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1: coverage a--bodily injury and property damage liability.

Bodily injury and property damage liability coverage is provided as Coverage A of the commercial general liability (CGL) coverage forms. Coverage A consists of two sections: insuring agreement and exclusions.

INSURING AGREEMENT

Under the Coverage A insuring agreement, the insurer agrees to pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury or property damage to which the insurance applies. In addition, the bodily injury or property damage must be caused by an occurrence that takes place in the coverage territory. Each of the italicized terms above is discussed in more detail in this chapter.

The insuring agreement also sets forth the coverage trigger that applies to each form. Form CG 00 01 contains an occurrence trigger, and CG 00 02 contains a claims-made trigger. The coverage triggers of the CGL coverage forms are described briefly in this chapter; a more detailed explanation of the coverage triggers is in Chapter 4.

Finally, the insuring agreement expresses the insurer's duty to defend the insured. Accordingly, this chapter describes the defense coverage provided by Coverage A. Because of their logical relationship to defense coverage, the supplementary payments section of the CGL coverage forms is also described in this chapter. The supplementary payments also apply to Coverage B, the subject of Chapter 2.

Meaning of Legally Obligated

The expression legally obligated connotes legal responsibility that is broad in scope. It is directed at civil liability, rather than criminal liability, the latter being against public policy to insure. Civil liability can arise from either unintentional (negligent) or intentional tort, under common law, statute, or contract.

The Coverage A insuring agreement does not contain the statement, found in the 1973 general liability policy, that the insurer will "pay on behalf of the insured." The absence of that language should not, however, be taken to mean that the CGL coverage forms are indemnity policies, that is, policies that pay the insured only after the insured has paid the injured party. The current insuring agreement does not use the word indemnify, nor does it express any requirement that the insured must pay the injured party first. The insurer's promise to "pay those sums that the insured becomes legally obligated to pay" requires only that the insured have an obligation to pay.

"Damages Because of"

Damages comprise those sums of money that the law imposes as compensation, such as medical and funeral expenses, loss of services, lost wages, and pain and suffering resulting from bodily injury, and repair bills and other forms of retribution for damage to property or its loss of use. Unless otherwise prohibited by law, damages may also include punitive damages. The fact that "damages" is not defined in CGL policies has made it the focal point in litigation dealing with environmental cleanup costs. Insureds have maintained that the costs associated with remediating contamination damage to property constitute damages. Insurers, on the other hand, have maintained that the term in question embraces any legal damages, or, in other words, the costs associated with actions at law, rather than actions in equity. An action in equity seeks an equitable remedy. For example, injunctive relief proceedings, one form of action in equity, deal with the required performance or prohibition of an act and therefore do not directly involve money damages, but these proceedings do involve costs and expenses in litigating them.

Yet the courts have interpreted damages in insurance policies independently of the legal and equitable distinction that has been asserted by insurers. Examples are nuisance actions, situations involving the mitigation of damage to restore property, and actions that have alleged a combination of injunctive relief and damages in an otherwise covered claim or suit. (1)

The phraseology "damages because of," as used in the CGL policy insuring agreement, conveys a broad promise that is sometimes overlooked. The pertinent part of the insuring agreement in which this phraseology appears reads: "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."

In light of this wording, all damages flowing as a consequence of bodily injury or property damage would be encompassed by the insurer's promise, subject to any applicable exclusion or condition. This includes purely economic damages, as long as they result from otherwise covered bodily injury or property damage.

For example, absent some allegation of physical bodily harm potentially covered by a liability policy, there may be no coverage for allegations of emotional distress or mental anguish, depending on the law of the jurisdiction involved. In fact, the debate over whether emotional distress or mental anguish equates with bodily injury in the absence of physical bodily harm has long persisted. However, if a claimant sustains bodily injury or personal injury that is deemed to be covered by the policy, there should be no question that all damages for emotional distress or mental anguish flowing as a consequence from the bodily injury or personal injury should also be covered.

Likewise, loss of investments or profits and goodwill are not considered to be property damage, because the definition of property damage requires physical injury to tangible property. However, these damages, when associated with and flowing as a consequence of otherwise covered property damage, would also be covered.

"Bodily Injury" and "Property Damage"

"Bodily injury," as defined in the CGL coverage forms, remains relatively unchanged from predecessor forms. It means:

Bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.

It has been said that when "bodily injury" is stated to mean bodily injury, it is an attempt to use words that need no further explanation, and it would be an imposition on insurers to require them to provide insureds with "an unnecessary lexicon" [Cotton States Mutual Ins. Co. v. Crosby, 260 S.E.2d 860 (Ga. 1979)]. In its usual sense of the word, however, bodily injury means hurt or harm to the human body by contact of some force and any resulting pain and suffering, sickness or disease, as well as death.

The definition of property damage has changed since introduction of the 1986 forms. To understand the transition of this definition, it is helpful to restate the definitions as they appeared in the 1986 forms and again with the 1990 and subsequent editions.

1986 CGL Policy Definition

a. Physical injury to tangible property, including all resulting loss of use of that property; or

b. Loss of use of tangible property that is not physically injured.

Within Insuring Agreement 1.c. there is an additional explanation:

"Property damage" that is loss of use of tangible property that is not physically injured shall be deemed to occur at the time of the "occurrence" that caused it.

1990 and subsequent editions of the CGL Policy

a. 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

b. 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.

Under the 1986 forms, loss of use of tangible property resulting from physical injury to that tangible property is covered at any time it occurs following the physical injury. So, for example, loss of use of tangible property in 2002 resulting from physical injury to that tangible property in 2000 would be covered by the 2000 policy under the wording of Part (1) of the property damage definition in the 1986 policy. This application is reinforced by the fact that the CGL policy also covers "damages because of" property damage and that loss of use of tangible property physically injured, as a consequence, would fall into that category.

This contrasts with the wording found in Part a. of the property damage definition of the 1990 forms and as it exists today in subsequent policy editions, where loss of use resulting from physical injury to tangible property is deemed to occur at the time of the injury that caused it. It has been said that injury or damage generally is simultaneous with an occurrence, but that is not necessarily the case in every instance. However, not to complicate matters, assume that work was performed on a building in 2000. Defects in the construction cause windows to leak damaging some contents in 2001. As a result of that physical injury to tangible property, there is loss of use of that part of the building, in 2002, while repairs are pending and while repairs are being made. For purposes of applying coverage, loss of use would relate back to the policy year 2001, the date the water damage occurred.

In theory, there should be little difference in the application of coverage between the 1986 and 1990 editions. However, by stating under both of these editions that loss of use and the occurrence causing it must take place during the policy period, coverage may be difficult to ascertain or even be eliminated where the occurrence is in one policy period and loss of use is in another.

Interestingly, the property damage definition wording of the 1986 and 1990 CGL forms, requiring that both the occurrence and the loss of use occur during the policy period, produces a result similar in some ways to the progressive injury exclusion (so-called Montrose endorsements, named after the 1995 case of Montrose Chemical Corp. v. Admiral Insurance Company, 913 P.2d 878) that is now part of the standard CGL insuring agreements. The Montrose case and its consequences will be discussed in more detail in Chapter 4. However, it needs to be mentioned here that the purpose of the progressive injury exclusion is to preclude coverage in future policies for continuous or progressive injury or damage once it is known to exist. This is also the general idea behind the wording of the property damage definition stating that the loss of use of tangible property is deemed to occur at the time of the occurrence that caused it.

Reference to physical injury suggests that the tangible property must sustain some form of visible harm or impairment. Thus, if property is lost or stolen, it can be argued that there has been no physical injury to the property. For example, in State of Vermont v. Glen Falls Ins. Co., 315 A.2d 257 (Vt. 1974), the Vermont Supreme Court held that an insured's general liability policy did not cover disappearance of the property of another from the mailbox of an employee of the insured. The insured's policy had a definition of property damage that required physical injury to tangible property.

Even if loss or theft of property is not considered to be physical injury to tangible property, however, the insured may still be able to recover on the ground that there is "loss of use of tangible property that is not physically injured," which is also defined as property damage. For example, see Travelers Insurance Co. v. De Bothuri and P.L.A. Inc., 465 So. 2d 662 (Fla. App. 1985), and Chertok v. Hotel Salisbury, 516 F. Supp. 766 (S.D.N.Y. 1981). Some insurers now specifically exclude money, securities, and other valuables from coverage under liability policies.

The 2001 revision of the CGL policy added the following language to the definition of "property damage":

For purposes of this insurance, electronic data is not tangible property.

As used in this definition, electronic data means information, facts or programs stored as or on, created or used on, or transmitted to or from computer software, including systems and applications software, hard or floppy disks, CD-ROMS, tapes, drives, cells, data processing devices or any other media which are used with electronically controlled equipment.

The tendency of some people to view computer data as intangible property is rooted in the premise that tangible property must possess some physical property capable of being touched, and they believe that computer data does not exhibit such characteristics. However, once information travels from thought process to a computer disk as data, it can be viewed and edited and then printed onto paper or conveyed via email or computer-generated facsimiles. From this perspective, many insureds would view electronic data as being tangible property.

Whether it was this perspective of insureds about viewing electronic data as tangible property or the fact that a policy definition is not an equivalent of an exclusion, ISO introduced a new exclusion, designated as exclusion p. in the 2004 edition of the CGL coverage form. This exclusion buttressed the intent that liability for loss of electronic data, however caused, is not intended to be covered by the basic policy provisions. Exclusion p. is discussed later in this chapter.

Caused by "Occurrence"

A basic requirement of both CG 00 01 and CG 00 02 is that the bodily injury or property damage must be caused by an occurrence, which both forms define as follows:

"Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

The definition of this term in the CGL coverage forms differs from the definition in the 1973 policy. Reference in the 1973 policy to "bodily injury or property damage neither expected nor intended from the standpoint of the insured" does not appear in the current definition. Instead, the current forms treat intentional harm through an exclusion that is described later in this chapter. Reference to "the same general harmful conditions" in the current definition is taken in part from the limits of liability section of the 1973 policy, which reads: "For purposes of determining the limit of the company's liability, all bodily injury and property damage arising out of continuous or repeated exposure to substantially the same general conditions shall be considered as arising out of one occurrence."

Despite the change in the wording of the occurrence definition, the effect is intended to be the same as in the 1973 policy. Thus, whether it can be said that bodily injury or property damage is caused by an occurrence still hinges on fortuity. It does not matter whether the event is sudden and definite in time or place, or one that is continuous or repeated and difficult to pinpoint within a specific time-frame. What really matters is whether the bodily injury or property damage results without the insured's foresight or anticipation. (2)

"Coverage Territory"

Under the CGL coverage forms, an occurrence must take place within the coverage territory in order for bodily injury and property damage to be covered under Coverage A, and an offense must take place within the coverage territory in order for personal and advertising injury to be covered under Coverage B. Thus, it is obviously important to understand the meaning of this defined term, which has until the 2001 CGL revision remained unchanged from when first introduced in 1986. The 2001 changes primarily affect Coverage B--Personal and Advertising Injury, to take into consideration the worldwide loss exposures arising out of e-commerce.

"Coverage territory" means:

a. 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 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 a. above;

(2) The activities of a person whose home is in the territory described in 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 a. above or in a settlement we agree to.

The effects of the above definition are as follows:

* Reference to injury in c. above is intended to include not only bodily injury but also personal and advertising injury, the subject of Coverage B.

* Regarding products liability coverage, the coverage territory is worldwide, provided the goods or products are made or sold by the named insured in the basic coverage territory, even though sold for use or consumption abroad. In contrast, the policy territory of the 1973 CGL policy provided international coverage for products only if they were sold for use or consumption in the basic coverage territory (the United States, Puerto Rico, and Canada). Although the 1986 and later CGL coverage forms provide a broader territorial definition for overseas products than the 1973 policy did, the insured who makes or sells products for overseas use or consumption is still likely to want broader coverage than that found in current CGL forms to cover suits filed outside the basic coverage territory.

* Although products and completed operations are combined for purposes of defining the elements of the products-completed operation hazard, completed operations are not covered on a worldwide basis. Like the 1973 CGL policy, the current CGL forms do not cover injury or damage resulting from the insured's completed operations that occurs outside the basic coverage territory.

* The coverage territory for occurrences or offenses involving the activities of a person for whose acts the insured may be responsible is worldwide, provided the person's home is within the basic coverage territory (i.e., that part of the coverage territory described in part a. above) and the person is away only for a short time.

* While personal and advertising injury coverage requires that the offense be committed in the coverage territory during the policy period, the resulting injury has no territorial restriction. For pur poses of offenses taking place through the Internet, the CGL policy's territorial scope is worldwide. Likewise, personal and advertising offenses committed by a person while in a foreign jurisdiction are within the coverage territory so long as that person resides in one of the places identified in part a.

Until the 2001 policy revision, the problem has been in determining where an offense takes place if an injury is sustained outside the coverage territory. Because the Internet has no boundaries, finding an answer would have been difficult, if not impossible. With the 2001 revision of the coverage territory, the task of determining where the offense takes place is no longer a concern. Coverage now applies, for purposes of an offense involving personal and advertising injury, because of the Internet or other similar electronic means of communication, on a worldwide basis.

* Although a certain amount of coverage is on a worldwide basis, the insured's responsibility to pay damages must be determined in a suit on the merits in the basic coverage territory. Whether it necessarily must be the original suit (a requirement under the 1973 CGL policy) that is filed against the insured is not readily apparent. A literal reading of the policy wording reveals no such requirement. It therefore is conceivable that a suit originally filed in a foreign country could be dismissed (without prejudice) and refiled later in the coverage territory.

Under pre-1986 CGL forms, there was a question whether claims within foreign jurisdictions were covered. The basis for that position is that the terms of the 1973 CGL policy stated that the insurer may investigate and settle any such claim it deemed expedient. If the claim materialized into a lawsuit then arguably the original suit was required to be brought within the policy territory.

In 1986 and subsequent editions of CGL forms, the insurer's obligation to investigate and settle claims is at the insurer's discretion. However, it would not be in the best interest of the insurer (and the insured) if the insurer were to ignore the investigation of any claim wherever it occurs. In fact, it could be construed as a failure on the part of the insurer to mitigate damages arising from a claim. Thus, it would appear that if an insurer decides to settle a claim outside the coverage territory, the claim should be covered for at least three reasons:

1. There is no specific policy provision that precludes such an obligation;

2. The insured's legal obligation to pay damages can arise from a claim or a suit; and

3. The term suit is defined in 1986 and subsequent policy editions, but the term claim is not defined in these policies connoting a difference between the two.

Coverage Triggers

In form CG 00 01, Coverage A applies to bodily injury or property damage that occurs during the policy period. This is the so-called occurrence coverage trigger, also used in the 1973 CGL policy. Simply stated, the policy in effect at the time injury or damage occurs is the policy that covers resulting damages, even if a claim is not made until long after the policy expires.

In form CG 00 02, Coverage A is subject to a claims-made coverage trigger. Coverage applies only to injury or damage for which a claim is first made during the policy period. In addition, the injury or damage for which a claim is made must have occurred on or after the retroactive date, if any, shown in the policy declarations.

Prior to introduction of form CG 00 02 in 1986, a claims-made trigger had not been used in standard general liability forms. It was added to CGL forms to give insurers an appropriate form for insuring risks that could incur long-tail liability losses, that is, injury or damage that does not result in a claim until long after the injury or damage occurs. An example is a claim, made today, for injury that is considered to have occurred when the claimant was exposed to the insured's product several years ago. Typically, an insurer does not want to cover long-tail risks under an occurrence policy, because the insurer will be liable for claims made at any later time due to injury or damage that occurs during the policy period. Another problem (from the insurer's point of view) with the occurrence trigger is that injury occurring over several years (as in the case of long-term exposure to a substance such as asbestos) may be covered under all policies in effect during those years, allowing the insured to stack the per-policy limits.

In 1999, ISO introduced a mandatory endorsement (CG 00 57) that modified the Coverage A insuring agreement of the occurrence CGL form to eliminate coverage for injury or damage known to the insured before the policy period began. The language of the endorsement was incorporated in the occurrence form with the 2001 CGL revision. This language, commonly referred to as the Montrose provision after a California court case, is discussed in Chapter 4 as part of the provisions that define the occurrence coverage trigger.

In contrast with the operation of the occurrence trigger, when the claims-made form is used, a claim is payable only under the policy in effect when the claim is first made. Once that policy period ends, the insurer will be aware of all claims it must pay under that policy, unless additional claims are reported during an extended reporting period, that is, an additional period for reporting of claims after the policy period ends.

Despite the advantages of claims-made coverage to insurers, it is generally avoided by insureds. Because of the retroactive date and the various options for extended reporting periods, arranging claims-made coverage is often complicated and can result in coverage gaps. Accordingly, an in-depth explanation of the claims-made trigger (which also applies to Coverage B of the 1990 and 1993 versions of form CG 00 02) is provided in Chapter 4 of this text.

Duty to Defend--Allocation

It has been a well-known fact since the introduction of standard general liability policy provisions in 1941 that the duty to defend is broader than the duty to pay. Insurers, in other words, have been required to defend the insured against all allegations and assume the costs of defense for even those allegations clearly not covered by the policy. In fact, these earlier policies, until the 1986 forms were introduced, stated that the insurer's duty to defend applied "even if any of the allegations of the suit are groundless, false or fraudulent."

When the standard ISO 1986 forms were introduced, the insurer's right and duty to defend was stated this way:
   We will have the right and duty to defend the insured against any
   "suit" seeking those damages ... We may at our discretion
   investigate any "occurrence" and settle any claim or "suit" that
   may result. ...


The above wording remains to this very day despite numerous revisions to the forms. However, what may have been overlooked with the introduction of the 1986 forms was the elimination of the phraseology "groundless, false or fraudulent." It was mentioned in this text in the early editions that, while that explicit statement no longer appeared in current CGL forms, it would not matter since the insurer still has "the right and duty to defend the insured against any 'suit' seeking damages." If "any" is given its literal meaning, the statement should encompass groundless, false, or fraudulent suits as well as legitimate ones. Thus, absence of the prior wording should not be interpreted to mean that the insurer was relieved of the duty to defend groundless, false, or fraudulent suits against the insured.

Of course, the complaint must have contained at least one allegation that was potentially within coverage. It was not necessary that all of the allegations came within the scope of coverage. It became generally recognized that if some part of the damages sought were covered, the insurer had to defend, but had no obligation to pay damages not covered by the policy.

There has been continuous dialogue over the years that defense costs far exceeded the payment of damages and that something had to be done about it. One of the approaches to reducing the costs of defense espoused by insurers was allocation. This concept of allocating defense costs between covered and noncovered claims had been around for many years. Directors and officers liability policies, for example, have long sought to allocate defense costs between covered and noncovered claims.

What may have encouraged insurers to allocate defense costs between covered and noncovered claims was the case of United States v. United States Fidelity & Guaranty Co., 601 F.2d 1136 (10th Cir. 1979). This case dealt with an architectural and engineering firm that purchased a CGL policy subject to a professional services exclusion. When two suits were filed in 1971 against the firm alleging bodily injuries resulting from the performance of professional services, the CGL insurer denied both defense and coverage.

The U.S. Court of Appeals for the 10th Circuit held that the insurer was obligated to defend its insured because it was unclear whether the exclusion of professional services applied to the duty to defend as well as to the duty to pay. The court explained that "if the insurance company wants to protect itself in this type of situation, it should be clearly stated that the exclusion clause applies to both the duty to pay and the duty to defend."

Citing the above case, ISO issued a memorandum in 1991 advising insurers that if they do not want to defend a suit alleging damages not covered by the policy, they should clearly state their intentions in the policy. As a result, insurers began to issue endorsements with wording attempting to make this subject clear. It was not until the 1996 CGL policy revisions that the following specific wording first appeared within the insuring agreement of standard forms:
   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.


On its face, this wording may not appear to limit the defense obligation since case law still requires that the insurer defend the entire action if even one cause of action is potentially covered. As it is turning out, however, emerging case law indicates that with a combination of other factors, some insurers that must defend are able to seek reimbursement of costs attributed to noncovered claims. Much depends on whether the insurer has complied with all of the legal requirements and the law of the state involved permits such a result.

These revisions by ISO indicate an intent to pursue the right to allocate dating back to its deletion in 1986 of the "groundless, false, or fraudulent" wording.

One of the commonly cited cases upholding allocation in an insurer's favor is Buss v. The Superior Court of Los Angeles County, 96 D.A.R. 2372 (1996). This case is not a good one to rely on because of all the allegations cited, only one allegation was potentially covered. The CGL policy also did not contain the wording above that was introduced by ISO in its 1996 CGL forms. However, the insurer did include in its reservation of rights a statement to the effect that the insurer expressly reserves its rights to be "reimbursed and/or an allocation of attorneys' fees and expenses," if it were determined that there was no coverage under the policy. Also, the attorney defending the case was instructed by the insurer to keep specific records of time allocable to the covered claim as opposed to the claims not covered.

In this case, the court held that with respect to claims for which there never was any potential for coverage, the insurer could recover costs shown by a preponderance of evidence to be fairly reasonably allocable solely to the noncovered claim or claims. The court also held that an insurer's unilateral reservation of rights to recoup defense costs could not, in absence of policy wording to that effect, justify a claim for the recovery of such costs prior to a determination of noncoverage. This is an important point, because of the policy language introduced by ISO in 1996. In policies expressly stating that there is no defense obligation for claims not covered by the policy and omitting the "groundless, false, or fraudulent" wording found in earlier policies, there now seems to be an argument for the allocation of defense costs expended on noncovered claims even before a case is over, subject to possible arguments of ambiguity in policy wording.

What has been discussed here relative to Coverage A--Bodily Injury and Property Damage Liability also applies to Coverage B--Personal and Advertising Injury Liability.

Relationship of Defense Costs to Limits of Insurance

The defense provisions stated above are followed by two conditions. The first of these states that "the amount [the insurer] will pay for damages is limited as described in Section III--Limits of Insurance." Although the various limits of insurance that apply to the CGL coverage forms will be discussed in Chapter 5, a key point of this condition is that policy limits are applicable only to damages. Thus, all other covered costs in connection with a covered claim against the insured, including expenses incurred to defend the insured, are payable in addition to the applicable limits of insurance.

The second condition states that the insurer's "right and duty to defend end when we have used up the applicable limit of insurance in the payment of judgments or settlements under Coverage A or B or medical expenses under Coverage C." As noted above, the limits of insurance apply only to damages; all other costs, including defense, are payable in addition to limits. However, once the applicable limit of insurance has been paid, the insurer's duty to defend is intended to cease.

There is one notable exception to the fact that defense costs are payable in addition to policy limits. First introduced with the 1992 and 1996 revisions, and now applying to all subsequent policy editions, is the statement, as part of the contractual liability exclusion, that the insurer will pay defense costs that the insured assumes under an insured contract. However, any payment the insurer makes for defense costs assumed under contract are payable within the applicable limits of insurance. To reinforce this provision, the defense provisions in the 1992 and 1996 forms state that the insurer has the right and duty to defend only the insured against suits seeking covered damages. Prior editions stated that the insurer had the right and duty to defend any suit seeking damages covered under the policy. The coverage for defense costs assumed under contract is discussed in more detail later in this chapter in connection with the contractual liability exclusion.

Definition of "Suit"

The word "suit" in the defense provision was first defined in the 1986 policy provisions. In the 1992 and 1996 amendments, the definition of suit was broadened to include arbitration proceedings and other alternative dispute resolution proceedings to which any insured--not just the named insured--submits. The latest version reads as follows:

"Suit" means 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.

One reason why the definition of suit was introduced was to encompass arbitration proceedings and other techniques for resolving disputes, such as minitrials and pretrial mediations. These techniques, advocated by insurers as a less costly alternative to court proceedings, have become increasingly popular ways to resolve claims against the insured.

Another possible reason for adding the definition of suit was to preclude coverage for insureds seeking protection under their CGL policies following receipt of notice from a governmental agency that they were potentially responsible parties to an environmental incident. Such notice is commonly referred to as a PRP letter. Insurers have maintained that a PRP letter or other notice is not the equivalent of a lawsuit and therefore have denied insureds the benefit of any defense. The courts, however, are split on this subject. Adding the definition of suit appears to be the method chosen to end those kinds of disputes.

SUPPLEMENTARY PAYMENTS

Closely related to the insurer's duty to defend are the supplementary payments that the insurer promises to make in addition to paying damages. These payments, which apply to both Coverage A and Coverage B, are expressed in the 2001 CGL forms as follows:

We will pay, with respect to any claim we investigate or settle, or any "suit" against an insured we defend:

a. All expenses we incur.

b. Up to $250 for cost of bail bonds required because of accidents or traffic law violations arising out of the use of any vehicle to which the Bodily Injury Liability Coverage applies. We do not have to furnish these bonds.

c. The cost of bonds to release attachments, but only for bond amounts within the applicable limit of insurance. We do not have to furnish these bonds.

d. All reasonable expenses incurred by the insured at our request to assist us in the investigation or defense of the claim or "suit", including actual loss of earnings up to $250 a day because of time off from work.

e. All costs taxed against the insured in the "suit".

f. Prejudgment interest awarded against the insured on that part of the judgment we pay. If we make an offer to pay the applicable limit of insurance, we will not pay any prejudgment interest based on that period of time after the offer.

g. All interest on the full amount of any judgment that accrues after entry of the judgment and before we have paid, offered to pay, or deposited in court the part of the judgment that is within the applicable limit of insurance. These payments will not reduce the limits of insurance.

In most respects, these supplementary payments provisions are the same, in effect, as those of the 1973 general liability policy. The few differences are noted below.

Unlike the 1973 version, the current supplementary payments do not include coverage for expenses incurred by the named insured for first aid to others at the time of an accident. However, the medical payments section of the current forms does specifically cover reasonable expenses for first aid administered at the time of an accident. A difference between the two ways of covering first aid expenses is that the current approach requires the insured to have purchased medical payments coverage, while the old approach provides the coverage automatically, as long as the insured has liability coverage.

Moreover, under the current forms, the payment of first aid expenses reduces the applicable limits of liability, whereas the 1973 provision applied in addition to policy limits. The applicable limits of liability with respect to the current medical payments coverage are a per-person limit applicable only to medical payments, an each occurrence limit for both medical payments and bodily injury/property damage liability, and a "general aggregate" limit. (These limits are described more thoroughly in Chapter 5.)

The loss of earnings provision allows up to $250 per day for loss of earnings because of time off from work. The loss of earnings provision in the 1973 form limited recovery to $25 per day. The 1986, 1990, and 1993 CGL forms limit recovery to $100 per day.

The current provision respecting interest on judgments applies not only to interest accruing after entry of the judgment but also to prejudgment interest awarded against the insured. Until 1984, when ISO introduced in many states an amendatory endorsement for general liability forms providing prejudgment interest coverage, standard liability forms provided for postjudgment interest only.

The current supplementary payments provisions are silent as to the cost of premiums on appeal bonds required in any suit defended by the insurer, an item that was specifically covered under the 1973 provisions. The absence of a provision regarding appeal bonds should probably not be construed as an indication that the CGL coverage forms relieve the insurer of the obligation to pay for appeal bonds in all cases. And, more importantly, the absence of an appeal bond provision should not be interpreted as relieving the insurer of the duty to pursue an appeal if there are reasonable grounds for an appeal.

A case in point is Cathay Mortuary (Wah Sang), Inc. v. United Pacific Ins. Co., 582 F. Supp. 650 (N.D. Cal. 1984). In this case a United States district court held that "there is a general consensus that an insurer is obligated to pursue an appeal on behalf of its insured where there are reasonable grounds for appeal." Moreover, the court held that the insurer's duty to pursue post-trial remedies, including appeal, was "part and parcel of the general duty to defend," and was not attributable to the provision regarding payment for the cost of appeal bonds.

Consequently, if an insurer, under the current forms, is obliged to pursue an appeal by virtue of its general duty to defend, payment for appeal bonds required in conjunction with that appeal would seem to be inseparable from the insurer's duty to pay for the other costs associated with the appeal.

An insurer's failure to pursue an appeal when there are reasonable grounds for appeal can subject the insurer "to liability for both the costs of defense and any adverse judgment the insured suffers, even when the judgment was rendered on a theory not within the policy coverage." (Kapelus v. United Title Guarantee Co., 93 Cal. Rptr. 278 (1971), as quoted in the Cathay Mortuary case.)

Defense of the Indemnitee Costs Within or Outside the Policy Limit?

In 1992, ISO proposed that the defense costs assumed under an "insured contract" would be considered damages and therefore payable as part of the policy limit, rather than in addition to the limit of insurance. ISO also proposed that the insurer express no right or duty to defend the indemnitee, the person or organization whose liability is being assumed under contract by the insured (who is the indemnitor). This proposal created a great deal of controversy. In fact, not all insurers implemented this proposal but instead continued to defend the indemnitee in order to maintain some control over the suit.

In the 1996 CGL revision, new provisions were inserted into the Supplementary Payments provision of the CGL and other coverage forms. These provisions provide that, if the indemnitee and the insured ask the insurer to conduct and control the defense of the indemnitee, the insurer will defend an indemnitee of the insured if the indemnitee is named in a suit against the insured, and pay the defense costs of the indemnitee in addition to the policy's limit of insurance, if the following conditions are met:

1. The suit against the insured also names an indemnitee of the insured as a party to the suit.

2. The suit against the indemnitee must seek damages for which the insured has assumed liability in an "insured contract."

3. The insurance provided under the policy applies to such liability assumed by the insured.

4. The obligation to defend, or the cost of the defense of, the indemnitee has also been assumed by the insured in the same contract.

5. The allegations in the suit and information known about the occurrence are such that no conflict appears to exist between the insured's interests and the indemnitee's interests. The indemnitee and the insured must agree that the insurer can assign the same counsel to defend both parties.

6. The indemnitee agrees in writing to:

a. cooperate with the insurer in the investigation, settlement or defense of the suit;

b. immediately send the insurer copies of any demands, notices, summonses or legal papers received in connection with the suit;

c. notify any other insurer whose coverage is available to the indemnitee;

d. cooperate with the insurer in coordinating other applicable insurance available to the indemnitee; and

e. provide the insurer with written authorization to: (i) obtain records and other information related to the suit; and (ii) conduct and control the defense of the indemnitee in such suit.

Legal costs unquestionably have become an increasingly heavy burden on insurance companies and often represent a highly disproportionate amount compared to the damages payable by the insurer. It therefore is understandable that insurers are seeking ways to reduce these kinds of costs. But these conditions create so many obstacles that this particular approach is destined for failure.

The question is what the effect is if one of the conditions is not met. It should be pointed out that there are many ways in which these conditions will not be met. One of the common ways involves so-called third-party-over actions (discussed under Exclusion E--Employers Liability later in this chapter) where indemnitees, alone, are the ones named in a suit. Also, it is not unusual to find a dispute between the indemnitor and indemnitee as to the degree of liability assumed. Adversarial relationships are common. In any event, if one of the above conditions is not met, the answer to the question is that defense costs assumed by the indemnitor (insured) in an insured contract, assuming coverage otherwise applies, will be paid subject to the policy's limit of insurance, and not in addition to the limits of insurance. The provisions of the CGL form that describe the coverage for defense costs assumed under an insured contract are described later in this chapter, under Exclusion B--Contractual Liability.

In a growing number of instances, hold harmless and indemnity agreements are reinforced by additional insured endorsements. Assuming the proper endorsement is attached to the named insured's (indemnitor's) CGL policy and applies in a given claim or suit, the foregoing conditions dealing with defense costs within limits may not be applicable. The reason is that, at least from the standpoint of defense for additional insureds, defense costs are in addition to policy limits. One of the exceptions where additional insured status may not solve this issue is when the hold harmless and indemnity agreement is broader in scope than the additional insured endorsement. The rule is that the indemnitee is to be provided the broader of the two coverages, that is, contractual liability or additional insured status.

EXCLUSIONS

The bodily injury and property damage liability insurance provided in Coverage A of the CGL coverage forms is subject to several exclusions. With some important exceptions, these exclusions achieve the same effect as the exclusions found in the 1973 general liability policy and relevant portions of the broad form comprehensive general liability endorsement. For example, the watercraft exclusion of the current CGL coverage forms contains an exception providing coverage for nonowned boats less than twenty-six feet long, which was previously expressed as a separate coverage in the broad form liability endorsement. Similarly, many of the former broad form property damage provisions are incorporated into the current exclusions instead of being stated in a separate endorsement.

The most significant changes found in the current exclusions are an almost total exclusion of pollution liability, clarifications and liberalizations in the scope of property damage coverage with respect to the insured's work or products, and amendments in contractual liability coverage. These and other changes in the exclusions are discussed in the order in which the exclusions appear in the CGL coverage forms.

In the 1993 and later editions of the CGL forms, all of the Coverage A exclusions carry a descriptive title. For example, exclusion a. is entitled "Expected or Intended Injury." This change may have helped to clarify that it is not an intentional act that is excluded, but rather an intentional injury or result of such act. The titles of the other exclusions are included in the subheadings that follow.

Exclusion A--Expected or Intended Injury

Exclusion a. of the CGL coverage forms is derived from the 1973 form's definition of occurrence and from the extended bodily injury coverage of the broad form CGL endorsement. The current exclusion reads as follows:

This insurance does not apply to:
   "Bodily injury" or "property damage" expected or intended from the
   standpoint of the insured. This exclusion does not apply to "bodily
   injury" resulting from the use of reasonable force to protect
   persons or property.


It might appear that the term occurrence in the insuring agreement of the CGL coverage forms would be sufficient to preclude coverage for such claims or suits as are excluded here, especially if occurrence is interpreted to include fortuitous events only. The exclusion, however, clarifies that deliberate or intentionally caused bodily injury or property damage is not deemed to be accidental.

As noted above, it is the intentional injury, rather than the intentional act, that is excluded. This exclusion therefore does not rule out protection of an insured who commits an intentional act, unless it can be proved that the consequences of the act could have been expected. In many cases, it is likely to be a question of fact for a court to decide, unless the insurance company's investigation reveals solid ground on which to pay or deny the claim.

The exception to this exclusion duplicates the extended bodily injury coverage of the broad form liability endorsement. While it may be recognized that a person has the right to use reasonable force to protect his or her person or property, this exception grants an important clarification of coverage. Although coverage may apply in absence of the clarification, the insurer is less likely to deny coverage for a claim or suit alleging such an intentional act when the policy specifically provides coverage. This does not mean that coverage will be granted automatically. The bodily injury must have been prompted by a threat of harm and must have resulted from the exercise of reasonable force. What is reasonable will depend on the circumstances.

Exclusion B--Contractual Liability

Exclusion b. approximates the blanket contractual liability coverage available under the broad form general liability endorsement formerly added to the 1973 general liability policy. By use of an endorsement, the scope of contractual liability coverage under the current CGL coverage forms can be reduced to the incidental contracts coverage provided under the 1973 policy without the broad form endorsement.

The current version of exclusion b. reads: This insurance does not apply to:

"Bodily injury" or "property damage" for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages:

(1) That the insured would have in the absence of the contract or agreement; or

(2) Assumed in a contract or agreement that is an "insured contract", provided the "bodily injury" or "property damage" occurs subsequent to the execution of the contract or agreement. Solely for the purposes of liability assumed in an "insured contract", reasonable attorney fees and necessary litigation expenses incurred by or for a party other than an insured are deemed to be damages because of "bodily injury" or "property damage", provided:

(a) Liability to such party for, or for the cost of, that party's defense has also been assumed in the same "insured contract"; and

(b) Such attorney fees and litigation expenses are for defense of that party against a civil or alternative dispute resolution proceeding in which damages to which this insurance applies are alleged.

An addition to exception (2) above, providing payment of defense expenses for which the insured has assumed liability in an insured contract, is discussed under the section entitled "Defense of the Indemnitee Costs Within or Outside the Policy Limit?"

Liability in Absence of Contract

The contractual liability exclusion clearly states that it does not apply if the insured would be liable for damages in the absence of any contract or agreement. This exception makes coverage certain in situations that would otherwise be a source of conflict between insurance companies and their insureds.

An example is an insured contractor who agrees to hold harmless and indemnify a railroad owner for any bodily injury or property damage arising out of the project, regardless of whether the contractor is otherwise liable. This is not an insured contract if such injury occurs within fifty feet of the railroad, due to the railroad protective exclusion discussed below. However, if the insured would have been liable in absence of the contract--that is, the insured's own negligence caused the accident--the insured will nevertheless be covered, in spite of the railroad protective exclusion.

Meaning of "Insured Contract"

The second exception to the contractual liability exclusion states that the exclusion does not apply to liability assumed under an "insured contract." The definition of insured contract includes the following:

a. A contract for a lease of premises. However, that portion of the contract for a lease of premises that indemnifies any person or organization for damage by fire to premises while rented to you or temporarily occupied by you with permission of the owner is not an "insured contract";

b. A sidetrack agreement;

c. Any easement or license agreement, except in connection with construction or demolition operations on or within 50 feet of a railroad;

d. An obligation, as required by ordinance, to indemnify a municipality except in connection with work for a municipality;

e. An elevator maintenance agreement;

f. That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another to pay damages because of "bodily injury" or "property damage" to a third person or organization. Tort liability means a liability that would be imposed by law in absence of any contract or agreement.

The contracts itemized in parts a. through e. are comparable to the definition of incidental contract in the 1973 general liability policy (without the broad form endorsement), except that the definition in the 1986 and later versions of the CGL form does not require that the contract be in writing. Thus, the 1986 and later editions of the CGL form cover both written and oral agreements. However, the 1990 and later editions require that the insured contract must have been executed before the bodily injury or property damage occurred.

Items a. through e. do not limit insured contracts to those under which the named insured assumes the liability of another. Thus, the CGL forms cover liability assumed by any insured under a contract described in items a. through e. However, coverage for any contract of a type not described in items a. through e. is restricted to the named insured's assumption of another entity's tort liability, that is, "a liability that would be imposed by law [on the other entity] in the absence of any contract or agreement."

The restriction of item f. to assumptions of the tort liability of another may be intended to strengthen the position, affirmed by a number of courts, that "liability assumed by the insured under any contract refers to liability incurred when one promises to indemnify or hold harmless another, and does not refer to liability that results from breach of contract" [as stated by the Alaska Supreme Court in Olympic, Inc. v. Providence Washington Ins. Co., 648 P.2d 1008 (Alaska 1982)]. The failure of an insured to have the CGL policy endorsed to name an additional insured as promised by contract is an example of a breach of contract. However, it is possible not only for the same act to constitute both a breach of contract and a tort but also for an allegation of breach of contract to be brought about by tort and be covered by the policy. See, for example, the landmark case of Vandenberg v. Superior Court of Sacramento County, 88 Cal. Rptr. 2d 366 (1999).

An important and often misunderstood point is that part d. above allows coverage of obligations to indemnify a municipality as required by ordinance. For example, a contractor constructing sidewalks for the owner of property in a particular city may be required by ordinance to indemnify the city for claims made against the city for injury arising in some way from the contractor's work. The contractor's obligation to indemnify the city is covered under this provision unless the work is being performed for the city. Even if the work is being performed for the city, the insured may still have coverage for the obligation by virtue of part f. of the definition. Since the 1990 revisions, part f. specifically includes "an indemnification of a municipality in connection with work performed for a municipality," as long as the obligation is an assumption of the municipality's tort liability to pay damages because of bodily injury or property damage to a third party.

What "Insured Contract" Does Not Include

Following item f. of the definition of "insured contract" are the exclusions shown below.

Paragraph f. does not include that part of any contract or agreement:

(1) That indemnifies a railroad for "bodily injury" or "property damage" arising out of construction or demolition operations, within 50 feet of any railroad property and affecting any railroad bridge or trestle, tracks, roadbeds, tunnel, underpass or crossing;

(2) That indemnifies an architect, engineer or surveyor for injury or damage arising out of:

(a) Preparing, approving, or failing to prepare or approve maps, shop drawings, opinions, reports, surveys, field orders, change orders, or drawings and specifications; or

(b) Giving directions or instructions, or failing to give them, if that is the primary cause of the injury or damage;

(3) Under which the insured, if an architect, engineer or surveyor, assumes liability for injury or damage arising out of the insured's rendering or failing to render professional services, including those listed in (2) above and supervisory, inspection, architectural or engineering activities.

The 1986 and 1990 editions of the CGL form also exclude "that part of any contract or agreement ... That indemnifies any person or organization for damage by fire to premises rented or loaned to you." In the 1993 and later editions of the policy, a comparable exclusion is located under item a. (pertaining to leases of premises) of the definition of insured contract. In either case, the purpose is to clarify that contractual liability coverage does not apply to the exposure covered by fire damage legal liability coverage, which (as discussed later in this chapter) is subject to a separate limit of insurance rather than the full each occurrence limit.

Railroad Protective Exclusion

Railroad companies frequently require contractors or others who are to perform work on, above, or otherwise within fifty feet of the railroad to hold the railroad company harmless for any claims or suits that may arise in connection with the work, even if the contractor would not otherwise be liable. Item (1) of the above clauses, sometimes called the railroad protective liability exclusion, expresses the insurer's intent not to cover liability arising under such hold harmless agreements (unless the insured would have been liable in the absence of the agreement, as stated under the contractual liability exclusion).

Although the same exposure is addressed in item c. of the definition of insured contract, that provision relates only to easement or license agreements. The provision expressed in item (1) above applies only to contracts described in item f. of the definition of insured contract.

In the 1986 and 1990 editions of the CGL coverage forms, the railroad protective exclusion applies to that part of a contract that indemnifies any person or organization (rather than just a railroad, as in later editions). ISO describes this change as a broadening of coverage because coverage will now apply to tort liability assumed in any contract or agreement that indemnifies any person or organization other than a railroad for operations within fifty feet of railroad property. Thus, if a subcontractor agrees to hold harmless and indemnify a general contractor for injury or damage stemming from construction work within fifty feet of any railroad property, this contractual assumption will be within the scope of an insured contract.

Although this change broadens coverage, it does not provide complete protection for a contractor working on or near railroad property. Whenever work is conducted on or within the proximity of railroad property, the railroad owner will likely impose a broad indemnification agreement and require the contractor to procure a separate railroad protective liability policy for the benefit of the railroad.

Even if a separate railroad protective liability policy is purchased by the contractor for the railroad, the contractor should still seek to have paragraph (1) deleted from its CGL policy, if possible. The reason is to protect the contractor in the event the insurer providing the railroad protective policy decides to bring a subrogation action against the insured.

Subrogation against the contractor buying the railroad protective policy for the benefit of the railroad may appear to be a remote possibility, but it happened under an owners and contractors protective liability (OCP) policy (which is similar in many ways to the railroad protective policy) in the case of Rome v. Commonwealth Edison Co., 401 N.E.2d 1032 (Ill. App. 1980). An Illinois court permitted the OCP insurer to subrogate against the contractor who purchased the OCP policy for the project owner because the parties did not agree that the insurance would satisfy the obligation to indemnify.

As a general rule, an insurer cannot subrogate against its own insured. Thus, it may be difficult for the insurer of the railroad protective policy to subrogate against the contractor who purchases the policy for the railroad if the same insurer also writes the contractor's CGL insurance. However, many insurers do not issue railroad protective liability policies, even though a standard ISO coverage form is available. Thus, the insurer providing the railroad protective policy may be different from the insurer providing the contractor's CGL insurance, opening the door to a subrogation action against the insured contractor.

Deletion of the railroad protective exclusion is therefore recommended whenever an insured is required (1) to purchase a railroad protective liability policy; (2) to sign an indemnification agreement with a railroad; or (3) to fulfill both of the preceding items. Endorsement CG 24 17, Contractual Liability--Railroads, is the ISO endorsement for effecting this change.

Professional Liability Exclusion

The exclusions contained in clauses (2) and (3) are both aimed at eliminating contractual liability coverage for injury or damage resulting from professional errors or omissions of architects, engineers, or surveyors.

* Clause (2) excludes coverage when the insured (who may or may not be an architect, engineer, or surveyor) agrees to indemnify an architect, engineer, or surveyor for injury or damage arising out of the itemized services.

* Clause (3) excludes coverage when the insured is an architect, engineer, or surveyor and assumes liability for injury or damage arising out of its rendering or failure to render professional services for others, including the itemized services.

The purpose of these exclusions is to prevent the insurer from covering losses that should be insured under a professional liability policy. Note that this exclusion applies to "injury" or "damage," rather than "bodily injury" or "property damage." Injury and damage can have wide application, since they are broader in scope than bodily injury or property damage. The purpose for using the words injury or damage is not clear, given the fact that Coverage A only insures bodily injury and property damage liability in the first place.

One of the perennial problems with the similar exclusions under the broad form liability endorsement, a problem that will probably continue under the current forms, is the gray area between professional and nonprofessional services. In one case, for example, an engineering firm sought coverage under its general liability policy for property damage liability resulting from the digging of a trench for the laying of pipes. The insurer denied coverage by maintaining that such activity was in the performance of "engineering services" and "the preparation or approval of maps, plans, ... surveys, designs or specifications." The Texas Court of Appeals, however, ruled for the insured. It did so for two reasons. In the court's opinion, the locating of underground pipes was not an activity included within the term "engineering services," and the latter term was ambiguous in that it was not defined. The case is Aetna Fire Underwriters Ins. Co. v. Southwestern Engineering Co., 626 S.W.2d 99 (Tex. App. 1981).

However, in another case the professional services exclusion in a CGL form was held to preclude coverage; this case is Natural Gas Pipeline Co. of America v. Odom Offshore Surveys, Inc., 889 F.2d 633 (5th Cir. 1989). The U.S. Court of Appeals in the 5th Circuit held that the professional liability exclusion barred coverage for damage to a natural gas pipeline caused by the negligence of the insured's employees in misdirecting the placement of a boat's anchor.

One of the ways commonly advocated to avoid such problems is to purchase both professional liability and general liability insurance from the same insurer. In reality, however, it is often impossible to obtain general liability insurance from the same insurer that provides the professional liability policy.

Defense Costs Assumed under Contract

One of the amendments proposed by ISO in 1992 was the following language, added to the contractual liability exclusion:

Solely for the purposes of liability assumed in an "insured contract", reasonable attorney fees and necessary litigation expenses incurred by or for a party other than an insured are deemed to be damages because of "bodily injury" or "property damage" provided:

(a) Liability to such party for, or for the cost of, that party's defense has also been assumed in the same "insured contract"; and

(b) Such attorney fees and litigation expenses are for defense of that party against a civil or alternative dispute resolution proceeding in which damages to which this insurance applies are alleged.

Because this provision covers defense costs assumed under an insured contract, it was represented by ISO as being a broadening of contractual liability coverage since many insurers previously considered the CGL policy to cover only damages (and not defense costs) assumed under an insured contract. However, some insurers apparently interpreted the policy to cover defense costs before the new language was introduced--and, moreover, to cover an indemnitee's defense costs in addition to the limits of insurance. Because the new language considers defense costs assumed under contract to be damages, they are payable within the limits. In this respect, some viewed the new language to be a restriction of existing coverage.

Because of its controversial nature, only a handful of states approved this 1992 change. When the same change was reintroduced as part of the 1996 revisions, it was approved by many states. However, the 1996 and later editions of the CGL policy contain additional provisions described earlier in this chapter under the heading "Supplementary Payments." The additional provisions provide that when the indemnitee and the insured are codefendants (and if several other conditions exist), the insurer will pay the defense costs of both parties in addition to policy limits.

It is important to note that the defense costs provision in the contractual liability exclusion applies only to indemnitees who are not also additional insureds. Thus, one way for indemnitees of the insured to sidestep this provision is to request and obtain additional insured status. They will then be entitled to defense coverage in addition to the limits of insurance regardless of whether they are codefendants with the named insured.

Exclusion C--Liquor Liability

Exclusion c. of the CGL coverage forms excludes:

"Bodily injury" or "property damage" for which any insured may be held liable by reason of:

(1) Causing or contributing to the intoxication of any person;

(2) The furnishing of alcoholic beverages to a person under the legal drinking age or under the influence of alcohol; or

(3) Any statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages.

This exclusion applies only if you are in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages.

This exclusion has primarily the same intent as the one that applies under the 1973 liability policy: to exclude liquor liability under common law, as well as under statute, be it a dram shop act or an alcoholic beverage control act. Apart from that similarity, there are some notable differences.

Conspicuous by its absence from the 1986 and later editions of the CGL form is the prior exclusion of coverage for owners or lessors of premises used by others for purposes of liquor businesses. The fact that owners or lessors of premises are now covered, when they are not engaged in the liquor business, eliminates the problem of requiring liquor liability insurance of tenants and naming premises owners as additional insureds.

Also absent from the current CGL coverage forms is a separate host liquor liability coverage, which in the broad form general liability endorsement is intended to be nothing more than a clarification of what the liquor liability exclusion does not encompass. It seems likely that a separate host liquor liability provision was not included in the current forms because it is too often confused as some kind of extra protection, particularly since it is provided under the broad form endorsement, which requires an additional premium. In fact, there have been some cases in which liquor vendors who were without separate liquor liability coverage attempted to find coverage under the host liquor provision. In one case, for example, a vendor maintained that because his license restricted liquor sales to 49 percent of the restaurant's total revenue, his liquor operation was only incidental to the insured's business. The insured lost his argument. The case is Heritage Ins. Co. of America v. Cilano, 433 So. 2d 1334 (Fla. App. 1983), decided by a Florida district court of appeal in 1983.

The applicability of the liquor liability exclusion hinges on the meaning of the phrase "in the business of." Since that phrase is not defined, it could present a problem for insurers and insureds alike. In one case, the New Hampshire Supreme Court held that the word business means "any regular activity that occupies one's time and attention, with or without a direct profit motive." In a narrow sense, it means "an activity with a direct profit motive." Since the word business was considered to be ambiguous, a club was granted coverage despite the liquor liability exclusion. The case is Laconia Rod & Gun Club v. Hartford Accident and Indemnity Co., 459 A.2d 249 (N.H. 1983).

Despite the foregoing case, owners or operators of liquor establishments would be well advised to obtain liquor liability insurance. Whether organizations that hold special events where liquor is sold need special insurance is a question that is difficult to answer. If they require a permit, there is a good chance they should have liquor liability insurance.

In any event, the inference may now be made that if a person or organization is not in the business (whatever that means) of manufacturing, distributing, selling, or furnishing alcoholic beverages, it will have protection by exception to this exclusion. The coverage that is intended to be provided should correspond to those events commonly cited as being covered by host liquor liability insurance.

In 1988, Insurance Services Office proposed changes to the CGL coverage forms that would have modified the liquor liability exclusion substantially. While ISO defended the modification as a means of distinguishing between a social host and a purveyor of alcoholic beverages, the Risk and Insurance Management Society (RIMS) and other parties opposed the change. Following public hearings by the National Association of Insurance Commissioners (NAIC) and meetings between ISO and NAIC, ISO agreed to leave the existing 1986 liquor liability exclusion intact and, as part of 1990 CGL amendments, offer the revised exclusion as an optional endorsement entitled Amendment of Liquor Liability Exclusion, CG 21 50.

The amended exclusion contains parts (1), (2), and (3) of the regular liquor liability exclusion quoted above, plus the following:

This exclusion applies only if you:

(1) Manufacture, sell or distribute alcoholic beverages;

(2) Serve or furnish alcoholic beverages for a charge whether or not such activity:

(a) Requires a license;

(b) Is for the purpose of financial gain or livelihood; or

(3) Serve or furnish alcoholic beverages without a charge, if a license is required for such activity.

The amended exclusion avoids the troublesome question of whether an insured is in the business of selling alcoholic beverages. For example, the exclusion applies in any situation, even a social gathering, when the insured serves alcoholic beverages for a charge. If the insured is required to have a license to serve alcoholic beverages, the exclusion applies even if the beverages are served free of charge.

In the 1990 CGL amendments, ISO also introduced a new endorsement that contains the exclusion just described but allows coverage for activities specifically described in the endorsement. An advantage of this endorsement over the regular liquor liability exclusion in the CGL form is that the endorsement allows the insured to be certain of coverage for the described event instead of having to depend on the insurer's interpretation of whether the insured is in the business of serving alcoholic beverages. The endorsement, Amendment of Liquor Liability Exclusion--Exception for Scheduled Activities (CG 21 51), allows the underwriter to assess the risk connected with the event to be covered and charge an additional premium for the specified event.

Exclusion D--Workers Compensation and Similar Laws

The workers compensation exclusion deals with a number of employment-related statutory coverages. The exclusion applies to:
   Any obligation of the insured under a workers' compensation,
   disability benefits or unemployment compensation law or any similar
   law.


Use of the word "obligation" in the above exclusion means that no coverage applies when (1) an insured has such statutory coverage and it applies to a loss or (2) an insured should have obtained the statutory protection that applies to a loss. Note also that this exclusion applies to the insured (including the named insured), rather than the named insured only. While a disability benefits law applies to nonemployment disability, it is still considered to be an employment-related law, because only those who are employed can generally qualify for the coverage in those states that mandate it. The same criterion applies to unemployment insurance.

Exclusion E--Employers Liability

Employers liability insurance is a necessary complement to workers compensation coverage and both are generally available under one statutory form of protection, except in monopolistic-fund states.

Before the exclusion itself is discussed, it may be worthwhile to review the reasons why employers liability insurance is still considered necessary. They are as follows:

* Workers compensation insurance may be elective, rather than compulsory, for certain types of employment. Employers liability insurance gives the employer both defense cost and indemnification coverage against liability for injury to exempt employees.

* Employers who are sued by members of an employee's family for loss of consortium (i.e., loss of companionship, comfort, and affection) may be required to pay damages even though the disabled employee has collected benefits under workers compensation coverage.

* Employers can become involved in suits called third-party-over or simply third-party actions. These actions arise when an injured employee sues a negligent third party (regardless of workers compensation benefits received), and the third party, in turn, impleads the employer. The employer, in such a case, must look to employers liability insurance (or stopgap coverage in monopolistic-fund states), unless the employer assumed the liability of the third party. In that instance, the CGL contractual liability coverage, rather than employers liability coverage, is the applicable coverage.

The employers liability exclusion of the current CGL forms reads as follows:

"Bodily injury" to:

(1) An "employee" of the insured arising out of and in the course of:

(a) Employment by the insured; or

(b) Performing duties related to the conduct of the insured's business; or

(2) The spouse, child, parent, brother or sister of that "employee" as a consequence of Paragraph (1) above.

This exclusion applies:

(1) Whether the insured may be liable as an employer or in any other capacity; and

(2) To any obligation to share damages with or repay someone else who must pay damages because of the injury.

This exclusion does not apply to liability assumed by the insured under an "insured contract".

Part (1)(a) of this exclusion is intended to prevent an insurer from having to cover the liability of any insured because of injury sustained by its employee that would or should be covered by employers liability insurance. This exclusion is not limited to employees of the named insured; it applies to employees of any party that qualifies as an insured under the policy, including an additional insured.

With the 1993 revision of the CGL policy, the terms "employee" and "leased worker" were defined in order to provide coverage for employee leasing arrangements (see Chapter 5). Because the term "employee" is defined to include a "leased worker," the 1993 and later editions of the CGL policy exclude bodily injury sustained by a leased worker defined in part as a person leased to the insured for purposes of performing duties related to the conduct of the insured's business. This is the rationale for part (1)(b) of the above exclusion. However, not within the scope of this exclusion are "temporary workers," whose employment is on a day-to-day or short-term basis, and "volunteer workers," a newly defined term of the 2001 edition meaning in part a person who is not an employee of the named insured.

The second part of the exclusion eliminates coverage for claims or suits by spouses or other close relatives against employers as a consequence of bodily injury sustained by employees. The apparent rationale for this part of the exclusion is to clarify that such claims or suits must be filed under the employers liability portion of the workers compensation policy. Although earlier editions of employers liability insurance did not state that coverage applied to these consequential damages, the current workers compensation and employers liability policy does.

Dual Capacity Claims

The employers liability exclusion is stated to apply whether the insured is liable as an employer or in any other capacity. The phrase "in any other capacity" is intended to encompass claims or suits against employers under the so-called dual capacity doctrine.

The dual capacity doctrine holds that an employer normally shielded by the exclusive remedy of workers compensation laws may still be answerable for additional damages in tort. This type of claim can occur when the employer is judged to occupy a second capacity that constitutes an exposure that is common to the public in general, rather than to one's employment. A simplified example of an event to which this doctrine might apply is the injury that occurs to an employee of a beer distributor while the employee is stocking the product on a vendor's shelves.

If the dual capacity doctrine applied in the above example, the employee would have two sources of recovery from the employer. The first would be under the employer's workers compensation insurance, since the injury arose out of and during the course of employment. The second source of recovery would be a lawsuit against the employer, such as any other member of the public could file against the employer. In other words, the injury, or the exposure thereto, is not necessarily peculiar to employment. It is an exposure to which the employee would have been equally exposed apart from his or her employment, as a consumer of the product.

Since the workers compensation and employers liability policy is now recognized as the only source of coverage for such suits by employees against employers, whether under the dual capacity doctrine or otherwise, the intent of the employers liability exclusion of the CGL coverage forms should be clear.

Third-Party-Over Actions

The last part of the employers liability exclusion deals with third-party-over actions, as explained earlier. The reason third-party-over actions are excluded under the current forms is that coverage for such actions is available under employers liability insurance, with one exception. This exception is when such liability is assumed by the insured under a contract. In that event, coverage applies under the CGL coverage form subject of course to the scope of that coverage for liability assumed under an insured contract.

Assume, for example, that an insured agrees to hold harmless and indemnify another party for liability stemming from the insured's negligence, including injury to employees of the insured. An employee of the insured is injured during the course of employment and collects benefits under the insured's workers compensation insurance. The employee then sues the third party for whom work was performed. When the third party demands that the employer hold it harmless against the employee's suit, coverage should apply under the insured's contractual liability coverage of the insured's CGL policy. In the absence of a contractual assumption by the employer, coverage for a third-party-over action would apply under the employers liability portion of the workers compensation policy.

Exclusion F--Pollution

Without a doubt, the CGL provision that has changed the most, in terms of number of times and in scope, is the pollution exclusion. It was once referred to as the "absolute pollution exclusion" in 1986 when it was first introduced because it eliminated coverage in most situations for bodily injury and property damage resulting from pollutants, and it totally excluded the costs of cleaning up pollutants. It was not too long thereafter that amendments were introduced to this exclusion, first to strengthen and then to liberalize it in a number of ways.

To gain a better perspective on how this exclusion has changed and the significance of the changes, each of the changes is discussed briefly later in these pages through numbered notes on an exhibit entitled "A Chronology of Changes Affecting the Pollution Exclusion." It is first necessary to understand why the pollution exclusion was first introduced with standard forms and why problems were encountered with it.

Background

The first standard pollution exclusion was introduced in 1970. Originally added to general liability policies by endorsement, the 1970 pollution exclusion was later incorporated into the standard 1973 CGL coverage part. However, the first application for approval of a pollution exclusion to the Maryland Insurance Department came in October 1981. Approval was granted in January 1983. (3)

According to its drafters, the exclusion was introduced for two reasons:

1. To make clear that the policy's definition of "occurrence" was not to categorize all pollution or contamination damage as being expected or intended by the insured.

2. To clarify that bodily injury or property damage resulting from pollution or contamination was excluded, even if accidental, unless the discharge, dispersal, release or escape was both sudden and accidental. (4)

However, when the definition of occurrence was taken into consideration in liability actions stemming from gradual pollution, the courts found that the exclusion either was "temporal" or "nontemporal" in nature.

To be considered temporal, the word "sudden" would be required to have one meaning and that is a temporal aspect of immediacy; that is, the characteristic of being swift, abrupt, quick, instantaneous, etc.

The problem for some insurers has been that when dictionary definitions of sudden are consulted, all are not limited to the temporal aspect and, instead, also consider sudden to mean unanticipated and unforeseen. As a result, the courts in some of these cases have agreed that when the word sudden is defined in both a temporal and nontemporal way, it is considered to be ambiguous and construed in the insured's favor.

Another aspect of this exclusion concerns the alleged polluter who seeks payment for the costs of cleaning up the source of contamination on the polluter's own property. The question is: where does the polluter's own property end? Some say at the water table or at the level of where property is considered to be within the domain of natural resources. In one of the leading cases on this subject, coverage was held to apply, despite the exclusion of property damage to property owned by the insured, for two reasons:

1. The cleanup costs were deemed to be necessary to prevent further damage to third parties.

2. If steps had not been taken to cleanup the premises, the insurer would have sustained additional losses.

The case is Bankers Trust Co. v. Hartford Accident and Indemnity Co., 518 F. Supp. 371 (S.D.N.Y. 1981), decided by the United States district court for the southern district of New York. For a time since this exclusion was introduced in 1986, it addressed this problem by totally excluding the costs of cleaning up pollutants. However, since 1998, certain exceptions apply to the exclusion of cleanup costs.

The primary reason the care, custody, or control exclusion is inapplicable to a claim for the costs to cleanup pollutants on the insured's own property is that the claim is not usually for property damage, as that term in defined in CGL forms, but for the costs to mitigate the threat of pollution. As noted earlier, this argument is likely to be moot in the wake of ISO's introduction of a provision in exclusion specifically addressing that exposure.

The imposition of liability under a variety of federal and state laws also is a target of the pollution exclusion, particularly enforcement under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) of 1980, also known as Superfund; the Superfund Amendments and Reauthorization Act of 1986, referred to as SARA; and the Resource Conservation and Recovery Act (RCRA) of 1976. Alleged polluters, especially those who are or were involved in the handling of wastes, are commonly looking to their CGL policies for protection in the wake of suits filed against them by federal government enforcers. Because the 1970 pollution exclusion has not lived up to insurers' expectations, the action to implement a broader exclusion and a buy-back procedure was viewed as the only way to keep insurers from having to pick up all the costs prompted by the pollution claims and suits.

The wording of exclusion f. in the CGL policy is found in the accompanying exhibit along with information as to when the exclusion was amended. An explanation of the rationale for the changes follows the exhibit. The 1986 and subsequent versions of this exclusion can be found in the appendices to this text.

The pollution exclusion as introduced with the 1986 CGL policy provisions has been restructured extensively and expanded to the point where it would be difficult to determine what has changed without the above chronology and a brief explanation of amendments below.

(1) This first subparagraph is one of the few remaining originals. However, even this part was amended in 1998 with the reference to the term "pollutants" in quotes to show that its meaning is to be found in the definitions section of the CGL forms rather than at the end of the exclusion, as has been the case since 1986.

(2) With the exception of the second sentence, this, too, is one of the few remaining original provisions. The second sentence was added in 1998, as part of the reconstruction process. Prior to this change, amendments to the exclusion were simply added in an unorganized fashion making it difficult to determine when a particular provision applied. This second sentence is a prelude to three exceptions specifically applicable to subparagraph f.(1)(a).

(3) This is the first exception to subparagraph f.(1)(a) and applies to bodily injury if sustained within a building and caused by smoke, fumes, vapor, or soot from equipment used to heat that building. This exception is meant to clarify the point that the CGL forms apply to a claim for bodily injury suffered by someone who has been adversely affected by smoke or fumes from a heater. For example, if a customer of the insured is injured or dies from carbon monoxide seeping from the insured's furnace, the CGL form will respond to a subsequent claim. Note that the furnace (or any other equipment to heat the building) need not be owned by the insured. One question is whether this exception is broad enough to encompass bodily injury by persons who acquire the so-called Legionnaires Disease. To the extent that this disease is caused by vapor from air-conditioning systems, there is room for argument, given that heating systems also commonly include air-conditioning.

To avoid these types of arguments and, according to ISO, at the request of agents and insurers, this building heating exception was clarified with the 2004 CGL revisions to include cooling and dehumidifying equipment, since both are said to have similar exposures to building heating equipment insofar as emitting various toxins. What may not have been anticipated with this latest change is that with humidity comes the possibility for the growth of mold, which would then likely be covered in light of this revision.

(4) The second exception was introduced in 1998 as a broadening of coverage and applies when the named insured is a contractor. Prior to this change, the pollution exclusion was triggered if pollutants escaped or were released from a premises or site owned or occupied by any insured. Assume, for purposes of illustration, that the named insured contractor is working on a building site and the owner of the site requires that it be listed as an additional insured on the contractor's CGL policy. While work is being performed, pollutants leak from the site and damage an adjoining premises. The owner of the adjoining premises files suit against the contractor and the site owner, who in turn looks to the contractor for protection as an additional insured. Prior to this change in 1998, the exclusion could have been interpreted to exclude a claim from the adjoining property owner because the additional insured owned the site and the pollution came from there.

The situation is now changed. The fact that the additional insured owns the site from which escaping pollutants have harmed a third party will not prevent the named insured contractor from receiving coverage under his or her CGL policy, if the named insured is held to be liable for the damage. The relationship of the additional insured, as owner or lessee of the work site and as an additional insured on the contractor's CGL form, no longer has an effect on the question of coverage for the named insured contractor. Note, however, that this exception applies only to additional insured status during ongoing operations, not within the "products-completed operations hazard."

(5) The third exception is for bodily injury or property damage arising out of heat, smoke or fumes from a hostile fire. This is not new to CGL forms, but the exception has been moved so that its relationship with subparagraph f.(1)(a) is made clearer. It also applies by exception to d.(iii). Basically, the exception means that if someone were to be injured from smoke from a fire billowing from the named insured's warehouse containing herbicides, pesticides, and other contaminants, the CGL form would apply to a bodily injury claim made against the insured, notwithstanding the pollution exclusion.

(6),(7) These two subparagraphs remain unchanged since they were introduced in 1986. They flatly exclude any bodily injury or property damage emanating from waste treatment sites, as well as while being transported, handled, treated, stored, disposed of, or processed as waste by the insured or by anyone for whom the named insured may be legally responsible.

(8) This subparagraph 1.(d) is sometimes overlooked. It is an original provision but was amended in 1998 with the addition of the last sentence. This is a significant subparagraph because some coverage applies by exception for bodily injury or property damage arising out of the named insured's products and completed operations. This exclusion does not contain any statement that products and completed operations are excepted from the exclusion. However, under certain circumstances, coverage can be inferred from the language of the exclusion. Thus, if the exclusion does not encompass bodily injury or property damage under a particular set of circumstances, then the bodily injury or property damage is covered, subject of course to all other policy provisions.

To illustrate, say the named insured sells and installs carpeting. If, after being installed by the named insured in a customer's home, a particular lot of carpeting emits vapors that cause bodily injury to the home owner, the injury would not be excluded by any provision of the pollution exclusion. The vapors, although they are pollutants, were not discharged at the named insured's premises or at a waste handling site [subparagraphs (1)(a) and (b)]; they were not transported or handled as waste [subparagraph (1)(c)]; and they were not discharged at a site at which the insured or any contractors are performing operations [subparagraph (1)(d)]. Subparagraph (1)(d), because it uses only present tense verbs ("premises ... on which any insured or any contractors or subcontractors working directly or indirectly on any insured's behalf are performing operations"), seems capable of excluding bodily injury or property damage that occurs only while operations are being performed and should therefore not be applicable to bodily injury or property damage that occurs after work is completed.

In fact, as noted in (10) below, at least two court cases have upheld coverage for injuries arising from the emission of toxic fumes from carpeting, undoubtedly leading to the introduction of a provision permitting coverage in these instances.

However, coverage for products and completed operations does not apply in all instances. For example, completed operations in the nature of waste disposal are clearly excluded by subparagraph (1)(b).

In addition to products and completed operations, another area where some coverage can be inferred from the exclusionary wording of 1(d) is where its subparts (d)(i) and (d)(ii) do not apply. Thus, if a pollution loss results under conditions not described in (d)(i) or (d)(ii) and the location is not otherwise excluded by sections (a), (b), or (c) of the pollution exclusion, then the loss may be covered--including cleanup costs as addressed in part (2) of the exclusion. To illustrate, assume that the insured is an independent contractor working on a building project away from its own premises. If the insured negligently causes the release of pollutants that were brought to the work site by the owner or by another contractor who is not working on behalf of the insured, resulting damages for bodily injury or property damage (and cleanup costs) should be covered by the contractor's CGL form. The exclusion would apply, however, if the pollutants had been brought to the work site by the insured or by a contractor or subcontractor working on behalf of the insured, or if the insured's operation from which the pollution resulted had been for purposes of testing for, monitoring, cleaning up, etc., of pollutants.

(9) Subparagraph (d)(i) was introduced in 1996 to make clear that the pollution exclusion does not apply to bodily injury or property damage arising out of the escape of fuels, lubricants or other operating fluids which are needed to perform the normal electrical, hydraulic or mechanical functions necessary for the operation of mobile equipment or its parts, if such fuels, etc., escape from a vehicle part designed to hold, store or receive them. This exception does not apply if the fuels, lubricants or other operating fluids are intentionally discharged, dispersed or released, or if such fuels, lubricants or other operating fluids are brought on or to the premises, site, or location with the intent to be discharged, dispersed or released as part of the operations being performed by such insured, contractor, or subcontractor.

(10) Subparagraph (d)(ii) was added as an exception to the pollution exclusion in 1998. This makes clear what might have been subjected to argument under subparagraph (1)(d). A probable rationale for this addition is that actual cases on point were being ruled against insurers. In Garfield Slope Housing Corp. v. Public Service Mutual Insurance Co., 973 F. Supp. 326 (E.D. N.Y. 1997), a former owner of an apartment sued the building apartment manager, alleging she was injured by fumes from new hallway carpet that had been installed and removed while she still lived in the apartment. The court held for coverage despite a pollution exclusion, because the policy could reasonably be construed as applying to environmental pollution and not applying to claims based on carpet fumes. Moreover, the court said, "the kind of injuries to which a reasonable insured might expect smelly carpet to give rise--that is, aggravation, inconvenience, annoyance, etc.[--are plainly not those that would typically implicate a liability policy."

In the later case of Freidline v. Shelby Insurance Company, 739 N.E.2d 178 (Ind. App. 2000), occupants of an office building filed suit against an insured carpet installer alleging they were harmed by toxic fumes from substances used to install carpeting. The court held that the pollution exclusion was ambiguous because while the policy's definition of pollutants included the word "fumes," it did not include carpet glue or any other substance used to install carpet. The insurer would prefer that the emphasis of this claim be on fumes, the court explained, but the plaintiffs did not complain of injury because of fumes but rather by fumes coming from substances used to install carpeting.

(11) See note (5) for an explanation of this subparagraph.

(12) Subparagraph 1 (e) also is one of the original provisions introduced with the 1986 exclusion. Specifically precluded from coverage is any bodily injury or property damage emanating from operations in any way related to the testing, monitoring, cleanup, removal, containment, treatment, detoxifying, neutralizing, or in any way assessing the effects of pollutants. So, for example, if a contractor were hired to perform a Phase II environmental task, no coverage would apply for bodily injury or property damage emanating from that work.

(13), (14) and (15) Before the 1998 revisions, commercial general liability insurance utilizing standard ISO wording did not apply to any loss, cost or expense arising out of any request, demand or order that any insured test for, monitor, cleanup, treat, or in any way respond to or assess the effects of pollutants. The revised CGL forms add that the insurance also does not apply to a "statutory or regulatory requirement" that any insured cleanup or in any way respond to the effects of pollutants.

The words "request," "demand," and "order" signify an action on the part of some entity that forces the insured to cleanup a pollution spill. However, there may be some statute or regulation on the books that would require the insured to cleanup a pollution spill, but, for whatever reason, no entity has taken the initiative to demand action on the part of the insured. The insured could cleanup the spill and then present the bill to the insurer and say, "there was no actual demand or order for us to cleanup the spill, but there is a regulation that holds us responsible and requires us to cleanup our mess, so we did, and there is no applicable wording in the pollution exclusion that covers this situation. Please pay the bill." With the revised wording of this cleanup exclusion, the insurer is now saying that the CGL forms will not cover the cleanup expenses of the insured, even if the insured was acceding to some regulatory wording instead of responding to a demand or order. In effect, the exclusion's wording expands application of the exclusion such that it no longer requires a request, demand or order that the insured cleanup in order to trigger the exclusion's application. Under the revised wording, so long as a statute, ordinance, or regulation dictating a cleanup obligation of any kind exists (however obscure), that statute, once located will be the basis of excluding coverage here.

This part of the pollution exclusion has another change worth noting. There has been some confusion when it came to the relationship between cleanup costs and property damage. On the one hand, the insured may be liable for property damage due to a release or escape of pollutants and, through an exception of the pollution exclusion, have insurance coverage for that property damage. On the other hand, some insurers argued that the insured has no coverage for cleanup costs. And, the cleanup costs exclusion was being interpreted by some to dispute or void any property damage coverage, a finding not supported by clear policy wording. So, where does paying for property damage end and cleanup costs for polluted property begin?

The 1998 revision clarifies this issue by declaring that the cleanup costs section of the pollution exclusion does not apply to liability for property damage that the insured would have anyway. In other words, if the insured is liable for property damage due to a pollution spill, and has insurance coverage due to an exception to the pollution exclusion, the CGL form should pay for the property damage, and there should be no denial of coverage with an assertion that the property damage is a cleanup cost and thus not covered.

Note that the revisions, as propounded by ISO and discussed above, are stated to apply only to coverage for bodily injury and property damage liability; there is no reference to personal and advertising injury liability. Now, personal and advertising injury coverage does have a pollution exclusion, as is discussed in a later chapter. Interestingly too, despite the many cases involving noise pollution, as well as injury through electromagnetic exposure, the pollution exclusion does not address these types of risk.

Pollution Coverage Options

ISO has prepared a number of endorsements for modifying exclusion f. to provide various levels of pollution liability coverage, or to exclude the pollution liability exposure entirely. The bad news is that there are not many insurers that are willing to provide coverage enhancements despite the availability of the endorsements. Generally, insureds in need of broader coverage need to seek out specialty line insurers for buy-back environmental impairment insurance.

However, the following describe briefly the purpose for each of the ISO standard endorsements:

(1) Pollution Liability Extension Endorsement (CG 04 22). When this endorsement is attached, subparagraph (1) of exclusion f., dealing with bodily injury and property damage is deleted.

(2) Limited Pollution Liability Extension Endorsement (CG 24 15). This endorsement expands coverage in two ways. First, the pollution exclusion is modified so as to not apply to bodily injury or property damage from premises owned, occupied, rented or loaned to the named insured. The second way the exclusion is modified is to provide coverage at locations at which the insured is performing operations that could be described as nonenvironmental in nature. Coverage also applies to cleanup costs other than as mandated by law. As this endorsement states, the exclusion for cleanup costs does not apply to liability for sums the insured becomes legally obligated to pay as damages because of property damage that the insured would have in the absence of such request, demand, order, or statutory or regulatory requirement, or by such claim or suit by or on behalf of a governmental authority.

(3) Pollution Liability Coverage Part (CG 00 39). This coverage form is for designated sites. Written on a claims-made basis, it provides coverage for bodily injury and property damage resulting from covered "pollution incidents," as defined in this coverage part, including cleanup costs as may be required by law. To obtain coverage in the event of voluntary cleanup costs, it would be necessary to attach the Voluntary Cleanup Costs Reimbursement (CG 28 33), which is only available with this coverage Part.

(4) Pollution Liability Coverage Part [Limited] (CG 00 40). This coverage form has the same coverage characteristics as the preceding coverage part, except that it does not provide coverage for cleanup costs as may be required by law.

(5) Underground Storage Tank Policy, Designated Tanks (CG 00 42). This policy provides two coverages: The first liability coverage applies in the event of bodily injury or property damage sustained by third parties and caused by an underground storage tank incident. The second coverage applies for corrective action costs the insured is obligated to pay in response to EPA requirements, because of an underground storage tank incident.

(6) Total Pollution Exclusion (CG 21 49). This endorsement is stated to apply to bodily injury and property damage which would not have occurred in whole or in part but for the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants" any time. Also precluded are cleanup costs whether done voluntarily or through governmental order.

(7) Total Pollution Exclusion with a Hostile Fire Exception (CG 21 55). Despite an absolute pollution exclusion, it is advisable to obtain the hostile fire exception, which insurers are not reluctant to provide. In fact, it would be advisable to also obtain the building heating equipment exception. If that is possible, then the endorsement listed below, (CG 21 65), would be applicable. Otherwise, this one (CG 21 55) needs to be issued.

(8) Total Pollution Exclusion with a Building Heating, Cooling and

Dehumidifying Equipment Exception and a Hostile Fire Exception (CG 21 65). This endorsement is applicable only when the insurer is willing to modify its absolute pollution exclusion with both exceptions. This endorsement's title was amended with the 2004 revisions to include reference to the cooling and dehumidifying equipment exception. Thus, this endorsement, although entitled as being a total exclusion, makes an exception for bodily injury produced by or originating from equipment used not only to heat but also to cool or dehumidify the building.

(9) Pollution Exclusion-Named Peril Limited Exception for a Short Term Pollution Event (CG 04 28). This endorsement affects subparagraphs (a) and (d). Furthermore, the discharge, dispersal, escape, etc., of pollutants must begin, end, and be reported within a certain period stated in this endorsement. Also, coverage only applies for injury or damage due to certain named perils, such earthquake, collapse, windstorm, vandalism, and overturn of tanks. In light of the 2004 CGL policy revisions, this endorsement also provides coverage, through an exception in sub-subparagraph (i), for bodily injury produced by or originating from equipment used not only to heat but also to cool or dehumidify the building.

(10) Pollution Exclusion-Limited Exclusion for a Short-Term Pollution Event (CG 04 29). This endorsement is similar to the preceding one, except that it is not limited to certain named perils. Coverage, instead, applies regardless of the circumstances, but only for a short period of time. Also, the bodily injury and property damage must not be a repeat or resumption of a previous discharge that occurred within the 12 months prior to the repeat or resumption of the discharge. In light of the 2004 CGL policy revisions, this endorsement also provides coverage, through an exception in sub-subparagraph (i), for bodily injury produced by or originating from equipment used not only to heat but also to cool or dehumidify the building.

(11) Pollution Exclusion-Limited Exception for Designated Pollutant(s) (CG 04 30). This endorsement adds an exception to subparagraphs (1)(a) and (1)(d) of exclusion f. for any release or escape of a pollutant specifically scheduled on this endorsement. This allows the owner of premises where certain pollutants are stored a limited amount of coverage that would not otherwise be available without this endorsement. However, this endorsement and its exception do not apply to the discharge, dispersal, etc. of a pollutant listed in the schedule of this endorsement which takes place while such pollutant is being (a) transported, handled, stored, treated, disposed of, or processed as waste; or (b) transported or stored for others.

Exclusion G--Aircraft, Auto or Watercraft

Since 1986, this exclusion has undergone four revisions. The first two concerned negligent entrustment and contractual assumptions. The third one, introduced in 2001, deals with what is referred to as negligent supervision or hiring. The fourth revision, found in the 2004 edition of the CGL policy, makes an exception for injury or damage arising out of the operation of machinery or equipment attached to a land vehicle under conditions that are discussed later in this chapter. The 2004 exclusion reads as follows:

"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. Use includes operation and "loading or unloading."

This exclusion applies even if the claims against any insured allege negligence or wrongdoing in the supervision, hiring, employment, training or monitoring of others by that insured if the "occurrence" which caused the "bodily injury" or "property damage" involved the ownership, maintenance, use or entrustment to others of any aircraft, "auto" or watercraft that is owned or operated by or rented or loaned to any insured.

This exclusion does not apply to:

(1) A watercraft while ashore on premises you own or rent;

(2) A watercraft you do not own that is:

(a) Less than 26 feet long; and

(b) Not being used to carry persons or property for a charge;

(3) Parking an "auto" on, or on the ways next to, premises you own or rent, provided the "auto" is not owned by or rented or loaned to you or the insured; or

(4) Liability assumed under any "insured contract" for the ownership, maintenance or use of aircraft or watercraft.

(5) "Bodily injury" or "property damage" arising out of:

(a) the operation of machinery or equipment that is attached to, or a part of, a land vehicle that would qualify under the definition of "mobile equipment" if it were not subject to a compulsory or financial responsibility law or other motor vehicle insurance law in the state where it is licensed or principally garaged; or

(b) the operation of any of the machinery or equipment listed in paragraph f.(2) or f.(3) of the definition of "mobile equipment".

The addition of entrustment to the exclusion appears to be more of a preventive measure, since most of the cases involving negligent entrustment of vehicles concern homeowners policies. While not all insureds have been successful in obtaining coverage for negligent entrustment, it can be a means to obtaining protection when no other insurance exists for a loss. The way a negligent entrustment claim usually arises is this: an owner of an auto lends it to a person who is a careless or an incompetent motorist. Following a claim stemming from the use of the auto, the owner, along with the permissive user, is sued. Since the owner does not have auto insurance, he or she looks to the personal liability coverage of the homeowners policy and maintains that coverage applies there. Despite an exclusion for the ownership, maintenance, or use of a motor vehicle, some courts have ruled for coverage. In doing so, the courts maintained that the resulting liability had nothing to do with the ownership, maintenance, or use of the auto, but, instead, with its negligent entrustment, or the insured's negligence in granting permission to use the vehicle, which is not excluded.

The second paragraph of this exclusion was new to the 2001 edition and is said by ISO to be a clarification that could result in a reduction of coverage in states where courts have ruled that the former exclusion is inapplicable to negligent supervision and kindred claims.

One such case is Pablo v. Moore, 995 P.2d 460 (Mont. 2000), which involved an accident that occurred when a truck driven by a paving company's employee struck the rear end of an auto. The auto's occupants sued the paving company alleging in part that the owner was negligent in hiring, training, and supervising its employee. The owner sought coverage under its CGL policy. The insurer argued that this policy was not intended to cover the injuries sustained in this accident, since the injuries arose out of the use of an auto, and this exclusion precluded coverage. The court ruled against the insurer because the auto exclusion did not clearly and unambiguously exclude negligent hiring, training or supervision.

It is unclear whether this revised exclusionary language is broad enough to be all-encompassing. For example, one of the allegations in the above case was negligent failure to warn of a known danger. The paving company's owner drove past the accident site about ten minutes before the accident occurred and saw a large cloud of dust created by a state highway broom truck that obscured visibility. The allegation was that the paving company's owner was negligent in failing to use his cellular phone to notify his employee of the hazardous road condition. Currently, the only specific reference in CGL policies for a failure to warn is within the definitions of "your product" and "your work." Additional reference to failure to warn may be necessary in the auto exclusion, given the possibility of failure to warn being raised as an allegation in future claims involving autos.

Like the 1973 exclusion, the current one flatly excludes aircraft liability. The current watercraft exclusion tracks with the 1973 general liability policy exclusion and the nonowned watercraft coverage provided in the broad form liability endorsement. Thus, coverage applies (1) if the watercraft is on shore on premises that the named insured owns or rents or (2) if the watercraft is not owned by the named insured, is less than twenty-six feet in length, and is not used to carry passengers or property for hire.

Exception (3) of the current exclusion achieves the same effect as a comparable portion of the 1973 exclusion: the policy covers liability arising out of the parking of autos on or adjacent to premises owned or rented by the named insured. However, the coverage does not apply if the auto is owned by or rented or loaned to any insured. Thus, the coverage is intended primarily for the parking of customers' autos, as when the insured provides valet parking services. Because of the care, custody, or control exclusion, to be discussed later in this chapter, the insured is not covered for damage to the car being parked. Garagekeepers coverage is needed to insure that exposure.

Under exception (4) of the current exclusion, coverage is provided for liability assumed under any insured contract for the ownership, maintenance, or use of aircraft or watercraft--but not an auto. In contrast, the contractual liability coverage of the broad form liability endorsement does not exclude auto liability. An insured with the current CGL form can cover auto liability assumed under contract through the business auto coverage form.

The last exception to exclusion g., under paragraph (5), refers to the operation of any of the equipment as listed in paragraphs f.(2) and f.(3) of the definition of "mobile equipment." That definition is examined in more detail below, but here it will suffice to say that paragraphs f.(2) and (3) of the definition relate to certain types of mobile equipment--cherry pickers, air compressors, pumps, generators, etc.--that are permanently attached to self-propelled vehicles. The definition merely states that such vehicles are to be considered as autos. Paragraph (5) of the exclusion makes it clear that operation of the equipment attached to such vehicles is not excluded, even though the vehicle to which the equipment is attached is an auto and therefore subject to the auto exclusion.

To illustrate, say that while a cherry picker mounted on a truck is being used by the insured to clear tree branches away from power lines, a large branch falls and damages a passing auto. A resulting liability claim against the insured would not be subject to the auto exclusion, since the damage arose out of the operation of the equipment attached to the vehicle. If, instead, the truck on which the cherry picker is mounted became involved in an intersection accident on the way to the next work site, coverage for the claim under the insured's CGL form would be precluded by the auto exclusion. The insured would need to have auto liability insurance on the vehicle in order to be covered for its operation.

Meaning of "Auto" and "Mobile Equipment"

The CGL coverage forms define the word "auto" as follows: "Auto" means:

a. A land motor vehicle, trailer or semitrailer designed for travel on public roads, including any attached machinery or equipment; or

b. Any other land vehicle that is subject to a compulsory or financial responsibility law or other motor vehicle insurance law in the state where it is licensed or principally garaged.

However, "auto" does not include "mobile equipment".

Before one can determine more precisely what an auto may or may not be, the definition of "mobile equipment" must also be considered.

"Mobile equipment" means any of the following types of land vehicles, including any attached machinery or equipment:

a. Bulldozers, farm machinery, forklifts and other vehicles designed for use principally off public roads;

b. Vehicles maintained for use solely on or next to premises you own or rent;

c. Vehicles that travel on crawler treads;

d. Vehicles, whether self-propelled or not, maintained primarily to provide mobility to permanently mounted:

(1) Power cranes, shovels, loaders, diggers or drills; or

(2) Road construction or resurfacing equipment such as graders, scrapers or rollers;

e. Vehicles not described in a., b., c. or d. above that are not self-propelled and are maintained primarily to provide mobility to permanently attached equipment of the following types:

(1) Air compressors, pumps and generators, including spraying, welding, building, cleaning, geophysical exploration, lighting and well servicing equipment; or

(2) Cherry pickers and similar devices used to raise or lower workers;

f. Vehicles not described in a., b., c. or d. above maintained primarily for purposes other than the transportation of persons or cargo.

However, self-propelled vehicles with the following types of permanently attached equipment are not "mobile equipment" but will be considered "autos":

(1) Equipment designed primarily for:

(a) Snow removal;

(b) Road maintenance, but not construction or resurfacing;

(c) Street cleaning;

(2) Cherry pickers and similar devices mounted on automobile or truck chassis and used to raise or lower workers; and

(3) Air compressors, pumps and generators, including spraying, welding, building cleaning, geophysical exploration, lighting and well servicing equipment.
   However, "mobile equipment" does not include land vehicles that are
   subject to a compulsory or financial responsibility law or other
   vehicle insurance law in the state where it is licensed or
   principally garaged. Land vehicles subject to a compulsory or
   financial responsibility law or other motor vehicle insurance law
   are considered "autos."


The above definition of mobile equipment is both longer and more detailed than its counterpart in the 1973 CGL policy. To qualify as mobile equipment under the 1973 policy, a land vehicle, whether or not self-propelled, must come within one of four categories. The current definition entails six such categories and several subcategories. The apparent reason for the more detailed approach of the current definition is to state more precisely the types of vehicles that will be given mobile equipment status (and, hence, automatic coverage), rather than leaving the matter of status to interpretation that fosters both arguments and varying results, as is the case with the 1973 policy.

Paragraphs a. through c. of the current mobile equipment definition are quite straightforward and seldom result in misunderstandings. The remaining parts of the definition do sometimes create confusion and are therefore analyzed below.

Paragraph d. includes vehicles that might otherwise be considered "autos" if they were not being maintained primarily to provide mobility to the types of permanently mounted equipment described in subparts (1) and (2) of the exclusion. In addition, paragraph f. includes vehicles not described in paragraphs a, b, c, or d that are maintained primarily for purposes other than the transportation of persons or cargo. This open-ended description could include, for example, a truck maintained primarily to provide mobility to any of various types of mobile equipment not described in paragraph d. However, paragraph f. goes on to clarify that self-propelled vehicles with other types of permanently attached equipment are not mobile equipment but will be considered autos. See subparts (1), (2), and (3) of paragraph f.

It is important to note that subparts (1), (2), and (3) of paragraph f. do not eliminate CGL coverage for the listed types of equipment; they eliminate CGL coverage only for the vehicles to which the mobile equipment is attached. Thus, the CGL policy covers the operation of the attached equipment (for example, spraying equipment while being used at a job site) but does not cover the operation of the vehicle to which the mobile equipment is attached (unless the CGL policy is endorsed to do so). The ISO business auto coverage form covers the vehicle exposure if the vehicle qualifies as a covered auto under the particular policy, and it specifically excludes the operation of the attached equipment.

The types of equipment under subsections (1), (2), and (3) of paragraph f. are primarily those that were the subject of controversy under the 1973 policy. When the definition of mobile equipment was first introduced to general liability policy provisions in 1966, some insurers were reluctant to give mobile equipment status to certain vehicles that in the absence of the definition of mobile equipment would have been rated as automobiles. An example is a truck whose sole purpose is to provide mobility to building cleaning equipment permanently attached to the truck. As the definition of mobile equipment reads in the 1973 CGL policy, the truck should be covered automatically under the CGL policy rather than rated separately under the insured's automobile policy.

Indicative of the kind of problems under the 1973 definition of mobile equipment was a case that involved a pickup truck to which welding equipment was bolted and welded. The insured had an automobile policy, which did not list this truck, and a comprehensive general liability policy. Both policies were with different insurers. When claim was made under the liability policy the insurer denied it on the ground that the truck was not maintained for the sole purpose of providing mobility to the welding equipment, since the truck was also used for the insured's personal use.

In construing the definition of mobile equipment, a Louisiana appeals court hearing this case held that the truck was a type of equipment covered by the liability policy. The court's rationale was that a land vehicle is mobile equipment if it is designed (i.e., structurally suited) or maintained (i.e., functionally suited) for the sole purpose of providing mobility to the equipment attached to it. The case is Doty v. Safeco Ins. Co., 400 So. 2d 718 (La. App. 1981). Because of paragraph f. of the current definition, the vehicle involved in the above noted case would clearly appear to be an auto under the current CGL forms, rather than mobile equipment, and would need to be insured under an automobile policy.

Paragraph e. of the mobile equipment definition gives mobile equipment status to vehicles that are not self-propelled and are maintained primarily to provide mobility to permanently attached equipment of the types specified. Liability coverage would apply here to both the existence and operations exposures of such equipment. However, when equipment in this category is being transported by an auto, the equipment is covered under the insured's business auto coverage form, rather than under either of the CGL coverage forms, because of exclusion h. (see below), which excludes mobile equipment while being transported by an auto owned or operated by or rented or loaned to any insured.

2004 Revision Affecting Mobile Equipment

The last paragraph of the definition of mobile equipment, added with the 2004 revisions, attempts to make clear that a land vehicle that is subject to compulsory or financial responsibility or other motor vehicle insurance laws is not intended to be considered as mobile equipment and, therefore, is not covered for its over-the-road exposures under the CGL policy.

The reference to compulsory insurance laws in the new wording includes laws requiring insurers to offer or provide uninsured motorists (UM) coverage. Since becoming mandatory in many states for both personal and commercial auto risks, UM coverage has become a thorn in the side of many insurers, particularly those issuing the CGL policy. These insurers often are required to pay for UM claims involving injuries sustained by operators of mobile equipment. The intent has been to cover mobile equipment under general liability provisions since standard forms were introduced in 1941. In fact, with the 1966 CGL policy provisions, a condition entitled financial responsibility laws was added in order to certify registered mobile equipment under financial responsibility laws of states and Canadian provinces.

This condition was eliminated with the 1973 CGL policy, and an endorsement--Motor Vehicle Laws, CG 99 01 11 85--was introduced with the 1986 CGL forms to replace the condition. Prior to this endorsement, coverage, when applicable, was automatic. In other words, the burden was on the insurer to provide coverage to mobile equipment involved in accidents on public roads. With the introduction of CG 99 01 in 1986, the burden shifted to the named insured to request the motor vehicle laws endorsement when an exposure arose.

Apparently, uninsured motorists, no-fault, and kindred coverages were still being required to be provided by the CGL form, despite the absence of this endorsement request. So, CG 99 01 was withdrawn in 2004, and mobile equipment and other land motor vehicles subject to compulsory or financial responsibility laws or other motor vehicle insurance laws are no longer covered by the CGL policy but, instead, are considered to be autos.

Exclusion H--Mobile Equipment

Although mobile equipment is generally insured under the CGL forms, there are two situations, set forth in the following exclusion, when mobile equipment is not covered. The exclusion applies to:

"Bodily injury" or "property damage" arising out of:

(1) The transportation of "mobile equipment" by an "auto" owned or operated by or rented or loaned to any insured; or

(2) The use of "mobile equipment" in, or while in practice for, or while being prepared for, any prearranged racing, speed, demolition, or stunting activity.

The reason for part (1) of the current exclusion is that mobile equipment while being transported is considered to be part of the auto and therefore covered by the insured's auto policy, if any. The reason for part (2) of the exclusion is to exclude exposures that are particularly hazardous and require other insurance if those excluded events are to be undertaken.

Exclusion I--War

As in the 1973 general liability policy, the insured's contractual liability for injury or damage due to war is also excluded under the current CGL forms. The exclusion applied to:
   "Bodily injury" or "property damage" due to war, whether or not
   declared, or any act or condition incident to war. War includes
   civil war, insurrection, rebellion or revolution. This exclusion
   applies only to liability assumed under a contract or agreement.


Although this exclusion has not, in the past, been the subject of much scrutiny, insurance buyers should not have been surprised to eventually see an expansion of the war risk exclusion, particularly in light of the terrorist attack on the World Trade Center on September 11, 2001.

ISO introduced three war endorsements in 2002 that expanded the war exclusion beyond contractually assumed liability to eliminate coverage for bodily injury or property damage arising out of any type of war or warlike action. One such endorsement, CG 00 62, was developed for use with the CGL coverage forms. Endorsement CG 00 63 was to be used with the Owners and Contractors Protective Liability (OCP) coverage form. And, endorsement CG 00 64 was designed for use with the liquor liability, pollution liability, railroad protective liability, and underground storage tank coverage forms.

With its 2004 commercial liability changes, ISO withdrew these endorsements and replaced the prior war exclusion with the new exclusionary wording that eliminates coverage for:

"Bodily injury" or "property damage", however caused, arising, directly or indirectly, out of:

(1) War, including undeclared or civil war;

(2) Warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign, or other authority using military personnel or other agents; or

(3) Insurrection, rebellion, revolution, usurped power, or action taken by governmental authority in hindering or defending against any of these.

Exclusion J--Damage to Property

Exclusion j. of the current CGL forms is a combination of the care, custody, or control and alienated premises exclusions of the 1973 general liability policy and various exclusions in the broad form property damage (BFPD) provisions. When the 1986 CGL forms were introduced, ISO prepared a chart comparing the then new occurrence form with the 1973 occurrence form. On the subject of property damage, including broad form property damage coverage, the chart stated that the "Exclusions have been completely rewritten and clarified with no change in overall scope of coverage." (5) There are, however, some new twists to the exclusions as found in the current forms, such as the following:

1. Limitation of the care, custody, or control exclusion to personal property;

2. Elimination of the exception allowing coverage for damage to property in the care, custody, or control of the insured resulting from use of elevators;

3. Amendment of the alienated premises exclusion with respect to speculative building;

4. Limitation of the "faulty workmanship" exclusion to ongoing operations; and

5. A limitation on coverage for mitigation costs to prevent further damage to property of others.

These and other differences between the 1973 and post-1986 versions of the exclusions are discussed in more detail following quotation of exclusion j.

The current version of the exclusion applies to the following. "Property damage" to:

(1) Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another's property;

(2) Premises you sell, give away or abandon, if the "property damage" arises out of any part of those premises;

(3) Property loaned to you;

(4) Personal property in the care, custody or control of the insured;

(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or

(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

Paragraphs (1), (3) and (4) of this exclusion do not apply to "property damage" (other than damage by fire) to premises, including the contents of such premises, rented to you for a period of seven or fewer consecutive days. A separate limit of insurance applies to Damage To Premises Rented To You as described in Section III--Limits of Insurance.

Paragraph (2) of this exclusion does not apply if the premises are "your work" and were never occupied, rented or held for rental by you.

Paragraphs (3), (4), (5) and (6) of this exclusion do not apply to liability assumed under a sidetrack agreement.

Paragraph (6) of this exclusion does not apply to property damage included in the products-completed operations hazard.

Paragraph (1)--Insured's Property

Paragraph (1) of exclusion j. corresponds to exclusion k(1) of the 1973 general liability policy. Since the word "property" is not qualified, this exclusion applies to both real and personal property that the named insured owns, rents, or occupies. The purpose of the exclusion is to avoid covering an exposure that can be insured by some form of property insurance. The only exception to the exclusion, stated at the end of the Coverage A exclusions, is for damage by fire to premises while rented to the named insured or temporarily occupied by the named insured with permission of the owner, thus providing fire legal liability coverage.

The portion of paragraph (1) that follows "Property you own, rent or occupy" was added in the 2001 CGL revision. This phraseology, which ISO refers to as a clarification, precludes costs incurred by the named insured or by others to repair, replace, enhance, restore or maintain property the named insured owns, rents or occupies for any reason, including the prevention of injury to a person or damage to another's property.

The basis for this new wording is Aetna Insurance Co. v. Aaron, 685 A.2d 858 (Md. App. 1996), which involved a suit brought by a condominium association against one of its unit owners for costs the association incurred to repair the unit owner's glass enclosure in order to prevent damage to another unit owner. ISO's explanation is that the CGL policy is not intended to pay for expenses incurred for repairs, etc. made on the insured's own property for any reason. The exclusion is primarily aimed at insureds involved in environmental situations where the insureds apply for coverage for the costs incurred in cleaning up their property because a pollutant has or is threatening to harm the natural resources. There is a good argument for coverage in the absence of this additional wording

Paragraph (2)--Alienated Premises

Paragraph (2) corresponds to exclusion l. of the 1973 liability policy, commonly referred to as the alienated premises exclusion. Its purpose is to preclude coverage for damage to property that has been sold, given away, or abandoned. For example, say the insured sells a building with a fire hazard that is neither disclosed by the insured nor clearly visible to the purchaser. If the building sustains fire damage as a result of the undisclosed hazard, the insured will have no protection in the event he or she is sued. However, the exclusion does not reach bodily injury and damage to property other than the alienated premises.

One of the problems with this part of exclusion j. is that in some cases it can create an ambiguity. An example is where an insured and a subcontractor construct a dwelling. The insured occupies the dwelling for one year and then sells it. Following sale, it is partially damaged because of a defect in the work of the subcontractor. The question is: Did the damage arise out of the premises sold? Or did the property damage arise out of the work performed on behalf of the insured? It would seem that but for the construction work in the first place, the property damage would not be within the scope of the premises alienated (premises you sell) exclusion j. (2), but instead the subject of coverage in light of the exception to the "damage to your work" exclusion l. This exception states that the damage to your work exclusion does not apply "if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor."

The main difference between the 1973 and current versions of the exclusion is that the current one is subject to an exception stating that the exclusion does not apply if the premises are your work and were never occupied, rented, or held for rental by the named insured. The definition of "your work" is quoted later but may be briefly defined for present purposes to mean work or operations performed by or on behalf of the named insured. This exception makes it clear that the exclusion does not apply to houses or other real estate built on speculation, as long as the builder never occupied the property, rented it, or held it for rental. Thus, a completed house built on speculation has the same coverage under the current CGL forms as one built under contract with a property owner, and cannot be flatly excluded by the alienated premises exclusion, as sometimes happened under the 1973 policy despite the fact that the loss would otherwise be covered by the insured's BFPD coverage.

Paragraph (3)--Property Loaned to Named Insured

Paragraph (3), excluding "property loaned to you," is wording found on current CGL forms. While both real and personal property loaned to the named insured could, depending on the circumstances, be reached by paragraphs (1) and (4) of exclusion j., this additional wording is likely to tie up any loose ends.

Paragraph (4)--Care, Custody, or Control

Paragraph (4) is the counterpart to the 1973 care, custody, or control exclusion. However, the current version applies only to personal property, whereas the 1973 version could apply to either real or personal property. Moreover, the current exclusion does not retain the former reference to property "as to which the insured is for any purpose exercising physical control." Nor does it have any exception, as the 1973 version does, providing coverage for property damage (other than to the elevator itself) arising out of the use of an elevator at the insured's premises. Consequently, an insured under the current CGL forms needs to arrange some other form of insurance to cover personal property of others in its care, custody, or control that can be damaged by use of its elevators, if such coverage is desired. Exclusion j. of the current CGL forms does, however, contain an exception of liability assumed under a sidetrack agreement, which applies to paragraphs (3) through (6) of the exclusion. A similar exception applies to the 1973 care, custody, or control exclusion and to comparable BFPD exclusions.

The fact that the care, custody, or control exclusion applies only to personal property should not be taken to mean that the insured has coverage for real property in its care, custody, or control in every case. Apart from the portions of exclusion j. already discussed, which can apply to real property in certain situations, parts (5) and (6) of the same exclusion can also apply to real property.

Before addressing parts (5) and (6), however, it should be pointed out that when BFPD coverage is added to the 1973 comprehensive general liability policy, the care, custody, or control exclusion of the liability policy is deleted in its entirety. In place of the deleted exclusion, BFPD coverage imposes a number of more specific exclusions. The retention in the current CGL forms of the care, custody, or control exclusion as respects personal property perhaps explains why some of these BFPD exclusions have no specific counterparts in the current forms. The exclusions omitted from the BFPD endorsement relate to the following:

* Property entrusted to the insured for storage or safekeeping;

* Property while on the insured's premises for purposes of having operations performed on it;

* Tools or equipment while being used by the insured; and

* Property in the insured's custody that is to be installed, erected, or used in construction by the insured.

It is problematical to say whether the current approach will result in more or less coverage than was available under the BFPD provisions. However, it seems possible that the blanket exclusion of personal property in the care, custody, or control of the named insured could have a wider scope of application than the separate, more specific BFPD exclusions.

In the 1986 edition of the CGL coverage forms, the care, custody, or control exclusion applies to personal property of the named insured ("you"). This means that the exclusion does not apply to personal property in the care, custody, or control of other (unnamed) insureds under the policy. The 1990 and later versions of this exclusion apply to property damage to "personal property in the care, custody, or control of the insured."

The 1998 revision declared that paragraphs (1), (3) and (4) of this exclusion do not apply to premises and contents of such premises that are rented to the named insured for a period of seven or fewer consecutive days. For example, if an employee of the named insured rents a hotel room on a business trip and negligently causes damage to the room or its contents, the named insured's CGL form will provide property damage coverage for the insured.

This coverage revision does not refer to damage by fire to premises rented to the named insured; that loss exposure is already covered under the fire damage, or fire legal liability, clause of the CGL forms, which will be discussed at the end of this chapter. However, the same limit, called the "damage to premises rented to you limit" in the 1998 and later editions, applies to both the coverage described in the paragraph above and fire legal liability coverage. Whether the damage is caused by fire or some other negligent action on the part of the insured, the insurer will pay no more than the "damage to premises rented to you limit" shown on the declarations page.

Paragraph (5)--Property Being Worked On

The counterpart to paragraph (5) of exclusion j. is the BFPD exclusion of the following:

... that particular part of any property not on premises owned by or rented to the insured, (i) upon which operations are being performed by or on behalf of the insured at the time of the property damage arising out of such operations, or (ii) out of which any property damage arises.

The only substantive difference between paragraph (5) and the BFPD exclusion is the limitation of paragraph (5) to real property.

The purpose of paragraph (5) and its BFPD counterpart is to exclude only "that particular part" of property on which work is being performed by or on behalf of the insured. For example, say that a subcontractor is erecting steel beams in a building. One of the beams falls while being attached and damages the work of the general contractor and other subcontractors. The general contractor, if held responsible for the loss, should be protected under its policy for damage caused by the beam, but coverage should not be expected for damage to the beam that fell.

If considered real property, the beam is excluded as "that particular part of real property ..." If considered personal property, because it was not yet attached to the realty, paragraph (6), as discussed below, would presumably exclude coverage for the fallen beam.

Paragraph (6)--Faulty Workmanship

Paragraph (6) of exclusion j. is derived from the BFPD exclusion of damage "to that particular part of any property, not on premises owned by or rented to the insured, the restoration, repair or replacement of which has been made necessary by faulty workmanship thereon by or on behalf of the insured (emphasis added)." The versions of this "faulty workmanship" exclusion found in the BFPD provision and the 1986 and later editions of the CGL coverage forms differ in at least two ways.

First, the BFPD exclusion applies only to property away from premises owned by or rented to the insured, while the current exclusion applies to work being performed either on or off the insured's premises. This should not amount to a significant difference in coverage, however, since BFPD coverage is subject to an exclusion of damage to property on the insured's premises for purposes of having operations performed on such property. This exclusion has not been carried forward into the current CGL forms, but they achieve much the same effect through their exclusion of damage to personal property in the care, custody, or control of the insured. Thus, both BFPD coverage and the current CGL forms will ordinarily exclude an entire piece of personal property (not merely "that particular part") that is on the insured's premises (i.e., in the insured's care) for purposes of having work performed on it by the insured. The chief applicability of the current faulty workmanship exclusion should therefore be to property away from the insured's premises.

If the insured is working on personal property away from his or her own premises, coverage for damage to other than "that particular part" will depend on whether the entire piece of property is in the insured's care, custody, or control. If the entire piece of personal property is in the insured's care, custody, or control, damage to the entire piece of property is excluded by the care, custody, or control exclusion. If the rest of the property is not in the insured's care, custody, or control, then only paragraph (6) applies, and the insured is covered for the entire loss except for "that particular part" whose replacement was required because of faulty workmanship. Since the current care, custody, or control exclusion applies only to personal property, real property the insured is working on is never subject to that exclusion.

A second way in which paragraph (6) differs from its BFPD counterpart is that it is specifically stated not to apply to property damage within the products-completed operations hazard. This does not mean that the insured therefore has coverage for damage to his or her own completed work in every case; on the contrary, exclusion l., discussed later in this chapter, defines the scope of coverage for damage to work within the products-completed operations hazard. However, the exception of completed work from paragraph (6) does eliminate from the current CGL forms the uncertainty under BFPD provisions of whether the faulty workmanship exclusion applies only to ongoing operations or to completed operations as well. In cases involving faulty work of subcontractors, it is to the insured's benefit not to have the faulty workmanship exclusion apply. This issue is discussed in more detail along with exclusion l.

Court Decision

A court decision involving broad form property damage coverage that has application to the 1986 and subsequent CGL forms is National Union Fire Insurance Company of Pittsburgh, PA v. Structural Systems Technology, Inc., 756 F. Supp. 1232 (E.D. Mo. 1991). Briefly, the facts are as follows: SST contracted with Gillette Company for the erection of a 2,000 foot broadcasting tower. The land on which the tower was to be erected was owned by a married couple who leased it to Gillette. SST contracted with a subcontractor (L&RT) for diagonal rods to be used in the tower. SST also contracted with KIRX, Inc. to redesign the tower to accommodate an antenna and transmission line. After SST installed the television transmission equipment onto the tower and the television station began transmitting, defects were discovered in the tower. It was determined that the cracks were attributed to the work of the subcontractor (L&RT). While SST employees were repairing the tower and replacing the diagonal rods of the subcontractor, the tower collapsed and all equipment was destroyed.

All parties involved were sued for damages involving destruction of the tower, its transmission line, antenna system and associated equipment, diminution in the value of the station, and lost profits. The insurer of SST's commercial general liability policy denied defense and indemnification of damages based on "damage to your product" exclusion k., "damage to your work" exclusion l., and broad form property damage exclusions j. (4), (5), and (6).

Since the tower was considered to be real property, the court held that the "damage to your product" exclusion k. was inapplicable. Other reasons why this exclusion was inapplicable were that the tower was constructed by SST and not manufactured by it, and the other equipment furnished by SST was not "sold, handled, distributed or disposed of " by SST. (Within this context, "handle" meant to "deal or trade in," rather than to touch.)

Likewise "damage to your work" exclusion l. also was held to be inapplicable because, at the time of the collapse, the only work being performed was the repair by SST of the tower by the replacement rods, which were not considered to be "your work" (SST's work) but rather the work of the subcontractor L&RT. Furthermore, the damage to your work exclusion l. does not apply if the damaged work or work out of which the damage arises was performed on the named insured's behalf by a subcontractor. The insurer argued that this exception to exclusion l. did not apply because the supplier of the diagonal rods was a material man rather than a subcontractor. However, this argument of the insurer also was overruled.

Regarding the damage to property exclusion, the court held as follows:

* With respect to exclusion j.(5): this exclusion applies to the tower if it is determined that the collapse arose out of the actual repair operations, as opposed to out of the alleged defective rods. The insurer therefore had the obligation to defend because of the potential for coverage. However, if it is determined that the collapse arose out of the tower, the exclusion j.(5) will apply and the insurer will have no obligation to pay damages. However, the destruction of other equipment, for example, transmission lines and antenna system, are not excluded by j.(5) because they were not real property.

* With respect to exclusion j.(6): the tower was not excluded because the damage fell within the products-completed operations hazard exception. Such exception applied here, the court explained, since the work being conducted was treated as completed in that the work of SST was characterized as "service, maintenance, correction, repair or replacement." The other equipment alleged to have been damaged was not excluded because it was not being restored, repaired, or replaced.

* With respect to diminution in value of property and lost profits: To the extent there is property damage coverage, both diminution in value of property and lost profits are covered.

Exclusion K--Damage to "Your Product"

The exclusion of damage to the named insured's products applies to:

"Property damage" to "your product" arising out of it or any part of it.

The extent to which this exclusion may apply to property damage, whether it involves physical injury to tangible property or loss of use of tangible property that has not been physically injured, hinges on the meaning of "your product." This term is defined as follows:

"Your product":

a. Means:

(1) Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by:

(a) You;

(b) Others trading under your name; or

(c) A person or organization whose business or assets you have acquired; and,

(2) Containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products.

b. Includes:

(1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of "your product," and,

(2) The providing of or failure to provide warnings or instructions.

c. Does not include vending machines or other property rented to or located for the use of others but not sold.

The specific exception of real property under part a. makes it clear that work performed by contractors on buildings, structures, and other realty is not considered to be the named insured's product. Some insurers have used the injury to products exclusion of the 1973 general liability policy, or the fictitious work/product exclusion, to deny completed operations losses that would otherwise have been covered under the insured's BFPD coverage. Similar denials of coverage under the current CGL forms are clearly incorrect.

Another noteworthy provision is a.(3). Since the current CGL forms, like the broad form liability endorsement, automatically cover mergers and acquisitions for ninety days (see Chapter 5), all the exposures that confront the purchased or acquired firm are relevant, including liability for products previously sold by the acquired firm. Provision a.(3) makes it clear that the current CGL forms cover that products exposure. Whether a successor is liable for damage caused by a product sold by the predecessor does not have a clear-cut answer. (6)

The fact that "your product" includes warranties and representations does not mean that product warranty insurance is being provided, as some insureds might like to believe. If coverage is to apply, there must be bodily injury or property damage resulting from such warranty or representation--other than to the product itself.

However, there should be coverage for physical damage to another entity's product in which the insured's product has been incorporated as a component. Naturally, the cost of the insured's own product (the component) would not be payable, due to exclusion k. If the other entity's product is not physically injured, but is merely rendered unusable because of the insured's component, coverage for the product (exclusive of the insured's component product) will depend on whether exclusion m. of the current CGL forms, dealing with "impaired property," applies to the loss. Exclusion m. is discussed later in this chapter.

In 1990, the definition of "your product" was amended to include "the providing of or failure to provide warnings or instructions." This provision was added in response to court decisions upholding coverage--despite policy exclusions of the products-completed operations hazard--for products liability suits alleging the manufacturer's failure to provide warnings. The rationale for coverage was that the products exclusion did not specifically preclude coverage for liability stemming from the failure of a manufacturer to provide warnings or instructions for its product.

One of the earlier cases to uphold coverage for this reason is Cooling v. United States Fidelity & Guaranty Company, 269 So. 2d 294 (La. App. 1972). This action arose when the insured sold diesel engines and failed to warn the buyer about the adequacy of safety devices that would have made the engines safer to operate. As a result of an accident and injury, the insured was sued based on the failure to warn constituting actionable negligence. The court ruled in favor of the insured because of the absence of an express exclusion in the policy for injuries arising out of the failure of the insured to warn that machinery it sold could have been operated more safely with additional equipment. For later cases, see American Trailer Service, Inc. v. The Home Insurance Company, 361 N.W.2d 918 (Minn. App. 1985); Chancler v. American Hardware Mutual Insurance Company, 694 P.2d 1301 (Ida. App. 1985) rev'd 712 P.2d 542; and Keystone Spray Equipment, Inc. v. Regis Insurance Company, 767 A.2d 572 (Pa. Super. 2000).

The 1990 policy amendment concerning the failure to warn is directed at those instances when the CGL form is endorsed specifically to exclude the products-completed operations coverages. Its purpose is to put an end to the loophole that has allowed some insureds to obtain coverage despite a specific exclusion of the products-completed operations hazard. When products liability is not excluded, the 1990 addition clarifies that products suits based on failure to warn are subject to the aggregate limit that applies to products and completed operations.

Exclusion L--Damage to "Your Work"

Exclusion l. of the current CGL forms eliminates coverage for:

"Property damage" to "your work" arising out of it or any part of it and included in the "products-completed operations hazard."

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

Since the term "your work" is an integral part of that exclusion, it must be understood as well. It is defined as follows:

"Your work" means:

a. Means:

(1) Work or operations performed by you or on your behalf; and,

(2) Materials, parts or equipment furnished in connection with such work or operations.

b. Includes:

(1) Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of "your work" and,

(2) The providing of or failure to provide warnings or instructions.

In 1990, the definition of "your work" was amended to include "the providing of or failure to provide warnings or instructions" for the same reason as that phrase is included in the definition of "your product." Refer to "Exclusion K--Damage to Your Product" for the rationale of this phrasing.

Since the injury to work performed exclusion applies only to the products-completed operations hazard, it is important to quote that term's definition here as well. The definition is similar, but not identical, to the definitions of "products hazard" and "completed operations hazard" of the 1973 liability provisions. The 2001 version of the definition is quoted below.

"Products-completed operations hazard":

a. Includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except:

(1) Products that are still in your physical possession; or

(2) Work that has not yet been completed or abandoned. However, "your work" will be deemed completed at the earliest of the following times:

(a) When all of the work called for in your contract has been completed.

(b) When all of the work to be done at the job site has been completed if your contract calls for work at more than one job site.

(c) When that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.

Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed.

b. Does not include "bodily injury" or "property damage" arising out of:

(1) The transportation of property, unless the injury or damage arises out of a condition in or on a vehicle not owned or operated by you, and that condition was created by the "loading or unloading" of that vehicle by any insured;

(2) The existence of tools, uninstalled equipment or abandoned or unused materials;

(3) Products or operations for which the classification listed in the Declarations or in a policy schedule states that products-completed operations are subject to the General Aggregate Limit.

The injury to work performed exclusion of the 1973 general liability forms eliminates coverage for property damage to work performed by or on behalf of the insured arising out of the work or any part of it, including materials, parts, and equipment furnished in connection therewith. That exclusion differs from exclusion l. of the current forms in two noteworthy ways.

First, the current exclusion applies only to work within the products-completed operations hazard, whereas the 1973 exclusion applies to either completed work or work in progress. However, exclusion j. of the current forms, as discussed earlier, does apply to work in progress.

The second, perhaps more significant difference between the 1973 exclusion and the current one is that the current one is clearly stated not to apply if the damaged work or the work out of which the damage arises was performed by a subcontractor. Thus, with respect to completed operations, if the named insured becomes liable for damage to work performed by a subcontractor--or for damage to the named insured's own work arising out of a subcontractor's work--the exclusion should not apply to the resulting damage. Neither, apparently, should any exclusion apply to the named insured's liability for damage to a subcontractor's work out of which the damage to other property arises. If, for example, a subcontractor's faulty wiring causes an entire building to burn and the general contractor is sued for the entire loss by the building owner, the general contractor's CGL coverage form should cover his liability for the entire amount of the loss, including the cost of the failed wiring. If, instead, the loss had originated in work performed by the general contractor, the general contractor would be covered only for damage to work performed by subcontractors; there would be no recovery for any work performed by the named insured (general contractor).

As discussed more fully in Chapter 6, this exception to exclusion l., concerning damage to work performed by subcontractors, was the leading reason construction defects were held to be covered under the policies of general contractors. To combat many of these types of cases, ISO introduced two endorsements in 2001, discussed in Chapter 6. One of these endorsements is applicable on a blanket basis (CG 22 94), and the other is a site-specific exclusion (CG 22 95).

The previous BFPD provisions, when arranged to include completed operations coverage, have a similar effect, which is accomplished by deletion of the injury to work performed exclusion found in the 1973 general liability forms. In its place, the BFPD provisions substitute a similar exclusion, but without any reference to work performed on behalf of the named insured. When read in isolation, this exclusion allows for the same scope of coverage as found under the current injury to work performed exclusion.

However, insurers have frequently cited the separate faulty workmanship exclusion (discussed earlier with reference to paragraph (6) of exclusion j.) to deny BFPD coverage for damage to a subcontractor's failed work from which the injury to other property arose. In the current CGL forms, paragraph (6) of exclusion j.--the counterpart to the BFPD faulty workmanship exclusion--is clearly stated not to apply to work within the products-completed operations hazard and thus precludes the possibility of its being applied to a completed operations loss.

Paragraph (5) of exclusion j. also seems inapplicable to most completed operations claims, due not to a specific exception but to its own wording: "That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations." If the named insured or subcontractors are performing operations on the property at the time of the loss, it is quite unlikely that the operations will have been "completed" at the same time.

If the named insured becomes liable for damage to its subcontractor's work before operations are completed, one or more subparts of exclusion j. may apply to the claim, as discussed earlier. That is, if a subcontractor's faulty electrical work caused the building to burn before completion, paragraphs (5) and (6) of exclusion j. would eliminate coverage for the faulty electrical work. Damage to other real property arising out of the faulty work would not be excluded. Coverage for damage to personal property arising out of the faulty work would depend on whether other subparts of exclusion j.--such as the exclusion of personal property in the named insured's care, custody, or control--are applied to the loss.

Exclusion M--Damage to Impaired Property or Property Not Physically Injured

Exclusion m. is comparable to the so-called failure-to-perform exclusion of previous general liability forms, yet may come to be known as the "impaired property" exclusion, due to its use of that term as introduced in 1986.

The failure-to-perform exclusion has had a controversial history since it was first introduced under standard policy provisions in 1966. The first version contained an exception for active malfunctioning that was difficult to understand, and it worked to the detriment of insurers. The second version, introduced in 1973, has proved to be somewhat clearer, but it is not quite as "tight" as insurers might have wanted. The current version of the exclusion seems to address two weaknesses of previous CGL policies. These weaknesses are discussed subsequently.

The current exclusion applies to:

"Property damage" to "impaired property" or property that has not been physically injured, arising out of:

(1) A defect, deficiency, inadequacy or dangerous condition in "your product" or in "your work"; or,

(2) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.

This exclusion does not apply to the loss of use of other property arising out of sudden and accidental physical injury to "your product" or "your work" after it has been put to its intended use.

The policy definitions of "your product" and "your work" are quoted and explained earlier in this chapter, in connection with exclusions k. and l. The definition of impaired property is as follows:

"Impaired property" means tangible property, other than "your product" or "your work," that cannot be used or is less useful because:

a. It incorporates "your product" or "your work" that is known or thought to be defective, deficient, inadequate or dangerous; or

b. You have failed to fulfill the terms of a contract or agreement; if such property can be restored to use by:

a. The repair, replacement, adjustment or removal of "your product" or "your work"; or

b. Your fulfilling the terms of the contract or agreement.

The effect of the 1986 and later versions of the exclusion is largely the same as that of the 1973 version. However, the 1973 version applies only to loss of use of tangible property which has not been physically injured or destroyed resulting from ... (emphasis added), whereas the current one applies to property damage to "impaired property" or to property (not merely its loss of use) that has not been physically injured.

While the definition of impaired property, like the entire 1973 exclusion, is aimed at loss of use of property that has not been physically injured, the other part of the current lead-in language--the reference to "property that has not been physically injured"--transcends loss of use, and in that respect it enlarges the scope of the current exclusion.

The purpose of the impaired property exclusion is to exclude damages or costs or both associated with tangible property that cannot be used, or is made less useful, because (1) it incorporates the named insured's product or work, or (2) the named insured fails to fulfill the terms of a contract--but only if that property can be restored to use by the repair, removal, or replacement of the work or product or by fulfilling the terms of the contract.

To understand the application of the impaired property exclusion, one must read the exclusion and definition of impaired property in concert. In doing so, one should note the following:

* The exclusion acknowledges that the incorporation of a defective product or work into other property constitutes property damage.

* The exclusion is inapplicable if the property damage amounts to loss of use of other tangible property arising from the sudden and accidental physical injury to the named insured's product or work; or conversely, the exclusion is applicable if the loss of use of other tangible property does not arise from the sudden and accidental physical injury to the named insured's product or work.

* If the property damage did not arise from sudden and accidental physical injury to the named insured's product or work and the property damage was due to the incorporation of such work or product: (1) if the damaged property can be corrected or fixed through the repair, removal or replacement of the named insured's product or work, then such property damage is excluded; or (2) if the damaged property cannot be corrected or fixed through the repair, removal, or replacement of the named insured's product or work, then the impaired property exclusion does not apply and the property damage is covered.

* If the property damage did not arise from the sudden and accidental physical injury to the named insured's product or work, and the resulting loss of use is due to breach of contract, (1) if the other property can be restored to use by full performance of the contract, then the property damage is excluded; or (2) if the other property cannot be restored to use by full performance of the contract, then the impaired property exclusion does not apply and the property damage is covered.

Based on the above principles, the following are some examples dealing with the mechanics of this exclusion:

(1) A contractor's careless work on an underground storage tank causes the contents to leak into the ground. The impaired property exclusion would not apply because the loss of the tank's contents cannot be restored to use by the repair, removal or replacement of the tank.

(2) A manufacturer's machine part component, when added to another manufacturer's product, causes the machine to fail to work properly. The impaired property exclusion should apply to the machine's loss of use, because the machine can be restored to use with the repair, removal or replacement of the defective component.

(3) Defective roof insulation work of one contractor causes corrosion damage to the roofing work of another contractor thus necessitating the replacement of the insulation and roof. The impaired property exclusion should not be applicable because the resulting corrosion damage to property of others cannot be eliminated through the repair, removal or replacement of the defective roof insulation.

(4) Lumber used to build houses is discovered to be defective and presents the high probability that the houses may become unsafe in time. The owners not only sustain loss of use of their houses because of the potentially unsafe condition, but also diminution in the value of the property.

Whether the impaired property exclusion applies here is a question that cannot be answered. The ultimate question is whether the houses can be restored to use with the repair or replacement of lumber. In theory, the answer is yes. But for all practical purposes the answer is likely to be no, because it may require the dismantling or destruction of the houses in order to restore them to use. The answer also becomes one of economics; that is, whether the required restoration can be done reasonably and economically.

It is uncertain whether the impaired property exclusion will succeed in its objectives or fail like its predecessor exclusions. The impaired property exclusion's track record in the courts thus far is better than its predecessor exclusions but, more often than not, courts hold the current exclusion to be inapplicable when insurers rely on it to deny coverage. Part of the problem may be that it is cited by insurers more often than it should be, or it may be too difficult to understand. (7)

Among the cases to be considered are Gaylord Chemical Corporation v. Propump, Inc., 753 So. 2d 349 (La. App. 2000). This case arose when a newly purchased pump did not perform according to its specifications. The purchaser sought refund of the entire price, lost profits, and additional expenses incurred due to the pump's failure to perform properly, as well as damage to its physical plant and loss of use of some of its other equipment. As to the impaired property exclusion raised by the insurer, the court held that it was inapplicable to physical injury to the pump purchaser's plant, equipment, or other property. The exclusion, the court said, applied only if the property was not physically injured or the claimed damages were solely for loss of use of that property.

Another case is Federated Mutual Insurance Company v. Grapevine Excavation, Inc., 197 F.3d 720 (5th Cir. 1999). Here, a general contractor was hired by Wal-Mart to construct a parking lot at its store. The general contractor hired a subcontractor to perform the excavation, backfilling and compacting work. Six months after the work was completed, Wal-Mart discovered that the selected fill materials provided and installed by the subcontractor failed to meet specifications and, as a result, had caused damage to the work of the general contractor. The subcontractor's insurer denied coverage for a number of reasons, including the impaired property exclusion. The court, in ruling for coverage, held that the impaired property exclusion was inapplicable because the asphalt paving could not be "restored to use" by "the repair, replacement, adjustment or removal" of the underlying defective fill and therefore could not be considered impaired property.

In Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal. App. 4th 847 (2000), the impaired property exclusion was held to be inapplicable where cereal nut clusters, found to contain wood splinters, could not be restored to use.

In Dorchester Mutual Fire Insurance Company v. First Kostas Corporation, Inc.731 N.E.2d 569 (Mass. App. Ct. 2000), the contractor, while painting the exterior of a house, caused lead paint chips and dust to go inside the house. As a result, the homeowners sent a demand letter to the contractor claiming that the latter's activities caused them to hire a hazardous waste cleanup company, vacate the premises, and conduct tests of family members and pets for lead levels. The contractor's insurer denied coverage by raising several exclusions including the impaired property exclusion. The court held the impaired property exclusion to be applicable because there was no injury to property apart from the incorporation of the contractor's faulty work and no coverage applied for damage to property that was not physically injured and arose from a "defect, deficiency, inadequacy, or dangerous condition" in the contractor's work.

In Standard Fire Ins. Co. v. Chester-O'Donley & Associates, Inc., 972 S.W.2d 1 (Tenn. App. 1998), the issue was over the loss of use of a building occasioned by the installation of a faulty heating system. The court stated that the exclusion is intended to target situations where a defective product, after being incorporated into the property of another, must be replaced or removed at great expense thereby causing loss of use. However, the court said that the exclusion does not apply if there is damage to property other than the insured's work or if the insured's work cannot be repaired or replaced without causing physical injury to other property. (8)

The current CGL definitions of "your product" and "your work" are stated to include warranties or representations, but they are not limited to them. Furthermore, a "defect, deficiency, inadequacy or dangerous condition" (to quote the current exclusion) can arise under theories of tort law (negligence or strict liability) or contract law (express or implied warranty). The absence of the words "warranted or represented" from the current exclusion seems to be intended to remedy the weakness under the pre-1986 wording.

For an example of how the current exclusion might operate in a particular situation, say that the insured installs a heating and ventilation system in a new building. If the system later proves to be defective, resulting in loss of use of the building while the system is being repaired or replaced, the insurer can cite the portion of the exclusion relating to "impaired property" in denying coverage for a resulting loss-of-use claim against its insured.

There is an exception to the exclusion, however. The exclusion does not apply to loss of use of other property (i.e., property other than the insured's product or work) due to sudden and accidental physical injury

to the named insured's product or work after it has been put to its intended use. Returning to the above example, if the system's heat exchanger suddenly and accidentally ruptured, the resulting loss of use of the rest of the building would be insured, assuming no other policy provision stood in the way of coverage.

Exclusion N--Recall of Products, Work, or Impaired Property

Exclusion n. is commonly referred to as the sistership liability exclusion. The sistership liability exclusion derives its name from occurrences in the aircraft industry where enormous loss-of-use claims resulted from the grounding of all airplanes of the same type because one of the planes crashed and its "sister ships" were suspected of having a common defect. Anticipating similar situations with respect to virtually any type of product or work, insurers added a so-called sistership exclusion to general liability policies in 1966.

The purpose of the exclusion was, and is, to preclude coverage for the costs incurred because products have to be recalled or withdrawn from the market or from use because of a known or suspected defect or deficiency. While the exclusion may have more applicability to products, it also applies to work performed by or on behalf of the insured. The current version of this exclusion precludes coverage for:

Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:

1) "Your product";

2) "Your work"; or

3) "Impaired property";

if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy, or dangerous condition in it.

This current exclusion is considerably more detailed than the 1973 version in an apparent attempt to close some of the gaps created by court interpretations. One of the more notable stopgaps is that the current exclusion applies whether the damages claimed for loss, cost, or expense are incurred by the named insured or by others.

In a number of cases, the previous exclusion has been held not to apply if the actual withdrawal of the product is performed by organizations other than the named insured. With specific reference to "damages claimed for any loss, cost or expense incurred by you or others" (emphasis added), the new exclusion may apply as was originally intended.

Note that this exclusion applies to loss of use, withdrawal, recall, etc., of "your product," "your work," or "impaired property." The definition of impaired property is quoted earlier in this chapter, under the discussion of exclusion m.

Exclusion O--Personal and Advertising Injury

When the 1986 edition of standard CGL forms was introduced, the term "personal injury" was newly defined to mean "injury, other than bodily injury, arising out of one or more of the following offenses." This specific reference to bodily injury as being outside the scope of personal injury coverage caught the eye of some commentators who noted a potential problem with this wording. These commentators reasoned that if bodily injury resulted from a personal injury offense (for example, bodily injury resulting from a scuffle between a store's security guard and one of the store's customers during a false arrest), the insured storeowner might not be fully covered. The allegation of false arrest would be the subject of Coverage B, but the resulting bodily injury claim would not, because the personal injury definition precluded bodily injury. If any coverage were to be applicable to bodily injury, it would have had to be under Coverage A of the policy. However, these same commentators pointed out that there could be situations when bodily injury still might not be covered in light of policy exclusion a dealing with expected or intended injury, that is, the allegation that the security guard expected the injury to happen based on his or her conduct.

As a result of these concerns, ISO made two revisions to its CGL forms in 1998. One was to specifically include, under Coverage B, consequential bodily injury arising out of the covered offenses, and the other was to exclude, from Coverage A, the type of consequential bodily injury now covered under Coverage B. The new exclusion, designated exclusion o., reads as follows:

"Bodily injury" arising out of "personal and advertising injury".

By including consequential bodily injury in the revised definition of "personal and advertising injury" (discussed in Chapter 2), potential problems in applying coverage for bodily injury resulting from an offense should be reduced.

Exclusion P--Electronic Data

In the 2004 revision of the CGL form, ISO added an exclusion pertaining to damages arising out of the loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data. This exclusion also contains a broad definition of electronic data. This exclusion was added to reinforce the 2001 modification that excluded electronic data (as defined) from the CGL definition of property damage.

Fire Damage Coverage

The final provision of the Coverage A exclusions is a statement that exclusions c. through n. do not apply to "damage by fire to premises rented to you," thus providing what the CGL forms call "fire damage" coverage, which is the same thing as fire legal liability coverage. A special limit of insurance applies to this coverage, as is discussed in Chapter 5.

The applicability of fire legal liability coverage when the insured has agreed by contract to be liable for fire damage to rented premises is discussed earlier in this chapter, with exclusion b. Briefly, however, if the insured would have been liable for fire damage to rented premises in the absence of any contract or agreement, fire damage coverage will apply even if the insured had also agreed by contract to be responsible for such damage. In essence, then, the insured is covered for fire damage to rented premises resulting from the insured's negligence. If, on the other hand, there are no grounds for liability other than a contract or agreement, fire damage coverage does not apply, because of exclusion b.

Reference to the term "rented" in the final provision of the Coverage A exclusions may, in some jurisdictions, be argued to require a transfer of money between a tenant and landlord before this coverage becomes effective. However, tenants are sometimes granted occupancy privileges for consideration other than rental monies, such as the performance of managerial or janitorial duties. To acknowledge this practice, the CGL coverage forms were amended in 1993 to encompass such arrangements. The provision as amended in the 2001 forms reads:
   Exclusions c. through n. do not apply to damage by fire to premises
   while rented to you or temporarily occupied by you with the
   permission of the owner. A separate limit of insurance applies to
   this coverage as described in Section III--Limits of Insurance.


The revised wording also encompasses situations when there is no consideration paid as long as the premises are occupied with permission of the owner or, presumably, the owner's agent. A corresponding change also has been made in the Limits of Insurance section pertaining to the fire damage limit.

It is important to keep in mind that exclusion b., dealing with contractual liability, still applies to the fire legal liability exposure. In fact, as noted earlier, part of exclusion b. relating to fire legal liability (specifically, the definition of "insured contract") also underwent change in 1993.

ENDNOTES

(1.) See, for example, Garden Sanctuary, Inc. v. Insurance Company of North America, 292 So.2d 75 (1974); City of Ypsilanti v. Appalachian Ins. Co., 547 F. Supp. 823 (1983); and Doyle v. Allstate Ins. Co., 154 N.Y.S.2d 10 (1956).

(2.) "Occurrence," FC&S, Casualty & Surety vol., Public Liability M.12; also, "Construction and Application of Provision of Liability Insurance Policy Expressly Excluding Injuries Intended or Expected by Insured," American Law Reports 4th, p.957

(3.) Bentz v. Mutual Fire Marine & Inland Insurance Co., 575 A.2d 795 (Md. App. 1990).

(4.) Memorandum to letter from Insurance Rating Board to Ohio Insurance Department dated May 8, 1970.

(5.) The fact that there is no change in the overall scope of broad form property damage means that the January 29, 1979 memorandum issued by ISO to explain application of broad form property damage can still be relied upon conceptually.

(6.) For a review of court decisions on this matter, see "Liability of Successor Corporation for Injury or Damage Caused by Product Issued by Predecessor," 66 American Law Reports 3d (The Lawyers Co-Operative Publishing Co., Rochester; and Bancroft-Whitney Co., San Francisco, 1975), p. 824

(7.) See, for example, Pete Ligeros and Donald S. Malecki, "Impaired Property Exclusion: Using Discretion to Make It Work," Claims Magazine, Nov. 1994, p. 58.

(8.) The court in this case also referred to an earlier edition of the present text, which gave an illustration of how the impaired property exclusion would apply to a defective heating and ventilation system.
A Chronology of Changes
Affecting the Pollution Exclusion f. Pollution

BIand PD                     (1) "Bodily injury" or "property damage"
Exclusion                    arising out of the actual, alleged or
1986                         threatened discharge, dispersal, seepage,
1998                         migration, release or escape of
(1)                          pollutants:

At or from the               (a) At or from any premises, site or
Premises                     location which is or was at any time
1998                         owned by or occupied by, or rented or
(2)                          loaned to, any insured. However, this
                             subparagraph does not apply to:

Heating Equipment            (i) "Bodily injury" if sustained within a
Coverage                     building and caused by smoke, fumes,
1997                         vapor or soot produced by or originating
                             from equipment that is used to heat, cool,
Cooling and Dehumidifying    or dehumidify the building, or equipment
Equipment Coverage           that is used to heat water for personal
2004                         use, by the building's occupants or their
(3)                          guests;

Owner as                     (ii) "Bodily injury" or "property damage"
Additional Insured           for which you may be held liable, if you
1998                         are a contractor and the owner or lessee
(4)                          of such premises, site or location has
                             been added to your policy as an additional
                             insured with respect to your ongoing
                             operations performed for that additional
                             insured at that premises, site or location
                             and such premises, site or location is not
                             and never was owned or occupied by, or
                             rented or loaned to, any insured, other
                             than that additional insured; or

Hostile Fire Coverage        (iii) "Bodily injury" or "property damage"
1986                         arising out of heat, smoke or fumes from
(5)                          a "hostile fire";

Waste Treatment Site         (b) At or from any premises, site or
1986                         location is or was at any time used by or
(6)                          for any insured or others for the
                             handling, storage, disposal, processing or
                             treatment of waste;

Transported, Handled         (c) Which are or were at any time
Processed, etc.              transported, handled, stored, treated,
1986                         disposed of, or processed as waste by or
(7)                          for: (1) Any insured; or (2) Any person or
                             organization for whom you may be legally
                             responsible ; or

At the Job Site While        (d) At or from any premises, site or
Work Is in Progress          location on which any insured or any
1998                         contractors or subcontractors working
(8)                          directly or indirectly on any insured's
                             behalf are performing operations if the
                             "pollutants" are brought on or to the
                             premises, site or location in connection
                             with such operations by such insured,
                             contractor or subcontractor. However, this
                             subparagraph does not apply to

Mobile Equipment             (i) "Bodily injury" or "property damage"
Exception                    arising out of the escape or fuels,
1996                         lubricants or other operating fluids which
(9)                          are needed to perform the normal
                             electrical, hydraulic or mechanical
                             functions necessary for the operation of
                             "mobile equipment" or its parts, if such
                             fuels, lubricants or other operating
                             fluids escape from a vehicle part designed
                             to hold or receive them. This exception
                             does not apply if the "bodily injury" or
                             "property damage" arises out of the
                             intentional discharge, dispersal or
                             or other operating fluids, or if such
                             fuels, lubricants or other operating
                             fluids are brought on or to the premises,
                             site or location with the intent to be
                             discharged, dispersed or released as part
                             of the operations being performed by such
                             insured, contractor or subcontractor;

Contractors' Operations      (ii) "Bodily injury" or "property damage"
Vapor Coverage               sustained within a building and caused by
1998                         the release of gases, fumes or vapors from
(10)                         materials brought into that building in
                             connection with operations being per-
                             formed by you or on your behalf by a
                             contractor or subcontractor; or

Hostile Fire Coverage        (iii) "Bodily injury" or "property damage"
1986                         arising out of heat, smoke or fumes from
(11)                         a "hostile fire"

Professional Cleanup         (e) At or from any premises, site or
Exclusion                    location on which an insured or any
1986                         contractors or subcontractors working
(12)                         directly or indirectly on any insured's
                             behalf are performing operations if the
                             operations are to test for, monitor,
                             cleanup, remove, contain, treat, detoxify
                             or neutralize, or in any way respond to,
                             or assess the effects of, "pollutants."

                             (2) Any loss, cost or expense arising out
                             of any:

Cleanup Exclusion            (a) Request, demand, order or statutory or
1998                         regulatory requirement that any insured or
(13)                         others test for, monitor, cleanup, remove,
                             contain, treat, detoxify or neutralize, or
                             in any way respond to, or assess the
                             effects of "pollutants"; or

Cleanup Exclusion            (b) Claim or suit by or on behalf of a
1986                         governmental authority for damages
(14)                         because of testing for, monitoring,
                             cleaning up, removing, containing,
                             treating, detoxifying, or neutralizing or
                             in any way responding to or assessing the
                             effects of "pollutants."

Cleanup Exclusion            However, this subparagraph does not
Exceptions                   apply to liability for damages because of
1998                         "property damage" that the insured would
(15)                         have in the absence of such request,
                             demand, order or statutory or regulatory
                             requirement or such claim or "suit" by or
                             on behalf of a governmental authority.
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Publication:Commercial General Liability Coverage Guide, 8th ed.
Date:Mar 1, 2005
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