Tricky Insurance Endorsements Can Weaken Your Liability Coverage

Carolyn Mount and Seth Row | Miller Nash

Every contractor and subcontractor is required to carry liability insurance referred to as Commercial General Liability or “CGL” coverage. These policies are fairly standardized and most people assume that the coverage that is presented on the front declarations page is all that they need to know: the policy’s coverage limits, time period, and deductible. But increasingly insurance companies are adding endorsements (additional forms modifying coverage) to these policies that can weaken the coverage that is actually provided if there is an accident. In this article, we’ll discuss two particular endorsements to look out for—but these aren’t the only ones that can cause problems! At renewal time, make sure to talk to your broker about every endorsement to your policy.

  • The “Limited Coverage” Endorsement Can Reduce Your Limits to Almost Nothing Based on an Obscure Rule of Coverage Law: “Efficient Proximate Cause.” When there is an accident that is caused by more than one cause, and one of those causes is excluded under the policy, courts often apply the “efficient proximate cause” rule. Under that rule, if the initial (or “incepting”) cause of loss is covered, then there is coverage under the policy regardless of whether subsequent events within the chain of causation are excluded by the policy. For example, if a fire (a covered cause) erupts, triggering sprinklers and causing water damage to the floors, an insurer cannot deny coverage based on a “water damage” exclusion, because the first link in the causal chain—fire—is a covered cause of loss.We are seeing increasing use of an endorsement called “Limited Coverage for Bodily Injury, Property Damage or Personal and Advertising Injury Involving Efficient Proximate Cause (Defense Within Limits).” The endorsement sets a sub-limit of $100,000 when the efficient proximate cause rule results in coverage. That’s a very low sublimit in a policy that usually provides upwards of $2,000,000 in coverage. Adding insult to injury, the Limited Coverage endorsement includes defense costs in the sub-limit—meaning that once $100,000 is incurred to defend the insured, no money remains to indemnify the insured.We believe that this endorsement could exacerbate conflicts between the insurer and the insured. What motivation does an insurer have to provide a competent and vigorous defense when the maximum amount it is liable for both defense and indemnity is already established? It also raises questions about whether the insurer will have to defend until the sub-limit is exhausted or wait until after the proximate causation question is answered by a court. We suggest that policyholders avoid this endorsement as much as possible.
  • The “Defense Costs” Endorsement Can Require You to Repay Your Insurer for “Uncovered” Defense Costs. One of the key benefits of a CGL policy is that the insurer will hire a lawyer to defend you in a lawsuit that alleges damage covered by the policy. Sometimes it is not clear whether the damages are covered are not, but in those situations courts have held that the insurer has to provide a defense anyway, until the issue is resolved at the end of the case. Insurance companies have tried in several cases to force policyholders to reimburse defense costs paid for by the insurance company if it turns out that the damages were not covered after all. Courts have not allowed that to happen, pointing out that nothing in the policy gives the insurance company a right to reimbursement.
     The insurers accepted the invitation and crafted the “Defense Costs” endorsement. The endorsement provides that if the insurer initially defends or pays for an insured’s defense costs, but later “determines that none of the claims” are covered, the insurer has the “right to reimbursement” for the costs incurred. This right to reimbursement only applies only to costs incurred after the insurer has given written notice to the insured “that there may not be coverage and that we are reserving our rights to terminate the defense,” and to seek reimbursement.We are increasingly seeing insurers include in their “reservation of rights” letters that the insurer intends to demand reimbursement of defense costs if it turns out there is no coverage for damages– even when the policy does not carry a “Defense Costs” endorsement. This is an attempt to change the insurance contract after the fact, and should be rejected. But if your policy has a “Defense Costs” endorsement, your options are more limited. This endorsement will incentivize insurance companies to wait to clarify coverage issues until the end and then spring a giant “surprise” defense costs bill on the policyholder. The relationship between insurance companies and their insureds is frequently fraught already—this will make it even more contentious.

These are just two examples of endorsements that we are seeing more and more frequently added to standard-form CGL policies that significantly weaken coverage. Because they are tucked away at the back of long and dense legal documents, they may go unnoticed. Besides, who wants to think about a lawsuit coming out of the woodwork when there is work to be done? But the reality is that lawsuits are a part of being in the construction industry. So make sure you are getting what you think you’ve paid for, and when you renew your liability insurance this year, watch out for sneaky endorsements.

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email

In Brief: Commercial General Liability Policies in USA

Bryce L. Friedman and Mary Beth Forshaw | Simpson Thacher & Bartlett

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 November 2020

Fifth Circuit Holds Insurer Owes Duty to Defend Latent Condition Claim That Caused Fire Damage to Property Years After Construction Work

Jeremy Macklin | Traub Lieberman Straus & Shrewsberry

Most general liability policies only provide coverage for “property damage” that occurs during the policy period. Thus, when analyzing coverage for a construction defect claim, it is important to ascertain the date on which damage occurred. Of course, the plaintiffs’ bar crafts pleadings to be purposefully vague as to the date (or period) of damage to property. A recent Fifth Circuit decision applying Texas law addresses this coverage issue in the context of allegations of a condition created by an insured during the policy period that caused damage after the policy expired.

In Gonzalez v. Mid-Continent Cas. Co., 969 F.3d 554 (5th Cir. 2020), Gilbert Gonzales (the insured) was a siding contractor. In 2013, the underlying plaintiff hired Gonzales to install new siding on his house. In 2016, the underlying plaintiff’s house was damaged in a fire. The underlying plaintiff sued Gilbert in Texas state court alleging that when Gonzalez installed the siding in 2013, he hammered nails through electrical wiring and created a dangerous condition that caused a fire three years later in 2016.

At the time Gilbert performed construction work, he was insured by Mid-Continent Casualty Company. Mid-Continent disclaimed coverage to Gonzales on the basis that the complaint unequivocally alleged that property was damaged in 2016 and there were no allegations that property damage occurred prior to 2016 or was continuing in nature.

The Fifth Circuit started its analysis by acknowledging Texas’ strict eight-corners rule for determining an insurer’s duty to defend. Relying on prior Texas and Fifth Circuit decisions (Don’s Building Supply, Inc. v. OneBeacon Insurance Co.Wilshire Insurance Co. v. RJT Construction, LLC, and VRV Development L.P. v. Mid-Continent Casualty Co.), the court narrowed its focus to “actual, physical damage alleged in the underlying litigation.” The court reasoned, “[i]f the only alleged damage occurred outside of the policy period, then there is no duty to defend. But if any of the alleged damage occurred during the policy period, then the duty to defend attaches.”

The court held that the underlying lawsuit “plainly alleges physical injury to property that occurred within the policy period.” The court identified three reasons for its holding: (1) the underlying complaint stated that the 2016 fire “relates back to [the] construction and/or installation of siding” in 2013, (2) the policy defined “property damage” to include “all resulting loss of use of that property,” so damage to the wire includes damage to the entire house, and (3) the underlying plaintiff’s claim of damages alleged that “the electrical wires were damaged in 2013.”

Judge Catharina Haynes dissented, explaining that she would hold that property damaged occurred after the policy period ended, when the fire broke out in 2016. Judge Haynes agreed that the court is bound by Don’s BuildingWilshire, and VRV Development, but she emphasized that those cases also hold that when an underlying plaintiff alleges actual, physical damage due to the insured’s negligent conduct, the alleged property damage does not relate back to the time of the negligent act when determining when the property damage occurred. Judge Haynes criticized the majority for focusing on the time of the negligent conduct.

The Gonzales decision highlights the importance of analyzing each allegation in an underlying pleading to determine when any physical injury may have occurred. The dissent also leaves the door open for a different panel of Fifth Circuit judges to distinguish or reverse Gonzales.

Based on “Other Insurance” Clause, D&O Insurer has no Duty to Defend Suit Covered by General Liability Policy

Wiley Rein LLP – September 11, 2012

The U.S. District Court for the Southern District of New York has held that a directors and officers liability (D&O) insurer had no duty to defend an underlying lawsuit—and thus no duty to share in defense costs with a general liability insurer—where the D&O policy at issue contained an “other insurance” clause making that policy excess to the general liability policy.  The court determined that the D&O insurer had no duty to defend even though certain causes of action were covered by the D&O policy, but not the general liability policy.  Admiral Indem. Co. v. Travelers Cas. & Sur. Co. of America, 2012 WL 3194881 (S.D.N.Y. Aug. 8, 2012).

The insured, a condominium association, purchased commercial general liability insurance and D&O coverage from two insurers.  After a lawsuit was brought against the insured, the general liability insurer filed a declaratory judgment action against the D&O insurer, alleging that the D&O insurer was obligated to pay all or part of the costs the general liability insurer incurred in defending the insured in the underlying action.  The general liability insurer claimed that it was entitled to recover a portion of its defense costs because the D&O insurer had a duty to defend the insured in the underlying action.  Both insurers moved for summary judgment.

Granting summary judgment in favor of the D&O insurer, the court concluded that the D&O insurer had no duty to defend the insured in the underlying action.  In so doing, the court first found that the “other insurance” clauses in the policies—when read together—were complementary, rendering the coverage afforded under the D&O policy excess to that afforded by the general liability policy.  The court explained that the other insurance clause in the general liability policy provided that it was “primary” and that the general liability insurer’s “obligations are not affected unless any of the other insurance is also primary.”  In contrast, the D&O policy stated that, if any other insurance policy provided coverage, “then this Policy shall apply only in excess of the amount of any deductibles, retentions and limits of liability under such other insurance.”

The court then rejected the general liability insurer’s argument that both insurers should equally share the defense costs because the general liability policy only covered several of the alleged causes of action.  According to the general liability insurer, because the D&O insurer would have had to pay for the remainder of the causes of action had they been successful, the D&O insurer should have to reimburse the general liability insurer for the defense costs of those claims.  The court disagreed, noting that the general liability insurer had a duty to defend the entire action and that the D&O insurer’s duty to contribute if liability were found against the insured did not alone require it to share in the defense costs.

The court also rejected the general liability insurer’s argument that a revised general liability policy, which contained a different other insurance clause and was issued while the underlying action was ongoing, should apply to the underlying lawsuit.  The general liability insurer argued that the revised policy’s other insurance clause was an “excess” clause and thus should operate to “cancel out” the D&O policy’s other insurance clause, meaning that both policies would be treated as primary.  The court explained that “[the general liability insurer] points to no case where a primary insurer was able to turn its responsibility for defense costs into excess coverage . . . after it had already incurred the obligation to pay for the defense costs of an ongoing litigation.”

via Based on “other insurance” clause, D&O insurer has no duty to defend suit covered by general liability policy – Lexology.