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.

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. 

Michigan Supreme Court Finds Faulty Subcontractor Work That Damages Insured’s Work Product May Constitute an “Occurrence” Under CGL Policy

Jason Taylor | Traub Lieberman Straus & Shrewsberry

In Skanska USA Bldg. Inc. v. M.A.P. Mech. Contractors, Inc., 2020 WL 3527909 (Mich. June 29, 2020), the Michigan Supreme Court addressed whether unintentionally faulty subcontractor work that damages an insured’s work product constitutes an “accident” under a commercial general liability insurance policy. In aligning itself with a growing number of jurisdictions, the Michigan Supreme Court answered, “yes.” In Skanska, a construction manager brought an action against a commercial general liability (CGL) insurer seeking coverage as additional insured for the cost of repairs to correct faulty work performed by its subcontractor in renovation of medical center. In 2009, the construction manager hired MAP to install a steam boiler and related piping for the medical center’s heating system. MAP’s installation included several expansion joints, which it was later discovered, were installed backward. Significant damage to concrete, steel, and the heating system occurred as a result. The construction manager performed the work of repairing and replacing the damaged property to the tune of $1.4 million, and submitted a claim to MAP’s CGL insurer, Amerisure, seeking coverage as an additional insured.

Amerisure denied the claim contending that MAP’s defective construction was not a covered “occurrence” within the CGL policy. The policy defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” but did not define the term “accident.” The trial court looked to the Court of Appeal’s decision in Hawkeye-Sec. Ins. Co. v. Vector Const. Co., 185 Mich. App. 369 (1990), which defined “accident” as “…a result which is not anticipated and…takes place without the insured’s foresight or expectation and without design or intentional causation on his part.” But, again citing Hawkeye, the trial court concluded that “[d]efective workmanship, standing alone, is not an occurrence within the meaning of a[ ] general liability insurance contract[;] an occurrence exists where the insured’s faulty work product damages the property of another.”

The trial court held that an “occurrence” may have happened because the damage caused by MAP’s defective installation of the expansion joints may have gone beyond the scope of the work required by the contract between the plaintiff and the medical center. On appeal, however, the Court of Appeals reversed the trial court and ordered that summary disposition be granted to Amerisure reasoning that there was no “occurrence” under the CGL policy because the only damage was to the insured’s own work product.

The Michigan Supreme Court reversed again holding that faulty work by a subcontractor may fall within the plain meaning of an “occurrence,” or “accident.” The Michigan Supreme Court rejected the carrier’s argument that faulty workmanship to the insured’s product was not an “occurrence” because it lacked “fortuity.” According to the court, fortuity is one way to show that an incident is an accident, but it is not the only way. Rather, appropriate focus of the term “accident” must be on both the injury-causing act or event and its relation to the resulting property damage or injury, which must be analyzed from the subjective standpoint of the insured. Thus, even if an insured acts intentionally, the act may still be an “accident” under policy so long as the injury or damage was not specifically intended by the insured. The Michigan Supreme Court also noted that the policy did not limit the definition of “occurrence” by reference to the owner of the damaged property, which might otherwise preclude a finding of an “occurrence” for damage to the insured’s own work product.

The court, referencing other similar rulings in other jurisdictions, resorted to its reading the contract as a whole to confirm its conclusion. For example, the court reasoned that the policy contained an exclusion precluding coverage for damage to an insured’s own work product (the “Your Work” exclusion), but that the exclusion contains an exception for work performed by a subcontractor on the insured’s behalf. Thus, “[i]f faulty workmanship by a subcontractor could never constitute an ‘accident’ and therefore never be an ‘occurrence’ triggering coverage in the first place, the subcontractor exception would be nugatory.” Skanska, 2020 WL 3527909 at *6 (citing cases). Put another way, if the insuring agreement does not confer an initial grant of coverage for injury or damage to the insured’s own faulty work, then there would be no reason for the “your work” exclusion (and the subcontractor exception).

The Skanska Court also reviewed the context and history of CGL policies, including policy language changes from the 1973 policy forms to those adopted in 1986 in support of its conclusion that an “accident” may include damage to an insured’s own work product, and referred to cases holding otherwise as an “outdated view” of the insurance industry. While this history is interesting, it is beyond the scope of this post. Suffice it to say, the Michigan Supreme Court found that “the 1986 reformation of the scope of coverage under the CGL policies underscored a plain reading of “accident”—that faulty subcontractor work may fall within the policy’s coverage. Id. at *10.

In sum, the Michigan Supreme Court’s holding in Skanska aligned Michigan with the growing body of jurisdiction to hold that an “accident” may include unintentionally faulty subcontractor work that damages an insured’s work product. Of course, the next logical inquiry is whether one or more of the CGL policy’s “business risk” exclusion might apply. (Notably, the Court did not address application of the “your work” policy exclusion. Specifically, Amerisure argued that because MAP was a named insured under the CGL policy, the subcontractor exception to the “your work” exclusion did not apply, and the exclusion barred coverage. The Court merely remanded this question, among others, to the Court of Appeals to address, depending on whether it determines they are properly presented and preserved for its review.)

Michigan Supreme Court Opens Door to CGL Claims for Construction Defects

Jeffrey L. Hamera | Duane Morris

The Michigan Supreme Court overturned precedent and joined the jurisdictions that allow damages arising from construction defects to be the basis of a claim against a subcontractor’s comprehensive general liability (“CGL”) policy written on a 1986 ISO form. This decision opens the door to CGL claims for construction defects that had been shut in Michigan since Hawkeye-Security Ins Co v Vector Constr Co, 185 Mich App 369; 460 NW2d 329 (1990).

Skanska USA Building Inc. (“Skanska”) incurred costs correcting the defective work of its subcontractor, M.A.P. Mechanical Contractors, Inc. (“MAP”), on a medical center renovation project. Skanska was an additional insured on MAP’s CGL policy. MAPs installed expansion joints backwards, which resulted in damage to concrete, steel and the heating system. Skanska repaired the damage and sent the bill to MAP and a claim to the CGL insurer.

The insurer, Amerisure, asserted that MAP’s defective work was not an “occurrence” as defined in the policy: “an accident, including continuous or repeated exposure to substantially the same general harmful conditions”. “Accident” was not defined in the policy. The trial court applied the definition of “accident” in Hawkeye-Security Ins Co v Vector Constr Co, 185 Mich App 369 (1990), and denied Amerisure’s motion, without determining whether an “accident” had occurred. The appellate court reversed, reasoning that Skanska could recover only for damage to a third-party’s property and not its “own work”. However, as the Supreme Court noted, work by a subcontractor was excepted from the “own work” exclusion in the policy.

The Michigan Supreme Court, in a unanimous decision, held that an insured can recover under MAP’s CGL policy, which has standard “post-1986” language, for damages to the insured’s work that is caused by unintentionally faulty work. The Court interpreted language changed from the 1973 version of standard CGL polices to the 1986 revisions to affect the meaning of accident” and allow it to include business risks related to faulty workmanship. Also, the CGL policy did not tie “occurrence” to the ownership of the damaged property. Regarding the definition of “accident” the Court rejected the argument that an accident must be linked to the common law concept of “fortuity” and accepted that a deliberate act performed negligently can be an “accident”.

This case provides a precedent in Michigan for overcoming restrictions on recovering the costs of correct defective work resulting from a subcontractor’s negligence.