Critical Issues in CGL, 3rd Edition

Michael F. Aylward, Shaun McParland Baldwin, Gregory G. Deimling

• Publisher: The National Underwriter Company
• Year: 2014
• ISBN:
  9781939829993
• Topic: Business
• Subtopic: Insurance
• Index: Business

Critical Issues in CGL, 3rd Edition is fully updated, revised and expanded to deliver exclusive insights into the most litigated--and potentially costly—provisions of the CGL form. This unique resource leads you through: » Additional Insured and Contractual Liability » Business Risk Exclusions » Occurrences Issues » And Cyber Liability – NEW! The CGL policy is the linchpin of all business insurance programs. Whether large or small, companies simply cannot afford to operate without general liability insurance. And because the CGL policy remains one of the broadest coverage forms in the industry, its application continues to be hotly debated in agent, insurer, and risk manager offices…as well as in the courts. Now in its third fully revised and updated edition, Critical Issues in CGL equips you to handle the commercial general liability coverage form topics that consistently create the most conflict. Identify Unique Vulnerabilities under the CGL and Successfully Manage Loss Critical Issues in CGL, 3rd Edition, provides updated and enhanced material to cover common and emerging issues in commercial general liability, including exclusive analysis of the 2013 ISO CGL form. The book provides practical and tangible advice to resolve the CGL policy's most problematic provisions. Simplify the Complexities Connected to Cyber Risks This one-of-a-kind resource provides proven guidance on how to use the CGL policy in connection with cyber policies—in order to build a comprehensive loss-prevention scheme. Critical Issues in CGL, 3rd Edition, illuminates the trends in cyber-related crimes. It also provides a practical, historical perspective that delivers the most informed understanding of the CGL's treatment of cyber-related crimes and anticipates how the courts will continue to interpret the CGL for cyber losses in light of the most recent court decisions. All of this enables professionals to tackle cyber risks and prevention in a lucid and practical way—even as technology continues to evolve!

Section III

One Occurrence, Two Occurrences …

By: Michael F. Aylward, Esq.

An industrial plant explosion causes damage to several adjacent property owners … an alleged defect in the design of a PVC pipe product causes plumbing systems around the country to leak … an archdiocese is sued for its negligent failure to protect parishioners from the sexual depredation of a priest … a municipal housing authority faces a class action for refusing to rent to African Americans … a food wholesaler negligently processes ground beef, which causes fast food customers in several states to suffer food poisoning.

What do all of these cases have in common? Each presents the question of whether claims arising from them should be treated as arising from separate occurrences or whether the claims share a common cause and, therefore, trigger only a single occurrence limit.

Few issues can have as dramatic an impact on an insured’s coverage rights (and an insurer’s duty to pay) as the determination of whether a given set of claims involve one occurrence or many. Yet, the rules pertaining to this issue are cloaked in obscurity and difficult to follow. Indeed, few areas of the law seem as result-oriented as this one.

Until recently, cases involving multiple occurrences have been relatively rare. The rarity stems not so much from the obscurity of the issue as from the constellation of circumstances that must come together to produce such a case. Specifically, 1) the insurer must be found to owe coverage, 2) the insured must be liable, 3) the damages in question must be large, and 4) the claims must not be able to be settled within the limits that the insurer concedes are available.

Most often, disputes arise over which, if any, aggregate should be eroded; when excess or umbrella liability coverage should be pierced; whether single or multiple insured retentions should be applied; when the duty to defend ends; and whether the insured’s coverage should be maximized. While such disputes typically focus on policy limits, some recent cases have featured efforts by insureds to separate out new occurrences to avoid defenses of late notice or having “expected or intended” the original occurrence.

Unlike occurrence disputes over cases involving the application of policy exclusions, there is no clear right or wrong position on the number of occurrences that reliably will benefit a party. The analysis that maximizes an insured’s indemnity recovery in one case may be devastating to an insured with a different profile. Similarly, the position that an insurer might favor in a case in which its policies are primary might be unfavorable to it in another case in which it issued excess policies. Such shifting roles and complications may well explain the relatively small number of reported decisions.

Indemnity issues also are transforming the cast of characters in coverage disputes. Whereas coverage disputes conventionally have pitted primary insurers against policyholders, disputes concerning the number of occurrences may arise in suits between 1) a policyholder and its primary insurers, 2) a primary insurer and an umbrella or excess insurer, or 3) a ceding insurer and its reinsurer(s).

Although the thrust of this section is on commercial general liability (CGL) policies, some of the examples and case citations deal with excess liability coverages. However, even when coverage on the primary liability policy is excluded, the definition of occurrence is important in determining when and how excess coverage is triggered as well as how self-insured retentions and deductibles are applied.

The Role of Occurrence Wordings

Limiting Coverage

The meaning of occurrence is vital to the two main promises in a liability insurance policy: the promise to pay damages on behalf of the insured, whether through judgments or agreed-to settlements (the duty to indemnify), and the promise to defend suits seeking covered damages (the duty to defend). While broadly stated, neither obligation is without limitation; since 1966, most general liability policies have provided that that the insurer’s obligation to defend ends when the applicable policy limits are exhausted. This is one situation in which the issue of how many occurrences are triggered can be critical.

Trigger of Coverage Distinguished

An occurrence can play several roles in a CGL policy. Traditionally, general liability policies are triggered by an occurrence that results in bodily injury or property damage during the policy period. The coverage grant in the current ISO CGL form (CG 00 01) provides that coverage only applies if:

1) the bodily injury or property damage is caused by an occurrence that takes place in the coverage territory; and

2) the bodily injury or property damage occurs during the policy period.

Occurrence also measures the insurer’s indemnity obligations that affect when the insurer’s duty to defend is exhausted. Looking back to the 1973 comprehensive general liability form, the policy provided that:

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.

More recent ISO forms have tweaked this language slightly, defining occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

While this dual usage sometimes has created confusion, an occurrence is not the trigger of coverage under a liability policy. Broadly stated, an occurrence is the source or cause of the insured’s liabilities. By contrast, it is the effect of that occurrence that triggers coverage. In short, the cause of the insured’s liability determines the number of occurrences, but that cause does not trigger coverage under an occurrence policy. Coverage is triggered by bodily injury or property damage. Thus, it is the effect of the insured’s negligence that determines which policies are triggered, not the date of the original causative negligence that set a train of events in motion that culminated in those injuries. The difference between the occurrence and its effects can be seen in different types of cases.

In some cases, cause and effect will coincide, as in the negligent operation of a motor vehicle. Such is not the case, however, if the cause of the auto accident was the negligent design of the vehicle by the auto manufacturer or negligence by a garage in adjusting the brakes of the vehicle. In these cases, the insured’s negligence could antedate the injury-causing accident by months or even years.

A similar lag in time between negligent conduct and resulting injuries often occurs in product liability cases. For instance, in Whittaker Corp. v. Allianz Underwriters, 14 Cal. Rptr. 2d 659 (1992), a soft drink producer was sued for injuries resulting from exploding containers. Ruling that the cause of these injuries was the insured’s decision to change the process by which its bottles were manufactured, the trial court held that coverage was triggered when the formula was changed. This ruling was overturned on appeal. While concurring that the insured’s decision to change its product formulation caused the ensuing products liability claims, the Second District held that the policies were triggered by the bodily injury. Since injuries did not occur until the manufactured products actually left the premises, which did not occur until the next policy year, the appeals court held that only those policies in effect when the explosions took place were triggered, not the policies that were in place when the process was changed.

This is not to say that the issue of trigger is entirely removed from determining how many policy limits may be implicated by a given claim or set of claims. A claim that is deemed to trigger coverage through either a manifestation or actual injury approach generally is more likely to tap into only a single policy limit. Conversely, those jurisdictions that follow a continuous injury or injury in fact approach are more likely to permit an insured to recover a separate occurrence limit in each policy year during which injury occurs.

Policy Wordings and Occurrences Determinations

Indemnity Limits

The limits of the insurer’s indemnity obligation generally are set forth in the policy declarations. For instance, a policy may provide that coverage is afforded for $1 million each occurrence, $2 million in the general aggregate, and $1 million for the products-completed operations aggregate. These terms are significant because the CGL form’s definition of occurrence states that:

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

Some policies contain event or happening language that is more commonly found in reinsurance agreements and permits the aggregation of a series of related acts. For example, in Owens Illinois, Inc. v. United Insurance Co., 625 A.2d 1 (N.J. Super. 1993) reversed on other grounds, 650 A.2d 974 (N.J. 1994), policy provisions treating “a series of interrelated acts” were considered to be one “occurrence.”

The insurer’s obligation to pay damages on account of a covered occurrence is capped by the amount stated in the declarations. In the event that other claims are made against the insured, the insurer may owe a further policy limit (and an accompanying duty to defend) unless the additional claims arise out of the same occurrence for which the insurer has paid its limit. Some also may be subject to a policy aggregate or some other indemnity limitation.

Definition of Occurrence

CGL policies have typically provided that “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.” For the most part, courts have ruled that “conditions” are those that physically cause injury, not negligent acts or omissions that merely set the stage for such losses to occur, such as an insured’s failure to warn about a dangerous condition in its products or a failure to prevent injuries from occurring on its premises.

In Koikos v. Travelers Insurance Company, 849 So.2d 263 (Fla. 2003), the Florida Supreme Court held that a restaurant’s failure to prevent a gang shoot-out that injured several patrons had more than a single “cause.” The court refused to find that the “continuous and repeated exposure to conditions” language was relevant in considering the acts or omissions of the policyholder for which it was deemed to be legally responsible, ruling instead that this language was intended to broaden the scope of earlier coverage so as to clearly afford coverage for incidents in which injuries resulted from environmental exposures or other conditions that occurred over an extended period of time:

We conclude that the inclusion of the “continuous or repeated exposure” language does not restrict the definition of “occurrence” but rather expands it by including ongoing and slowly developing injuries, such as those in the field of toxic torts. Therefore, we reject Travelers’ reliance on the “continuous or repeated exposure” language as a basis for concluding that Koikos’ negligent failure to provide security constitutes a single occurrence under the terms of the policy. The victims were not “exposed” to the negligent failure to provide security. If the victims were “exposed” to anything, it was the bullets fired from the intruder’s gun.

In London Market Insurers v. Superior Court of Los Angeles County, 146 Cal. App. 4th 648; 53 Cal. Rptr. 3d 154 (2d Dist. 2007), the California Court of Appeal rejected a primary insurer’s contention that a product manufacturer’s sale of asbestos products fell within the “continuous or repeated exposure to conditions” language. The court concluded that the failure to protect claimants from asbestos was not a “condition,” but the condition was, rather, the asbestos fibers to which the underlying claimants were exposed. See also Fina, Inc. v. Travelers Ind. Co., 184 F.Supp.2d 547 (N.D. Tex. 2002)(rejecting Travelers’ argument that insured’s failure to protect its employees was a “continuous or repeated exposure to conditions”).

The First Department of the Appellate Division of the New York Supreme Court ruled in Ramirez v. Allstate Ins. Co., 2006 NY Slip Op 01356 (App. Div. 2006), that separate claims brought by two infant children who were exposed to lead dust inside the insured’s apartment building were subject to the same occurrence limit as presenting claims for bodily injury “resulting from continuous or repeated exposure to the same general conditions.” See also, Accord Allstate Ins. Co. v. Bonn, 2010 U.S. Dist. LEXIS 43178 (D.R.I. May 3, 2010)(the children’s exposure to lead paint in the insured’s apartment share the same cause as arising out of continuous or repeated exposure to the same conditions, namely the presence of lead in the premises).

The court ruled in Western World Ins. Co. v. Wilkie, 5:06-cv-64 (E.D.N.C. November 1, 2007) that injuries suffered by various children who came into contact with fecal matter while petting animals at the insured’s petting zoo over the course of a week arose out of exposure to the same general harmful conditions (the presence of e. coli at the zoo).

Despite an insurer’s argument that the building complex had suffered water damage through various different means and therefore involved multiple “occurrences,” Division One of the Washington Court of Appeals ruled in Certain Underwriters at Lloyd’s, London v. Valiant Ins. Co., 155 Wash. App. 469, 229 P.3d 930 (2010) that the gradual intrusion of water into the building over a five year period involved “continued or repeated exposure to substantially similar conditions” and was therefore only the product of a single “occurrence.” Ongoing discharges of dust from the insured’s recycling operations were held to involve “continuous exposure or repeated exposure to substantially the same general harmful conditions” despite the plaintiff’s argument in Stonelight Tile, Inc. v. California Insurance Guaranty Association, 58 Cal. Rptr. 3d 74, 150 Cal. App. 4th 19 (2007) that there were different types of exposure so as to warrant a finding of separate “occurrences.”

Rejecting arguments by the policyholder and excess insurers that each individual asbestos claimant is a new occurrence as well as the argument of the primary insurer that all of the underlying asbestos claims were a single occurrence, a federal district court ruled in LSJ Technologies, Inc. v. U.S. Fire Ins. Co., No. 2:07-CV-399 (E.D. Tex. September 2, 2010) that individual claimants could be grouped together as one occurrence if they were all exposed to asbestos-containing gaskets at the same time and location so as to have been exposed to “substantially the same general conditions.”

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