This article discusses certain challenges found in the insuring agreements of the Insurance Services Office, Inc. (ISO), commercial general liability (CGL) policy (April 2013 edition). Because the coverage implications of these challenges are easy to confuse, the purpose of this article is to help foster an improved appreciation when contemplating the particulars.
While the assertions here will not apply in all circ*mstances, as there are exceptions to every rule, the basis of the conclusions is the generally accepted insurance industry understanding of the workings of a CGL policy.
When Does the Duty To Defend End?
When a catastrophic event occurs, invariably, someone will insist that the CGL insurer should just write a check for the limit, deposit it with the clerk of courts, and wash their hands of the claim. In other words, they should just get out.
The wording of the ISO CGL policy does not allow the insurer to simply tender its limit and avoid defending its insureds. The insurer's duty to defend does not end until the applicable limit has been used in the payment of judgment or settlement. 1 This means that an insured has a right to be defended against any "suit" alleging damages arising out of covered bodily injury or property damage unless and until the full limit is paid via a settlement or settlements or pursuant to a judgment for damages. And with a standard ISO CGL policy, the costs of such a defense are payable in addition to the policy limit with no dollar limitation.
The Trigger of a CGL in an "Occurrence" Policy
Labeled an "occurrence"-based CGL policy since 1985, it seems a common belief that an "occurrence" triggers coverage. A better reading of the CGL insuring agreement reveals that coverage is triggered if the bodily injury or property damage is caused by an "occurrence" that takes place in the "policy territory" and only if the bodily injury or property damage occurs during the policy period. 2 More specifically, it does not matter when the "occurrence" took place; the time restriction applies only to bodily injury or property damage.
The implications of this concept can be far-ranging. Here is an illustration that describes the practical application of this concept: Assume a sole proprietor has an occurrence-based CGL policy continuously with the same insurer since 2012. The sole proprietor is a builder constructing one-family homes, doing the carpentry work personally. In 2022, the sole proprietor decided to retire, cancelling the CGL policy in December 2022.
A home built in late 2018 has a problem: the wrong material was used to secure the floor, which eventually weakened and collapsed in early 2023, severely injuring the occupant at the time of the collapse. The injured party sues the sole proprietor/builder for injuries. Does the builder have any CGL coverage?
A common response is that the insurer writing the CGL coverage in 2018, the time the floor was incorrectly constructed, should defend the sole proprietor and, if the sole proprietor is legally liable, pay damages resulting from the bodily injury. This view believes that the faulty construction of the floor was the "occurrence," and because the "occurrence" did take place during the 2018 CGL policy, the 2018 CGL policy is triggered. But the CGL policy says no such thing—the CGL policy is not triggered by the "occurrence" but rather by the happening of the bodily injury—which took place in 2023. Unfortunately for the builder, the 2018 CGL policy does not obligate the insurer to respond in any way because the bodily injury did not occur during the policy period. Even if the "occurrence" is understood to have taken place during the 2018 CGL policy period, the builder still has no CGL coverage.
The "tail." Another common response to this scenario is that the builder should have bought "tail" coverage. But this is an occurrence policy; tail coverage is not available. Even if the builder had a claims-made CGL policy and did purchase "the tail," a claims-made CGL policy would not respond to bodily injuries that take place after the policy expired and during the tail or "Supplemental Extended Reporting Period." The tail provides coverage only for injuries and damages that occurred prior to the purchase of the tail but for which a claim is made for that bodily injury against the insured during the tail period.
Discontinued completed operations coverage. The discontinued completed operations coverage is simply a standard CGL policy with premium calculation that reflects the diminishing liability exposure of the named insured. In our illustration, if the builder had purchased a discontinued completed operations CGL policy in 2023, coverage would have applied to the bodily injury in 2023. The reason is that the 2023 discontinued completed operations CGL policy would have been in effect when the bodily injury happened and that policy would have been triggered.
Would the insurer that wrote the builder's CGL previously have been willing to offer the discontinued completed operations CGL policy? Even though the exposure has not changed (the exposure is reducing—there are no ongoing operations), some insurers refuse to provide "discontinued" operations coverage under any circ*mstances. Or the insurer may offer the coverage with unaffordable premiums. 3
Aside from whether any insurer would have offered the discontinued completed operations CGL policy (or if the insured would pay for such coverage), understanding this concept remains crucial. In other words, it is important to appreciate that, despite paying for CGL coverage for 10 years prior, the terminated CGL policy did not provide any coverage because the bodily injury happened after the policy period. It does not matter that the work was done during the policy period—the policy is only triggered if bodily injury or property damage occurs during the policy period.
Damages Payable after the Policy Expiration
The CGL policy pays sums as damages because of bodily injury, property damage, or personal and advertising injury. In other words, the CGL policy does not pay for bodily injury, property damage, or personal and advertising injury but rather pays for the damages resulting from bodily injury, property damage, or personal and advertising injury. Coverage A and Coverage B insuring agreements of the CGL policy have been very clear on this matter for over 30 years: "to pay as damages because of" wording has been in the ISO CGL since the 1985 edition.
While the CGL policy is only triggered if bodily injury or property damage occurs during the policy period (Coverage A) or the personal and advertising injury offense was committed during the policy period (Coverage B), what is important here is to distinguish between the bodily injury or property damage itself and the damages that result from that injury or damage.
Damages are not the coverage trigger. Here is the key concept—the time at which the damages are incurred by the claimant/plaintiff is not the trigger of coverage for the CGL policy. The obvious implication is that damages are payable under the CGL policy, regardless of when the damages are incurred, provided the damages resulted from injury or damage that did take place during the policy period.
Bodily injury. The CGL policy states as much under Coverage A relative to bodily injury.
e. Damages because of "bodily injury" include damages claimed by any person or organization for care, loss of services or death resulting at any time from the "bodily injury". 4 [Emphasis added.]
Bodily injury illustration. A policyholder has a calendar year CGL policy from January 2021 to January 2022. A product made by the policyholder seriously injures the purchaser when the product exploded in August 2021. As the bodily injury to the purchaser occurred during the policy year, the bodily injury triggers the January 2021 to January 2022 CGL policy. The purchaser files suit against the policyholder for damages arising out of their injuries.
The injuries are so serious that the purchaser died from the injuries in March 2022. The estate of the purchaser files an amended complaint, now demanding additional damages for wrongful death.
Even though the wrongful death damages will be incurred after the policy expires, the above CGL wording makes clear that those damages will be covered by the January 2021 to January 2022 CGL policy (subject to the policy limits). All of the damages resulting from the injury caused by the explosion, including wrongful death damages, are "damages because of bodily injury." The CGL insurer cannot escape paying for the wrongful death damages by arguing the damages took place after the policy expired or was terminated.
Property damage. As with bodily injury, property damage must occur during the policy period to trigger the CGL policy. Once the CGL policy has been triggered by property damage taking place during the policy period, damages because of that property damage are also covered regardless of when those damages are incurred.
The definition of "property damage," rather than the insuring agreement, dictates this outcome. For tangible property that is physically injured, the definition of property damage states that all loss of use resulting from the damaged property occurs at the time of the physical injury. For property damage that involves tangible property that is not physically injured, the definition of property damage states all loss of use occurs at the time of the occurrence that caused the loss of use.
Property damage illustration. Using the same scenario, the product not only injured the purchaser, but the explosion caused so much damage to the purchaser's home that the purchaser's family could not occupy the home for over 9 months. For the 9-month period, the policyholder was liable to pay lodging and other related expenses for the family of the purchaser until the home could be repaired.
Even though the loss of use damages—payment of lodging expense—continued for 4 months after the policy expired, the insurer was required (subject to the policy limits) to pay the damages continuing beyond the policy period "as damages because of … property damage." In other words, because the property damage that resulted in the loss of use expenses occurred during the policy period, the insurer was obligated to pay all damages resulting from the loss of use, even for damages for which the policyholder is liable beyond the policy expiration.
Cumulative or progressive bodily injury or property damage. This concept of how damages are addressed in the CGL policy becomes far more complicated for cumulative injury or progressive damage claims in which the bodily injury or property damage is continuous and occurs over several successive policy periods. If injury or damage triggers multiple CGL policies, 5 the court's allocation of damages by "time on risk," which is often applied to such situations, may brush aside the CGL policy distinction between bodily injury/property damage (BI/PD) and the resulting damages.
Specifically, the presumption underlying the "time on risk" approach seems to conflate the BI/PD with the damages that result from such BI/PD. "Time on risk" seems to assume that damages ensued at the same time the BI/PD occurs and the damages do not continue beyond the happening of BI/PD. 6
Of course, a person may continue to suffer physical harm after the BI is deemed to be no longer "occurring" (i.e., based on the "time on risk" allocation). Consider a person who is no longer exposed to an environmental toxin but continues to suffer the resulting sickness, disease, or premature death well after the exposure ceases: mechanically applying the "time on risk" allocation in this situation appears to disregard the CGL's promise to pay "damages because of 'bodily injury'… resulting at any time from the 'bodily injury.'"
Personal and Advertising Injury Is Not Triggered by an "Occurrence"
The Coverage B—Personal and Advertising Injury insurance agreement of the CGL policy only requires that the offense arose out of the named insured's business and that the offense was committed in the coverage territory and during the policy period. Further, the limit applying to Coverage B is not an "each occurrence" limit but rather a separate limit that applies to all damages sustained by one person or organization. The word "occurrence" does not appear anywhere in relation to Coverage B. Further, there is no "expected or intended" injury exclusion. 7
Intentional torts. The very nature of the covered offenses, as enumerated in the CGL policy definition of personal and advertising injury, should also shed light on this matter. The covered offenses are the result of intentional acts—and are generally intentional torts. 8 Conversely, an occurrence must be an accident—an intentional tort is not considered an accident and, therefore, not an occurrence. 9 For example, the act of arresting someone is not an accident—whether the arrest was wrongful and thus a false arrest 10 is another matter.
Exclusions. Of course, none of this means Coverage B pays damages for intentional infringement or violation of the rights of another. 11 Coverage B is subject to 16 exclusions, including an exclusion that eliminates coverage for a knowing violation of the rights of another and an exclusion that eliminates coverage for publishing material known to be false. While demonstrating knowledge may be a challenge for the insurer, if proven, these exclusions take away coverage. Using the arrest example, Coverage B excludes coverage for damages demanded against an insured who arrested another if the insured had the knowledge that they had no legal authority to do so.
Punitive Damages
Does the ISO CGL policy include coverage for the payment of punitive damages?
First, consider that there is a difference between an insurer's obligation to pay according to the policy terms and a legal prohibition against the payment of punitive damages. Some jurisdictions will not allow insurers to pay punitive damages as such payments have been found to be against public policy. Other jurisdictions have statutes with similar prohibitions.
As the CGL policy insuring agreement does obligate an insurer to pay "as damages" those sums an insured is legally obligated to pay because of bodily injury or property damage, the simple answer to the question is, "Yes, the ISO CGL policy does obligate the insurer to pay punitive damages." 12 The legal prohibition of paying punitive damages forbids the insurer from discharging an obligation otherwise included in the CGL policy. But, keep in mind that, in some instances, the legal prohibition forbidding insurance to pay punitive damages does not apply if the punitive damages are vicariously imposed. 13 But the obligation is clear—the insuring agreement is not restricted to compensatory damages and, thus, includes all damages, including punitive damages.
Exclusionary wording. If an insurer endorses the CGL to exclude punitive damages (a common practice among nonadmitted insurers), then the answer becomes a very clear "No." Punitive damages are excluded, and there is no need to look beyond the policy to issues of legality and enforceability; there is no coverage for punitive damages.
Conclusion
These are just some of many situations that commonly occur in interpreting the insuring agreements of the CGL policy. It is hoped that this discussion of these situations helps shed some light on the "flood of darkness" that sometimes surrounds the CGL insurance policy.
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3 In lieu of purchasing a discontinued completed operations policy, some suggest the sole proprietor purchase an "if any" CGL policy. However, failing to disclose to the insurer that the business has ceased entirely may result in the policy being rescinded, affording no coverage.
6 "The most reasonable reading of these provisions is that the Century policies provided coverage for that portion of Boston Gas's liability attributable to the quantum of property damage occurring during a given policy period. Our reading of this policy language is consistent with that of other courts that have construed CGL policies with similar provisions limiting the applicability of a policy to property damage that occurs during the policy period." Boston Gas. Co. v. Century Indem. Co., 454 Mass. 337 (2009) at 359.
7 New Appleman 3 Law of Liability Insurance § 17.03[1] (2022): "When [the] definition [of 'personal injury'] is read with the provision that only unintentional and unexpected 'personal injury' is covered, then the policy only applies to unintentional false arrest, unintentional malicious prosecution, and unintentional assault and battery." This is complete nonsense.
8 Intentional tort—A tort committed by someone acting with general or specific intent. Examples include battery, false imprisonment, or trespass to land. Black's Law Dictionary (Eighth edition).
9 Reisig v. Union Ins. Co., 870 P.2d 1066 (Wyo. 1994)—The complaint alleged an intentional tort, which could not be considered an "accident" as defined by the policy, and hence was not a covered "occurrence."
10 False arrest—An arrest made without proper legal authority. Black's Law Dictionary (Eighth edition).
11 New Appleman 2 Law of Liability Insurance § 9.07 (2022)—Courts have held that where the underlying complaint against the policyholder pleads knowledgeable or intentional conduct, like fraud or defamation, subsection (1) of this provision will exclude coverage.
12 New Appleman 2 Law of Liability Insurance § 9.04[3] (2022)—Courts have recognized that "damages" include all kinds of money damages, such as punitive damages, that can be awarded in a civil action.
13 New Appleman 3 Law of Liability Insurance § 17.03[3] (2022)—However, in jurisdictions where insurance for punitive damages is unavailable as a matter of public policy to the wrongdoer directly, the law may allow coverage for defendants who are only vicariously liable.
