Begin at the beginning – with the insuring agreement! Coverage can never be any broader. This is the most basic CGL coverage concept.
Before applying the policy’s exclusions, exceptions or conditions to a loss, we must first ascertain if the loss even qualifies for coverage based on the relevant insuring agreement. Ignoring this basic concept and jumping directly into the middle of the policy can lead to coverage misinterpretations. Exclusions and exceptions might appear to grant coverage even though the loss falls outside the insuring agreement.
Moral – start at the beginning! Confirm if the loss even qualifies for coverage from the very beginning.
Let’s focus this most basic concept on the insuring agreement for Insurance Services Office’s (ISO’s) Coverage A – Bodily Injury and Property Damage Liability of the commercial general liability (CGL) policy. ISO’s CG 00 01 04 13, the most current edition of the CGL, is analyzed in this whitepaper. ISO’s Coverage A insuring agreement reads:
COVERAGE A – BODILY INJURY AND PROPERTY DAMAGE LIABILITY
- Insuring Agreement
We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result. But:
(1) The amount we will pay for damages is limited as described in Section III – Limits Of Insurance; and(2) Our right and duty to defend ends when we have used up the applicable limit of insurance in the payment of judgments or settlements under Coverages A or B or medical expenses under Coverage C.
No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under Supplementary Payments – Coverages A and B.
b.This insurance applies to “bodily injury” and “property damage” only if:
(1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory”
(2) The “bodily injury” or “property damage” occurs during the policy period; and
(3) Prior to the policy period, no insured listed under Paragraph 1. of Section II – Who Is An Insured and no “employee” authorized by you to give or receive notice of an “occurrence” or claim, knew that the “bodily injury” or “property damage” had occurred, in whole or in part. If such a listed insured or authorized “employee” knew, prior to the policy period, that the “bodily injury” or “property damage” occurred, then any continuation, change or resumption of such “bodily injury” or “property damage” during or after the policy period will be deemed to have been known prior to the policy period.
c.“Bodily injury” or “property damage” which occurs during the policy period and was not, prior to the policy period, known to have occurred by any insured listed under Paragraph 1. of Section II – Who Is An Insured or any “employee” authorized by you to give or receive notice of an “occurrence” or claim, includes any continuation, change or resumption of that “bodily injury” or “property damage” after the end of the policy period.
d.“Bodily injury” or “property damage” will be deemed to have been known to have occurred at the earliest time when any insured listed under Paragraph 1.of Section II – Who Is An Insured or any “employee” authorized by you to give or receive notice of an “occurrence” or claim:
(1) Reports all, or any part, of the “bodily injury” or “property damage” to us or any other insurer;
(2) Receives a written or verbal demand or claim for damages because of the “bodily injury” or “property damage” or
(3) Becomes aware by any other means that “bodily injury” or “property damage” has occurred or has begun to occur.
e.Damages because of “bodily injury” include damages claimed by any person or organization for care, loss of services or death resulting at any time from the “bodily injury”.
Six defined terms and 10 specific limitations/requirements found in the Coverage A insuring agreement narrow the protection initially provided by the coverage part. Each of the limiting definitions is presented in the next section. The 10 specific limitations are explored in the follow section. This article ends with a useful Coverage A insuring agreement checklist.
Defined Terms Limiting Coverage
When an insurance carrier desires or needs to limit a term’s meaning, the word or phrase is specifically defined in the policy. When a word or phrase is not defined, it is given its “everyday” meaning. ISO specifically defines and controls the application of six terms in the Coverage A insuring agreement:
- “Bodily injury“: bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.
- “Property damage“: Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.
- “Suit“: A civil proceeding in which damages because of “bodily injury”, “property damage” or “personal and advertising injury” to which this insurance applies are alleged. “Suit” includes: a. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or b. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.
- “Occurrence“: An accident, including continuous or repeated exposure to substantially the same general harmful conditions.
- “Employee“: Includes a “leased worker.” “Employee” does not include a “temporary worker.“
- “Coverage territory“: The United States of America (including its territories and possessions), Puerto Rico and Canada; b. International waters or airspace, but only if the injury or damage occurs in the course of travel or transportation between any places included in Paragraph a. above; or c. All other parts of the world if the injury or damage arises out of:
(1) Goods or products made or sold by you in the territory described in Paragraph a. above;
(2) The activities of a person whose home is in the territory described in Paragraph a. above, but is away for a short time on your business; or
(3) “Personal and advertising injury” offenses that take place through the Internet or similar electronic means of communication;
provided the insured’s responsibility to pay damages is determined in a “suit” on the merits, in the territory described in Paragraph a.above or in a settlement we agree to.
Each definition serves to limit coverage in some way by limiting the term’s scope. By limiting a term’s scope, the carrier controls the amount of coverage granted in the insuring agreement. For instance:
- “Bodily injury” excludes, or rather does not extend coverage to, injuries such as mental anguish and personal injury (which is defined separately in the CGL).
- “Property damage” limits the type of property covered to tangible property.
- “Suit” limits coverage to civil actions with no mention of or allowance for criminal actions. In order for coverage to exist, legal liability must flow out of a civil action.
- “Occurrence” limits protection to injury or damage caused by unintended and unexpected events occurring at a specific time or over a long period of time.
- “Employee” is different, the terms in not really defined. The definition simply expresses who is not considered an employee. Thus the term employee is ultimately given its everyday meaning (either legal or accounting).
- “Coverage territory” limits coverage to premises in or originate from, or products made in the US, its territories or possessions, Puerto Rico and Canada. Also requires the suit to occur in one of these locations.
Some insurance carriers may apply proprietary wording to these ISO definitions to alter the meaning. For example, some carriers may expand the definition of “bodily injury” to include mental anguish (and some courts have done this). Carriers may also expand the “coverage territory” be redefining the term.
The limitations created by these six defined terms directly affect the 10 specific coverage limitations contained within Coverage A’s insuring agreement as detailed in the next section.
Ten Coverage Limitations
Ten conditions exist within Coverage A’s insuring agreement that MUST be satisfied before any possibility of coverage exists. Once all of these conditions are satisfied, the coverage researcher can turn his attention to the exclusions, exceptions and conditions. The 10 insuring agreement limitations and requirements are:
- The person or entity causing the injury or damage must be an insured.
- There must be “bodily injury” (BI) or “property damage” (PD) as defined and limited by the definitions;
- The insured must be legally obligated to pay;
- Legal liability must arise out of a civil suit;
- The legal liability for BI or PD must arise out of a defined “occurrence;”
- The BI or PD must occur during the policy period;
- The “suit” must seek money damages;
- The BI or PD must occur in, arise out of or be tried in the “coverage territory;”
- No insured (as defined in the policy) or “employee” authorized by the named insured has received notice of any “occurrence” or claim or knew that BI or PD had occurred. Such “occurrence” is deemed to be known when:
- Any BI or PD is reported to any applicable insurance carrier (past or current);
- A written or verbal demand or claim for damages for BI or PD is received; or
- Any of the parties (insureds or “employees”) become aware by ANY means that BI or PD has begun to occur; and
- If BI or PD begins in a prior policy period and was not known, the prior policy responds. Likewise, if the BI or PD begins during the current policy period and continues into the next, the current policy responds.
Remember, EVERY condition must be met for coverage to exist within the insuring agreement. If coverage is extended from the insuring agreement, the facts of the injury or damage are compared to the exclusions, exceptions and conditions to make the ultimate coverage determination.
Three concepts within these limitations require greater explanation: “insured,” “legally obligated” and “occurrence.”
Status as an insured must exist before ANY question of coverage can be tackled – if the individual or entity is not an insured, there is no reason to go any further. The best-designed insurance program does little good if the person or entity being held financially responsible for the loss is not an “insured.” When a liability loss occurs, the very first question asked is, “Is the person or entity causing the injury or damage an insured?” If the answer is, “No,” stop, don’t go any further – there is no coverage.
Four types or levels of “insureds” exist within and by addition to the CGL. Each level is granted a different “amount” of protection:
- Named Insureds: Granted the greatest amount of protection. These are the “You” in the policy.
- Extended Insureds: These insureds are listed in the policy and differ based on the entity type of the named insured (“You”) – so the entity types must be correct. Extended insureds are granted the same level of protection as the “you” – for activities related to the business.
- Automatic Insureds: These insureds are “related” to the named insured. In essence, the named insured needs these people to conduct operations. Automatic insureds are listed in the policy, examples include “employees,” volunteer workers and real estate managers.
- Additional Insureds: These are always added by endorsement. Additional insured are not generally “related” to the insured, they have a business relationship with the insured. Additional insureds are usually given the least amount of protection.
Before anything else, make sure the person or entity causing the injury or damage is an insured. Once insured status is confirmed, continue applying the remaining requirements.
Legal obligation is the second key requirement within Part A’s insuring agreement. The policy reads, in part, “a. We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies.”
An insured (correctly named) can be found “legally obligated” in at least one of three ways; legal obligation can result from the insured’s:
- Direct actions or inactions of an insured;
- Vicarious liability for the actions of another; or
- Contractually assumed liability.
How do each apply to the insured:
- Direct actions or inactions: Either the named insured or any person qualifying as an insured in Section II of the policy must participate in the activity resulting in BI or PD.
- Vicarious liability: To become vicariously liable and thus legally obligated, an insured must have the right or responsibility to control the actions of another party who causes BI or PD. If the insured has no right or duty to control the actions or activities of the at-fault party, there is no vicarious liability and no legal obligation owed by the insured. Common examples of vicarious liability (the Latin term is: “respondeat superior”) include the employer/employee relationship; the upper tier/lower tier contractor relationship (but only for the operations contracted); principal/agent; and parent/child.
- Contractual liability: The insured can be legally obligated because it assumed the liability of another party via a contract (oral or written). Contractually accepted liability is specifically excluded in the policy; however, there are limited exceptions to the exclusion. If the contract qualifies as an “insured contract” (as defined in the policy), coverage for contractually accepted liability may be given back.
Unless the insured is legally obligated to pay based on these conditions, the CGL does not respond. Courts often decide when an insured is legally obligated.
“Occurrence” attempts to define or limit the date of injury or damage to a particular policy period. When did the accident “occur” or when did the exposure to injury begin? Once the date of a defined “occurrence” is established, the policy or polices in effect respond(s). Simply put, the policy or policies in effect when the injury or damage “occurs” defends and/or pays the loss.
Assigning the date of the “occurrence” is easy when the date of the act and the date of the injury are the same. But pinpointing the “occurrence” date is not as easy when/if there is a time lag between the act and the result, or when injury or damage occurs over a long period of time (repeated exposure to substantially the same general harmful conditions).
Based on the type of loss and the facts surrounding the injury or damage, courts may apply one of four legal theories to identify when bodily injury or property damage occurred (the date of the “occurrence”) in “time lag” claims:
- The “Injury-in-Fact Theory“: Also known as the “actual injury” theory, the date of physical damage to tangible property or act upon a person leading to actual injury is the date of the “occurrence,” regardless of when the injury or damage is discovered or manifests;
- The “Manifestation Theory“: The date the injury becomes EVIDENT is the date of the “occurrence;”
- The “Exposure Theory“: Courts consider all the dates of exposure to be the dates of the “occurrence” (multiple policy potential); or
- The “Continuous Trigger Theory“: This is also known as the “triple-trigger” theory; multiple occurrence dates (and thus multiple policies) may be involved based on:
- the date of first exposure,
- the dates of continuous exposure, and
- the date of manifestation.
“Injury-in-Fact Theory” vs. the “Manifestation Theory” of “Occurrence.” Simply explained, the basis of the “injury-in-fact” theory of “occurrence” is the date of the act that ultimately leads to injury or damage. For instance, a drywall contractor drives a nail into a water pipe on March 3, 2012. Over time, the expansion and contraction of the pipe coupled with the progressive rusting of the nail results in a leak and water damage first noticed on October 25, 2015. According to the “injury-in-fact” (“actual injury”) theory, the date of occurrence is March 3, 2012. The policy in effect on that date is responsible for the claim.
Conversely, the “manifestation theory” assigns the occurrence to the date the damage manifests itself – meaning it becomes evident. Applying the “manifestation theory” to the above example, the date of the occurrence is October 25, 2015. The policy in effect on that date pays the claim.
Whether a state is an “injury-in-fact” state or a “manifestation” state is a matter of precedent. And like many precedents, a particular state may apply just one theory, but some states apply both based on the facts of the case. Also, jurisdictions sometimes “change sides” after years on one side or the other.
“Exposure Theory” and “Continuous Trigger Theory” Issues. When introduced, many believed the goal of the known injury limitation wording found in paragraphs “b,” “c.” and “d.” of the insuring agreement was to confine coverage to just one policy period. But this “goal” was not realized when either the “Exposure Theory” or “Continuous Trigger Theory” is applied to a specific claim. In fact, this doesn’t appear to have ever been ISO’s intent.
Subparagraph “b.(3)” excludes coverage in the current policy only if and when an insured or authorized “employee” knew prior to the policy period that injury or damage had occurred. If no specified party knew about such injury or damage, the current policy responds – as do all previous policies if there was no prior knowledge. And paragraph “c.” goes on to state that the policy covers any loss that continues to occur during the policy period and into the future provided no insured or authorized “employee” knew that such injury or damage was or is occurring. (Note: Some proprietary endorsements alter this wording to preclude coverage if one of these persons knew or SHOULD have known injury or damage occurred.)
The policy in effect when the discovery is made is the last policy that responds. Some insurance carriers have filed proprietary endorsements that alter this wording with the intent of limiting coverage to just one policy, but the ISO wording does not do this.
(The “Exposure Theory” and the “Continuous Trigger Theory” most often apply to pollution and other such long-tail claims not generally covered by a CGL due to specific exclusions within the form or added by endorsement.)
Understanding the “occurrence” theories is as important as understanding the concept of “legally obligated to pay.” Four of the 10 requirements within the insuring agreement relate to the occurrence – either directly or indirectly.
Is There Coverage – So Far
Does the claim for injury or damage meet all the requirements of the insuring agreement? If so, move on to the exclusions, exceptions and conditions to ultimately confirm or deny coverage. If the loss falls outside the insuring agreement, stop – there is no coverage.
Begin at the beginning – always!
Just as a little added help, here is a checklist to help determine if a particular loss falls with Coverage A’s insuring agreement.
- Is the person or entity causing the injury or damage an insured?
- Was there “bodily injury” (BI) or “property damage” (PD) as defined and limited by the definitions?
- Is the insured legally obligated to pay?
- Was legal obligation decided by a civil suit?
- When was the “occurrence?”
- Did the BI or PD occur during the policy period?
- Was the injury or damage known by the insured or any authorized person to occur prior to the policy period?
- Are money damages; being sought?
- Did the BI or PD occur in, arise out of or being tried in the “coverage territory?”
All nine questions must be answered “correctly” for there to be any possibility of coverage. Questions 1, 2, 3, 4, 6, 8 and 9 must be answered “yes.” Question 7 requires a “no” answer. If the loss satisfies the requirements of the insuring agreement, it can be compared to the exclusions, exceptions and conditions to confirm coverage exists. If the loss does not meet these requirements, there is no coverage – and no need to dig any deeper into the policy.
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