Topics covered:

Insuring agreement
Exclusions
Exclusion A—expected or intended injury
Exclusion B—contractual liability
Exclusion C—liquor liability
Exclusion D—workers compensation and similar laws
Exclusion E—employer's liability
Exclusion F—pollution
Exclusion G—aircraft, auto, watercraft
Exclusion H—mobile equipment
Exclusion I—war
Exclusion J—damage to property
Exclusion K—damage to your product
Exclusion L—damage to your work
Exclusion M—damage to impaired property or property not physically injured
Exclusion N—recall of products, work, or impaired property
Exclusion O—personal and advertising injury
Fire damage coverage

Insuring Agreement

a.     We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result. But:

(1)     The amount we will pay for damages is limited as described in Section III—LIMITS OF INSURANCE; and

(2)     Our right and duty to defend ends when we have used up the applicable limit of insurance in the payment of judgments or settlements under Coverages A or B or medical expenses under Coverage C.

No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under SUPPLEMENTARY PAYMENTS—COVERAGES A AND B.

b.     This insurance applies to “bodily injury” and “property damage” only if:

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

(2)     The “bodily injury” or “property damage” occurs during the policy period; and

(3)     Prior to the policy period, no insured listed under Paragraph 1. of Section II—Who Is An Insured and no “employee” authorized by you to give or receive notice of an “occurrence” or claim, knew that the “bodily injury” or “property damage” had occurred, in whole or in part. If such a listed insured or authorized “employee” knew, prior to the policy period, that the “bodily injury” or “property damage” occurred, then any continuation, change, or resumption of such “bodily injury” or “property damage” during or after the policy period will be deemed to have been known prior to the policy period.

c.     ”Bodily injury” or “property damage” which occurs during the policy period and was not, prior to the policy period, known to have occurred by any insured listed in Paragraph 1. of Section II—Who Is An Insured or any “employee” authorized by you to give or receive notice of an “occurrence” or claim, includes any continuation, change, or resumption of the “bodily injury” or “property damage” after the end of the policy period.

d.     ”Bodily injury” or “property damage” will be deemed to have been known to have occurred at the earliest time when any insured listed under Paragraph 1. of Section II—Who Is An Insured or any “employee” authorized by you to give or receive notice of an “occurrence” or claim:

(1)     Reports all, or any part, of the “bodily injury” or “property damage” to us or any other insurer;

(2)     Receives a written or verbal demand or claim for damages because of the “bodily injury” or “property damage”; or

(3)     Becomes aware by any other means that “bodily injury” or “property damage” has occurred or has begun to occur.

e.     Damages because of “bodily injury” include damages claimed by any person or organization for care, loss or services or death resulting at any time from the “bodily injury”.

Analysis

The opening sentence of the insuring agreement might cause alarm to some insurance buyers and their advisers. First, it does not retain the promise of the insuring agreement on the 1973 comprehensive general liability policy to pay “all sums which the insured shall become legally obligated to pay” (emphasis added). Second, it does not promise to pay these sums on behalf of the insured, raising the possibility that the current coverage forms are on an “indemnify” basis; that is, an insurer might not be required to pay until after the insured has paid the person making claim against the insured.

Alarm over either point is unfounded. The elimination of “all” is perhaps best compared to the elimination of “all” from the “all risks of physical loss” wording of property contracts. In both cases, the purpose is not to lessen the intended scope of coverage but to avoid creating unreasonable expectations among insureds that the coverage literally extends to all sums, regardless of policy exclusions and conditions.

On the second point, it is most unlikely that the coverage forms would be construed to be on an indemnify basis instead of pay on behalf of. The CGL 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 must have an obligation to pay.

The duty of the insurer to defend the insured is noted. This duty mentions defending the insured against any suit, which is a defined term that includes alternative dispute resolution proceedings as well as the traditional lawsuit. And, this brings up a question concerning letters, known as PRP letters, sent to insureds by a governmental environmental protection agency. These PRP letters designate the insured as a “potentially responsible party”, that is, a party that may be responsible for the clean up costs of a site contaminated by pollutants. In many instances, an insured will turn such letters over to the insurer and demand that the duty to defend clause in the CGL form be implemented; in turn, the insurer will reject the demand by stating that no suit seeking damages has been filed against the insured. Are PRP letters the equivalent of lawsuits, requiring the insurer to defend against a claim?

Putting aside any issue of coverage for a moment and concentrating just on the question of whether a PRP letter is a suit demanding a defense by the insurer, interested parties must look at court decisions to find an answer. Unfortunately, as is usual with many disputes over insurance policy interpretation, courts stand divided on the question. Examples of court decisions that have found PRP letters to be the same as lawsuits, triggering a duty to defend, are Aetna Casualty & Surety Company v. Pintlar Corp.,948 F.2d 1507 (1991); A.Y. McDonald Industries, Inc. v. Insurance Company of North America, 475 N.W.2d 607 (1991); and Michigan Millers Mutual Insurance Company v. Bronson Plating Co., 519 N.W.2d 864 (1994). Examples of court decisions on the other side of the fence are Ryan v. Royal Insurance Company, 916 F.2d 731 (1990); Patrons Oxford Mutual Insurance Company v. Marois, 573 A.2d 16 (1994); and City of Edgerton v. General Casualty Company, 517 N.W.2d 463 (1994).

The Ryan case (irrespective of the decision) presents an extensive and logical analysis of the matter, taking into consideration the arguments put forth by courts on both sides of the issue. The court in the Ryan case stated that the common thread running through the legal reasoning of decisions that held PRP letters to be lawsuits requiring defense under general liability policies and of those decisions that held the opposite was a search by the various courts for governmental agency conduct that delivered “some cognizable degree of coerciveness or adversariness” to the recipient of the PRP letter. The Ryan court stated that “the duty to defend must relate to the seriousness of purpose which characterizes the government role. If the government assumes an adversarial posture, making it clear that the force of the State will be promptly brought to bear in a way that threatens the insured with probable and imminent financial consequences, then the functional equivalent of a lawsuit may be in progress and the insured might reasonably expect the insurer to defend.”

In summary, then, a PRP letter may be a suit under the terms of a CGL coverage form, but this depends on the judicial interpretation of the wording in the letter. If the letter is deemed as threatening the recipient with probable governmental action, then it can be seen as requiring a defense; on the other hand, if the letter simply informs the insured of potential liability and invites voluntary action on the part of the insured, there is no corresponding duty to defend.

In the 1973 general liability policy, the insurer's duty to defend is stated to apply “even if any of the allegations of the suit are groundless, false, or fraudulent.” There is no such explicit statement in the current CGL forms regarding groundless, false, or fraudulent allegations. However, the forms do state that the insurer has “the right and the duty to defend any suit seeking those damages” (emphasis added). If “any” is given its literal meaning, the statement should encompass groundless, false, or fraudulent suits as well as legitimate ones. The absence of the prior wording should not be interpreted to mean that the insurer is relieved of the duty to defend groundless, false, or fraudulent suits against the insured. Of course, the complaint must contain allegations that are potentially within coverage. It is not necessary that all of the allegations come within the scope of coverage. It is generally recognized that if some part of the damages sought are not covered, the insurer still must defend, but it has no obligation to pay those damages that are not covered. And, the insurer reserves to itself the right to investigate and settle any claim or lawsuit. The insured does not have the right to prevent a settlement even if he or she does not like the terms.

The insuring agreement states that “the amount (the insurer) will pay for damages is limited as described in LIMITS OF INSURANCE (SECTION III).” A key part of this statement is that it addresses only damages. As in the 1973 general liability policy, all other covered costs in connection with a covered claim, including defense expenses, are payable in addition to policy limits.

The agreement notes that the insurer's “right and duty to defend end when (it) has used up the applicable limit of insurance in the payment of judgments or settlements under Coverages A or B or medical expenses under Coverage C.” As previously noted, the limits of the CGL forms (like those of the 1973 liability policy) apply only to damages; all other costs, including defense, are payable in addition. But, once the applicable limit has been paid, the duty to defend ceases. It is important to note that the limits have to be used up in the payment of judgments or settlements; the insurer's simply tendering the policy limits and walking away from the defense of the insured is not an acceptable way for the duty to defend to end.

The last part of the insuring agreement requires that the bodily injury or property damage must be caused by an occurrence that takes place in the coverage territory. Note that the term “occurrence” appears in both the occurrence and the claims-made versions of the current CGL coverage forms and is not to be confused with the occurrence trigger of form CG 00 01 10 01. It is simply a requirement that the bodily injury or property damage must be caused by an “occurrence,” which both forms define as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

The bodily injury or property damage must occur during the policy period. This requirement seems simple enough, but a case from California has resulted in the current CGL forms including several paragraphs on prior knowledge and its effect on liability coverage. The case is Montrose Chemical Corporation v. Admiral Insurance Company, 913 P.2d 878 ( Cal. 1995).

In that case, the California Supreme Court ruled that the known loss rule does not bar liability coverage for claims alleging continuous or progressive injury or damage as long as there remains uncertainty about damage or injury that may occur during the policy period and the imposition of liability upon the insured. The court decided that if a party can show that the insured may not have known about damage or injury that was occurring during the policy period arising out of a known event, the CGL form will apply to a liability claim even if the insured knew that the event caused damage or injury prior to the policy period. As an example, if the insured knew that its actions were causing BI or PD prior to the inception date of a policy, that BI or PD is not covered by the policy; but, if the BI or PD continues during the policy period and a case can be made that the insured did not know the BI or PD was continuing, liability coverage under the terms of the CGL form is not barred for that particular BI or PD.

The current CGL forms now state that if the insured, or an employee authorized to give or receive notice of an occurrence or claim, knew that the BI or PD had occurred prior to the beginning of the policy period, then any continuation of that BI or PD is deemed to have been known before the policy began. And, this prior knowledge means that the CGL forms will not apply to the BI or PD claims (due to the known occurrence) that arise after the inception of the policy. The known loss rule, which holds that insurance coverage is not applicable when a loss is known or is apparent before the inception date of the policy, is, in effect, written into and becomes part of the CGL coverage forms.

The prior knowledge clauses go on to describe three ways that an insured is presumed to know that BI or PD has occurred. The first is that any insured or any employee authorized by the named insured to give or receive notice of an occurrence or claim reports the BI or PD to the insurer. The second way is for one of these same individuals to receive a written or verbal demand or claim for damages. The third way describes the insured becoming aware by any other means that BI or PD has occurred or has begun to occur. This is a rather omnibus clause that would presumably include reading about a loss in the newspaper or receiving a PRP letter or any other method of communication.