Is that claim covered?
The concept of commercial general liability insurance first arose in 1940, and since then has undergone many revisions.
Formerly known as the comprehensive general liability policy, it was designed to protect an insured against certain losses arising out of business operations.
Today, most policies follow a standard form that the Insurances Services Office, Inc. (ISO) developed in an effort to address misunderstandings, coverage disputes and litigation over the unique language under an insurer’s policy.
Despite the years ISO spent developing the standard commercial general liability policy, there are still many disputes litigated on a yearly basis. Even seemingly simple policy inquiries like “who is an insured?” or “when is the policy period?” can be more complicated than they appear on the surface and often result in contentious litigation. Let’s examine some of the more basic coverage questions and how they might lead to coverage disputes.
Who is an insured?
The first step in any coverage analysis is to determine whether or not a policyholder qualifies as an “insured.” ISO dedicated an entire Section of the standard commercial general liability to answering just this question, “Section II – Who is an Insured?” Thus, what would appear to require a straightforward answer, in reality demands something more nuanced.
Most obviously, the insured is the named person or entity designated on the declarations page. Additionally, the named insured’s spouse, employees and volunteer workers are generally insureds under the policy. The term “insured” does not typically include shareholders of a corporation or children of insureds.
Any of these persons must be acting in the scope of employment and/or business at the time of occurrence in order to be an insured covered under the policy. Business conduct includes conduct arising from a trade, profession, or other occupation, as well as risks incidentally related to such conduct.
Conduct is in the scope of employment only if: 1) the conduct is of the kind the employee is hired to perform; 2) the conduct occurs substantially within the time and space limits authorized or required by the work to be performed, and 3) the conduct is activated at least in part by a purpose to serve the master.
If an individual or organization does not meet the definition of insured, then the coverage journey will end here. The accident will not be covered under the policy.
What is an “occurrence”?
However, if it is determined that the person or property injured is an insured under the policy, then the next step in the coverage analysis will be to determine whether the claim qualifies as an “occurrence.” An act that causes bodily injury or property damage claimed under the policy must be an occurrence in order to be covered by the commercial general liability policy. Typically, an occurrence is defined as an accident or “continuous or repeated exposure to substantially the same general harmful conditions.” (CGL form 2013) Although the latter provision apparently broadens the scope of an occurrence, an accident is still requisite to coverage.
In the context of insurance coverage, “an accident means an unexpected happening without an intention or design.” (Terre Haute First Nat. Bank v. Pacific Employers Ins. Co.) Thus, to determine whether there was an occurrence, one must determine whether the insured intended or expected the damage resulting from the event. No coverage will exist where there is a scheme or plan, an expectation of damage, recklessness or an intentional act. The legal standard to determine whether the injury was either expected or intended within this context is a purely subjective standard.
In addition, no coverage will be provided if the occurrence fell outside the coverage territory. Further, no coverage will be provided if the occurrence fell outside of the policy period.
What is a “bodily injury”?
In order to constitute an occurrence, the accident must have caused bodily injury or property damage. Bodily injury is defined as “bodily injury, sickness or disease sustained by a person including death resulting from any of these at any time.” (CGL Policy 2013) Despite having the term “bodily injury” in the definition, the courts determined this term to be unambiguous. Under this term, only physical injuries to the body, including death, rape and sexual abuse are covered. Therefore, emotional distress, insomnia and humiliation are not considered bodily injury and not covered under the standard policy.
However, emotional distress with physical manifestations falls within the definition of bodily injury. Additionally, physical damage on an invisible, but cellular level (i.e., radiation damage) constitutes a bodily injury.
What is “property damage”?
Property damage is defined as any damage occurring to tangible property or loss of use of tangible property. Tangible property is property that can be touched, or property capable of being possessed and includes real property. Loss of business, loss of goodwill, lost profits, loss of investments, diminution in value, loss of evidence, loss of winnings, loss of computer data and defective property have been previously held to not constitute property damage under a commercial general liability policy.
To claim loss of use, an insured must be physically unable to use some tangible property. The insured does not need to claim a total loss of use to be covered under a policy. However, to claim loss of use, the property cannot be initially defective, because this would “fall outside the initial grant of coverage.” (Capstone Bldg. Corp. v. Am. Motorists Ins. Co., 2013)
What is generally excluded?
Assuming that one is determined to be an insured, that the accident was an occurrence that took place in the coverage territory and during the policy period, then the next step in the coverage analysis will be to determine whether or not there is an exclusion in the policy that might invalidate coverage. An exclusion is “an insurance-policy provision that excepts certain events or conditions from coverage.” (Blacks Law Dictionary).
The insured will have the burden of proving that the claim is covered by the policy, whereas the insurer will have the burden of proving the applicability of an exclusion. Here is a brief synopsis of some common exclusions in a commercial general liability policy:
Business risk exclusions
Business risk exclusions are a category of exclusions which exclude liabilities for the repair or correction of defective work from the scope of coverage. The coverage applicable under the Commercial general liability policy is for tort liability for injury to persons and damage to other property, not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damage to person bargained. Any liability incurred as a result of faulty workmanship or deficient work-product is not covered under the standard commercial general liability policy.
This exclusion is limited by any claim of personal injury or third party damage claimed in conjunction with a claim of faulty workmanship. Thus, any consequential damages of the defective work are covered by the standard policy.
Aircraft, auto, and watercraft exclusion
The standard policy excludes bodily injury or property damage arising out of the ownership, maintenance, use or entrustment to others of any aircraft, auto or watercraft owned or operated by or rented or loaned to any insured. This exclusion applies regardless of whether the aircraft, auto, or watercraft is turned on at the time of the loss.
Courts have applied this exclusion to bar coverage for the loading of an oil truck, the operation of a wheel chair lift, throwing or dropping things from an automobile, the use of a hang glider, and the operation of a hot air balloon. Bear in mind that if a claim is not covered under this exclusion, it may be covered under a separate automobile, watercraft or aircraft insurance policy.
Bodily injury or property damage arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants is not covered under a standard commercial general liability policy. While the term “pollutants” is the subject of much controversy, whether this term applies is dependent on factors such as the nature of the substance, the typical usage of the substance, and whether the substance is one that would generally be viewed as a pollutant. Surprising examples of what the courts held to constitute pollutants include: adhesive, grease, lead paint, saltwater, light and noise, and sand.
Understanding a commercial general liability policy is often easier said than done. The coverage analysis will begin with determining whether or not an individual is an “insured,” whether or not the accident constitutes an “occurrence,” and whether or not the occurrence occurred within the coverage territory and during the policy period. Once the initial grant of coverage is determined in a policyholder’s favor, then it will be up to the insurance company to prove that a particular exclusion applies to eliminate coverage.
Article written by Michelle Hardin, Esq. and Kimberly Kanoff Berman, Esq. – attorneys with the firm of McIntosh, Sawran & Cartaya, P.A. The firm is the Your House Counsel Member Firm in the South Florida area. To contact the authors or for more information, visit mscesq.com or YourHouseCounsel.com.