine this all-too-typical scenario: A 20-story building has thousands of pipe connections and many tens of thousands throughout the entire building. It only takes one of those joints failing, perhaps due to human oversight. Early on a Saturday morning when no one is onsite, one of the connections inside a wall begins to leak, slowly at first. In a couple hours the connection fails completely, sending a cascade of water into the building. The site is located next to a highway, so the security guards don’t hear the water flowing.

The leak goes undetected until crews come back onsite on Monday morning. By that point, lower levels of the building have been inundated with thousands of gallons of water that has destroyed construction material, carpeting and electrical switchgear. It’s flowed into the elevator pits and mechanical room.

An enormous amount of damage has been done to the building, but the financial damage is only just starting to accumulate. Following an extensive claims submission process, the contractor is left paying a deductible of many ten-of-thousands of dollars plus fees. Schedule delays increase the costs, damage relations with owners and tenants and impact the contractor’s reputation for years to come. Moreover, times insurers will increase premiums for the extended project duration and will likely increase both deductibles and premiums for future projects.

A general may never experience a fire, but small water damage incidents that cost only a few thousand are all too common. Because these small incidents fall below deductibles, they cannot be claimed and their costs fall squarely on the project’s bottom line. And because they are relatively small, most contractors do not keep track of them. Hundreds of thousands of dollars go to waste unnoticed.

A building nearing completion has piping systems for domestic water, HVAC and fire protection. All of those systems will have been turned on and pressurized as the project nears completion. The walls have been enclosed, finished surfaces such as high-end woodwork have been installed and leaks will damage expensive finishing materials. Monetary losses at this point tend to be very high, with the greatest risk coming from leaks at nights, weekends or holidays when the structure is unattended for extended periods of time.

Historically, the solution has been floor-based leak sensors that are, in essence, two wires in a container placed on the floor throughout the site. If water touches the wires, the circuit is closed and an alert is sent. How long has water been flowing and how much water accumulated before it reached the sensor? Was the building owner lucky enough to have a sensor at the right place for this leak? To provide significant coverage, thousands of them may be needed. And the false alerts that come from a bit of harmless water at the wrong place … no wonder these sensors are not very popular with general contractors.

Luckily, technology is evolving quickly. Solutions that use advanced IoT devices and advanced analytical tools such as machine learning and artificial intelligence are now available to solve these painful situations.

These advanced systems consist of valves and flow sensors installed in strategic locations on the facility’s pipes. Instead of hundreds of leak tapes and sensors, a building may need only a few dozens of these water intelligence devices. Using AI, each device learns what constitutes normal water flow at that location. When abnormal water flow patterns are detected, the system will alert and may shut off water flow. Users receive alerts with detailed water flow data to their mobile phones, site management systems or email. Moreover, if they believe the system’s automated decision should be changed, they can open or close the valve within seconds from their mobile app.

Let’s look at an alternative ending to the story with which we began. A small leak in a piping connection starts as a light drip early Saturday morning. The system’s AI algorithms identify the abnormal pattern which should not occur at this time of day, and sends an alert to the site team. Unfortunately, the team is off to the beach or perhaps at a party and miss the alert. The system continues to monitor the situation, and within minutes identifies that the situation is critical shuts water off and sends a shutoff notification alert.

When the site team eventually notices the alerts, an on-call team is called to the site. There’s no rush since water has already been shut off, so the inspection is scheduled for Sunday afternoon. The problem is found and Monday the piping contractor fixes the leaky fitting and normal operation resumes.

Water damage, whether in construction projects or in operational facilities is a major source of pain, but technology has now made it an avoidable hazard. Owners, developers and general contractors have the necessary tools to stop water damage before it becomes catastrophic. The built community has a tremendous opportunity to use the power of AI to mitigate water damage, bringing projects in on schedule and reducing the financial exposure for all parties involved.