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.

In many respects the coverage A exclusions on the current CGL forms are the same as the exclusions found on the 1973 comprehensive general liability policy, as amended by the broad form liability endorsement. For example, the broad form endorsement's liberalization of the usual watercraft exclusion to allow coverage for nonowned boats under 26 feet in length is written into the current watercraft exclusion. On the other hand, some broad form provisions, although incorporated into the current CGL exclusions, have been amended either to clarify or change coverage. Each of the exclusions contained in the CGL coverage forms is discussed below. Naturally, additional exclusions may be added to a CGL policy by endorsement, as underwriting considerations may require.

Analysis

The important point here is that the expected or intended part of the exclusion has to be seen from the standpoint of the insured; he or she is the entity being insured under the CGL form and so, his or her intention is the key. Now, some courts have made a distinction between an intentional act and an intentional or expected result, holding that an intentional act does not necessarily bring this exclusion into play. And, there are other factors that can affect the applicability of this exclusion, such as the age of the injured person (a sexual assault on a minor is deemed in many jurisdictions to be an automatic intentional injury); intoxication; mental capacity; and forseeability. However, the bottom line is that the action or the inaction that causes the injury or damage has to be looked at from the standpoint of the insured.

The exception to the exclusion parallels the extended bodily injury coverage of the broad form liability endorsement. Note that the exception, in either form, applies only to bodily injury and not to property damage. However, some courts have held that even without such an exception the intentional injury exclusion does not apply to injury caused by the insured's acts in self-defense. So, depending on the law in a particular state, there may also be coverage under the current CGL coverage forms for property damage resulting from the use of reasonable force to protect persons or property.

Analysis

Contractual coverage, under the current CGL forms is, in effect, defined by an exclusion, exclusion (b), which applies 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”; however, the actual coverage comes into play through exceptions to this exclusion. The exclusion is specifically stated not to apply to: (1) liability assumed under an “insured contract” as defined in the policy or (2) liability the insured would have in the absence of the contract or agreement. And, this contractual liability coverage is concerned with liability that is assumed and has no applicability to the liability that results from a breach of contract; the coverage under contractual liability is for those specific obligations of the insured wherein the insured has contracted to be responsible for the legal liability of another entity.

The contractual coverage here is comparable in most respects to the blanket contractual liability coverage provided in the broad form liability endorsement. However, a major difference is that contractual liability coverage under the current CGL forms is subject to a separate exclusion of liability for the ownership, maintenance, or use of automobiles. (See the discussion of exclusion (g) below.) In contrast, the blanket contractual liability coverage provided under the broad form liability endorsement specifically deleted the automobile exclusion in the 1973 policy. So, while the broad form endorsement's version of contractual liability insurance covers liability assumed for the ownership, maintenance, or use of automobiles, the current CGL forms do not. To fill this gap, ISO amended the business auto coverage form to provide insurance for certain—but not all—types of agreements in which the insured assumes automobile liability. See Business Auto Definitions and Business Auto Form—Liability Coverage for more information on this.

There has been a question in some circles over whether the contractual coverage offered under the CGL form extends defense cost coverage to the entity whose liability has been assumed by the insured through an insured contract. Going further, if the defense costs are covered, are they included within the limits of insurance for bodily injury and property damage or are the costs in addition to such limits, like supplementary payments?

The current CGL form, in discussing liability for damages assumed under an insured contract, states that “reasonable attorney fees and necessary litigation expenses incurred by or for a party other than an insured are deemed to be damages”. This would seem to answer the question about defense cost coverage in the affirmative since the word “damages” is the key word. The exception to the contractual liability exclusion states that the exclusion does not apply to liability for damages assumed under an insured contract; therefore, if the defense costs for the entity other than the insured are damages, the CGL form will cover them. There are some conditions to be met before the defense costs are deemed to be damages, namely, liability for the defense costs has to be assumed in the insured contract (just as the liability has to be assumed), and the defense costs have to be for defense against alleged damages that are covered by the insured's policy.

As for the issue of whether the defense costs are included within the limits of insurance, one has to look at the supplementary payments clauses on the CGL form. In those clauses, the insurer declares that payments for attorneys' fees and litigation expenses for a party other than the insured will not reduce the limits of insurance. Therefore, defense costs for entities whose liability has been assumed by the insured through an insured contract are not included within the limits of insurance. Such defense costs are treated the same as those costs for the insured; they are supplementary payments and do not reduce the limits of insurance.

Analysis

This exclusion is substantially the same as the 1973 liquor liability exclusion, except that it does not apply to an owner or lessor of premises used for a liquor business if the owner or lessor is not itself engaged in a liquor business. For example, if the insured owns a building that is rented by A-1 Liquor Sales, and the liquor store sells alcohol to a minor who promptly drives off and crashes into somebody causing injuries, the owner-insured's CGL form will respond to any claim made against the owner-insured based on his or her owning the building that housed the negligent liquor store. The liquor liability exposure itself is discussed in another section of this tab.

Analysis

This exclusion simply states the obvious: the CGL form is not meant to cover a workers compensation claim.

Analysis

The purpose of this exclusion is to complement the workers comp exclusion and to preclude CGL coverage for bodily injury to employees of the insured, an exposure that is handled under the workers compensation and employers liability insurance policy (WC 00 00 00 A) or other forms of employment related insurance.

The CGL forms consider leased employees to be the same as regular employees for the purpose of being excluded from coverage for their bodily injuries arising out of employment. To accomplish this, ISO made “employee” a defined term that includes leased workers and has the phrase “performing duties related to the conduct of the insured's business” in the exclusion.

There are more points to make about the employer's liability exclusion. First, it does not apply to liability assumed under an insured contract as defined on the CGL forms. Second, the employer's liability exclusion applies whether the insured may be liable as an employer or in any other capacity, such as a producer of goods. Third, the exclusion applies to any obligation on the part of the insured to share damages with or repay someone else who must pay damages because of the injury. These items a part of the exclusive remedy concept that is meant to draw a definite line between workers compensation coverage and general liability coverage. For more information on this concept, see Workers Compensation and Exclusive Remedy.

Analysis

The 1973 general liability policy, as originally worded, excluded bodily injury or property damage resulting from pollution or contamination but excepted from the exclusion, and therefore insured, pollution incidents that were sudden and accidental. This exclusion has been interpreted by some courts to include a wide range of accidents, wider apparently than the scope of coverage that insurers ever intended to provide for pollution liability. As a result of these interpretations, as well as the expanded potential for pollution liability under the Comprehensive Environmental Response Compensation and Liability Act of 1980, ISO has issued an almost absolute pollution exclusion.

Pollution liability that can be inferred to be covered is that resulting from certain off-premises exposures or within the products-completed operations hazard. For an example of an off-premises exposure that could be covered, say that the named insured temporarily has barrels of industrial chemicals (but not waste) at a location that is not owned, rented, or occupied by the named insured. While at the location, the barrels are hit by a truck, causing a toxic spill that damages property of an adjacent business. If the named insured is sued, the pollution exclusion should not stand in the way of coverage for the named insured. For an example of a products-completed operations loss that could be covered, say that the containers in the previous example were the product of the named insured and had been purchased by the business on whose premises the containers were being used to store hazardous chemicals. If the containers leak because of some manufacturing defect, causing a toxic spill, and the business sues the named insured for damage to its property, the named insured should be covered under its CGL form.

The second part of the pollution exclusion dealing with clean up costs is meant to clarify the point that the CGL coverage forms are not to apply to clean up costs imposed by various government acts or regulations, such as the Superfund Amendment and Reauthorization Act (SARA) of 1986; or to costs as a result of non-governmental bodies, such as a bank, demanding that the insured test for and clean up any pollutants, for example, prior to the sale of a particular site.

There are several exceptions to the pollution exclusion that should be noted.

That part of the exclusion that deals with pollutants that seep from or escape from any premises, site or location owned or occupied by any insured (f.1.a) does not apply to BI if sustained within a building and caused by smoke, vapor, fumes, or soot from equipment used to heat that building. As an example, if carbon monoxide fumes seep from a furnace and injure customers or visitors in the insured's building, and the injured parties (or their estates) file a lawsuit against the insured, the pollution exclusion on the CGL form will not prevent coverage for the insured. Incidentally, this coverage was available to the insured through endorsement CG 00 54, which is now withdrawn from use.

Another exception to this part of the exclusion is for BI or PD for which the insured may be held liable if he or she is a contractor and the owner of the site or location where the insured-contractor is performing operations is added to the insured's CGL form as an additional insured. Note that the exclusion itself prevents coverage for BI or PD arising out of the release or escape of pollutants at a site or location owned or occupied by any insured. If the owner (or lessee) of the site where the insured-contractor was working were to be made an additional insured on the contractor's CGL form (which is a very normal business practice), and a pollution spill occurred, the insurer could deny coverage, saying that pollutants were released from a site owned by an insured. However, with this exception for insured-contractors, the insured now has coverage for claims from such a loss. Remember, the insured has to be a contractor, the owner of the work site has to be an additional insured on the contractor's CGL form, and the site must not be and must have never been owned or occupied by or rented or loaned to any insured other than the additional insured owner (or lessee).

The final exception to this part of the pollution exclusion is for BI or PD arising out of heat, smoke, or fumes from a hostile fire. As an example, if the insured's building caught on fire and smoke billowing from the building caused damage to a neighbor's building or injury to someone working in that other building, the insured's CGL form would apply to a subsequent PD or BI claim.

The other part of the pollution exclusion that has exceptions is that part dealing with BI or PD escaping from any site or location on which any insured is performing operations (f.1.d).

One of the exceptions is for bodily injury or property damage arising out of the escape of fuels, lubricants, or other operating fluids that are needed to perform the normal electrical, hydraulic, or mechanical functions of mobile equipment. For example, if the insured has a bulldozer on a job site and gasoline leaks from the bulldozer onto the location where the insured is performing his operations, any claim for property damage will be handled under the insured's CGL form. This simply complements the coverage that is given to the insured under the CGL form for damages done by his or her mobile equipment. Of course, the exception does not apply if the pollutants are intentionally discharged or released.

Another exception is for BI or PD sustained within a building and caused by the release of gases or fumes from materials brought into that building in connection with operations performed by the insured. For example, if the insured is laying a floor and brings a sealant for the floor tiles into the building and the sealant's fumes make the building's workers sick, the CGL form will apply to subsequent claims against the insured.

The final exception is for BI or PD arising out of heat, smoke, or fumes from a hostile fire—the same exception as described previously.

The clean up costs part of the exclusion also deserves some mention.

Note that the exclusion now applies to any statutory or regulatory requirement that the insured clean up pollutants as well as any request, demand or order. The point here is that even if no one makes a demand or orders the insured to clean up a pollutant spill, and the insured does it anyway just because there is a law on the books that the insured (as a contractor or other responsible party) is required to clean up the spill, the CGL form will not pay the clean up costs. There is no coverage for clean up costs whether those costs are incurred as a result of an active demand for a clean up on the part of someone other than the insured, or as a result of the insured wanting to be pro-active, taking the initiative and cleaning up, with the knowledge that there is a statute or regulation that would force him or her to clean up the spill anyway.

The current CGL forms now have a paragraph declaring that the clean up costs exclusion does not apply to liability for damages because of property damage that the insured would have in the absence of any request or demand or order. Sometimes there is a thin line between paying for property damage for which the insured is liable and clean up efforts. Now, if the insured is liable for PD and the other parts of the pollution exclusion do not prevent coverage under the CGL form, the insured will have coverage for the PD liability and the insurer will not use the clean up costs section of the exclusion to deny any payments for fixing the property damage. The distinction between paying for property damage and paying clean up costs will still have to be made on a case-by-case basis, but there should no longer be any confusion about whether the clean up costs ban prevents payment for property damage; property damage costs will be paid.

Because of the broadness of the current pollution exclusion, it is inadvisable for many insureds to be without some form of extra protection, even insureds whose chances of becoming liable for a pollution incident are remote. There are two ways to provide the extra protection. Insureds without a substantial pollution exposure can purchase (if the underwriter is willing to offer it) the pollution liability coverage extension endorsement (CG 04 22). The endorsement deletes the first part of the pollution exclusion but does not affect the second part, which excludes governmentally ordered cleanup costs. The other approach, more likely to be used for insureds with a pollution liability exposure, is a separate pollution liability coverage part. ISO has prepared two different forms for this purpose, both on a claims-made basis. One of the forms, designated CG 00 39, covers bodily injury and property damage arising out of pollution incidents, as well as cleanup costs; the other form, designated limited form CG 00 40, does not include cleanup costs coverage. See Pollution Liability Coverage Forms for more information on these forms.

Analysis

This exclusion applies to entrustment of aircraft, autos, or watercraft to others, to avoid any possibility that claims for negligent entrustment of an automobile, aircraft, or watercraft would be covered under the policy; some courts have held premises and operations liability policies to apply to such claims in the past.

And, other court decisions have held that the CGL form applies to a claim against the insured for injuries arising out of an auto accident because the insured had hired or trained the driver of the car. These courts made a distinction between auto liability and general liability based on claims of negligent supervision or negligent hiring, and so, brought the CGL form into what should have been an auto liability claim. In reaction to such legal decisions, the CGL form now has in its auto exclusion a clause that has the exclusion applying to negligent supervision, hiring, or training claims arising out of an occurrence involving an auto, waterraft, or aircraft.

An exception to the auto exclusion states that bodily injury or property damage arising out of the operation of any of the equipment listed in paragraph f.(2) or f.(3) of the definition of mobile equipment is not subject to the exclusion. In other words, operation of the equipment attached to certain self-propelled vehicles is not excluded here even though operation of the vehicle is excluded. If, for example, a cherry picker attached to a truck were being used to cut down a tree, there would be coverage for injury to a pedestrian struck by the cherry picker as it descends from the top of the tree. However, there would be no CGL coverage if the vehicle to which the cherry picker is attached hit a pedestrian while proceeding to the next job site.

Exception (4) has important implications because of its omission of liability assumed under an insured contract for the ownership, maintenance, or use of autos. This omission emphasizes the point that the current CGL forms do not cover liability arising under automobile agreements, such as a car rental contract. Such contracts often include a hold harmless agreement whereby the renter (the insured under the CGL form) agrees to assume the liability of the rental company should an auto accident occur and a subsequent claim or lawsuit result. Exclusion (g) is declaring that, even if the car rental contract pertains to the business of the named insured, the CGL forms will not provide coverage. The business auto coverage form is the proper way to handle this type of exposure especially since ISO has written the business auto coverage form to provide insurance for insured contracts which include “that part of any contract or agreement entered into, as part of your business, pertaining to the rental or lease, by you or any of your employees, of any auto”.

It should be noted that, because the broad form liability endorsement's contractual coverage as used with the 1973 general liability policy does not exclude such auto agreements, some insureds may have come to rely on their general liability insurance to cover such assumptions of liability; since this liability is clearly not covered under the current CGL forms, insureds should be made aware of the fact.

The term “loading or unloading” as used in exclusion (g) is defined on the coverage forms. The main point of the definition of loading and unloading is that there is no coverage under the CGL forms for injury or damage arising out of the transportation of property. And, in order to correspond with the wording on the business auto form and the truckers form, and to attempt to clarify just which form would apply to a loss, the definition goes on to include the handling of property for movement into or from an auto, unless the movement is by means of a mechanical device, such as a forklift. As an example: the insured is loading property by means of a forklift onto a truck; the property falls off the forklift and injures a passerby; the CGL coverage form would handle a resulting claim. On the other hand, if the insured is loading the property into a business auto with the aid of a hand truck and the property falls off the hand truck and injures a passerby, the business auto form will apply to the resulting claim.

Analysis

The second clause of the exclusion is so worded to clarify that the CGL forms do provide coverage for liability arising from mobile equipment used just to prepare for such things as a prearranged race, as opposed to coverage being excluded for the actual mobile equipment engaging in or preparing to engage in such an event. To illustrate: if a piece of mobile equipment like a tractor is being prepared for a race at a county fair, the CGL form would not provide coverage if someone is injured by that tractor. On the other hand, if a particular piece of mobile equipment is being used to prepare the tractor for its later use in a race, and someone is injured through the use of that particular equipment, the CGL form would apply to a resulting claim.

Incidentally, clause (1) of exclusion (h) is ordinarily covered by automobile liability insurance. Clause (2) is an uncommon and especially hazardous exposure that must usually be insured on a specialty basis.

Analysis

For more information on the war exclusion clause, see War Exclusion Clause.

Analysis

Exclusion (j) contains six parts, each of which could be viewed as a separate exclusion. These exclusions are modeled after the care, custody, or control and alienated premises exclusions of the 1973 general liability policy and certain exclusions from broad form property damage (BFPD) coverage.

Clause (1) of the exclusion parallels a similar exclusion in the 1973 policy, making it clear that the named insured cannot rely upon its liability insurance to cover damage to its own property, whether real property or personal property. Moreover, if the named insured has responsibility for damage to property it rents or occupies, it cannot rely on its liability insurance for that responsibility, but must purchase the appropriate form of property insurance.

The current CGL form has added clarifying language to this clause to emphasize the point that the CGL form is not meant to pay for repair or maintenance costs for the named insured's own property. As an example, if a third party wanted the named insured to repair a certain piece of the named insured's property in order to prevent damage to the third party's property, some may see that as a property damage liability claim against the named insured. This exclusion would prevent the named insured's CGL form from paying for the repair work.

Clause (2) parallels the 1973 general liability policy exclusion of property damage to premises alienated by the named insured. Besides using language more easily understood by laymen, this exclusion also contains an important exception: the exclusion does not apply if the premises were built by or on behalf of the named insured and were never occupied, rented, or held for rental by the named insured. This means that contractors who build on speculation will have the same extent of coverage for their work as contractors who build without ever actually owning the property. In the past, some insurers have used the alienated premises exclusion to deny completed operations coverage for speculative builders under circumstances that would otherwise have been covered by broad form property damage (BFPD) coverage. The exception to the exclusion should avoid this controversy under the current coverage forms.

Clause (3) of exclusion (j) does not have an exact counterpart in either the 1973 policy or BFPD coverage. While “property loaned to you” will in many cases also be excluded by clause (1) or (4) of exclusion (j), the specific language of clause (3) should tie up any loose ends.

Clause (4) is a more up to date version of the usual care, custody, or control exclusion in that this current version applies only to personal property. The reason for the modification is that real property is instead subject to other, less strict exclusions that parallel BFPD exclusions.

The wording of this part of exclusion (j) should be noted not just for the specification of personal property as opposed to any type of property, but also for the use of the term “the insured” as opposed to “your” (the named insured) or “an insured”. By using “the insured”, the exclusion on the CGL forms applies to the particular insured holding the property, but not to other insureds. If the term “your” were used (as it was in previous CGL forms), the exclusion could properly be said to apply only to the named insured. If the term “an insured” were used, the exclusion would apply to any insured deemed as such on the policy. This latter term, then, could be seen as an omnibus term, denying coverage to any and all insureds regardless of which insured or how many insureds have custody or control of the property in question at the time of loss.

Clause (5) of exclusion (j) is one of the exclusions derived from BFPD coverage. To illustrate the effect of this exclusion, say that a plumbing subcontractor working for a home builder accidentally starts one of the builder's projects on fire while soldering copper pipes, and the entire structure is burned down. If the owner of the house sues the builder for the loss, the exclusion in question will apply only to “that particular part” of the structure on which the plumber was working. Thus, the named insured would be covered (on an excess basis over any builders' risk coverage on the work) for damage to all parts of the building other than the plumbing and all parts of the plumbing system other than the particular part being worked on at the time of the loss.

The coverage forms do not define “that particular part,” and so disputes over its meaning seem as likely here as they have been under BFPD provisions. However, in the final analysis, the use of the word “particular” indicates that the exclusion should be applied narrowly. In the example above, the exclusion should then apply only to the two portions of pipe being soldered together; the damage to the rest of the plumbing system should not be excluded.

Clause (6) of the exclusion is derived from the so-called “faulty workmanship” exclusion found in BFPD provisions. However, it differs from the BFPD exclusion in that the current version contains an exception stating that it does not apply to property damage included in the products-completed operations hazard. This exception should avoid disputes, sometimes arising in connection with BFPD claims, over whether the faulty workmanship exclusion applies to completed work. As will be discussed later, exclusion (l) of the CGL coverage forms is the exclusion that addresses coverage for property damage to completed work performed by or on behalf of the named insured.

Following the six parts of exclusion (j) are exceptions to various parts of the exclusion. Two of these exceptions, those relating to clauses (2) and (6), were discussed earlier. Another exception states that paragraphs (3) through (6) do not apply to liability assumed under a sidetrack agreement. This exception parallels a similar one found in the 1973 policy and BFPD endorsement. Finally, there is the exception to paragraphs (1), (3) and (4) for property damage to premises rented to the named insured for a period of 7 or fewer consecutive days. This exception takes note of a possible gray area in coverage and comes down in favor of coverage. Previous CGL forms had given rise to a question of whether the exclusions for PD to property rented or occupied by the named insured and for PD to personal property in the care, custody or control of the insured would prevent coverage for the businessman who damaged a hotel room he was renting while on a business trip. Now, it is clear that if the insured rents a room for a period of 7 or fewer consecutive days (for example, a hotel room on a business trip), and the insured negligently damages the room and its contents, the CGL form will apply to a subsequent claim.

If the insured is liable for damage by fire to premises rented to him or which he is temporarily occupying, that is another item. Such liability is not handled by the exception discussed in the previous paragraph, but in the fire legal liability coverage that the insured has under the terms of the CGL form. Fire damage coverage is discussed at the end of this article.

Exclusion (j) does not, it should be noted, have an equivalent of the 1973 policy's exception relating to property in the insured's care, custody, or control that is damaged by elevators on the named insured's premises. If the named insured under the current CGL coverage form has this exposure, an appropriate form of property insurance should be purchased.

Analysis

This exclusion focuses on and has meaning through the definition of “your product”. Basically, if the named insured's product (as defined on the CGL form) suffers property damage, the named insured must look to sources of recovery other than the named insured's own CGL form.

“Your product” is clearly defined as not applying to real property. The definition of the named insured's product under the 1973 general liability policy did not address this question and as a result some insurers used the injury-to-products exclusion to deny coverage for losses to real property that would otherwise have been covered by the BFPD coverage for completed operations. The current clarification should avoid that problem.

“Your product” is defined as including goods or products manufactured, sold, handled, distributed, or disposed of by “a person or organization whose business or assets you have acquired.” While such coverage might be merely inferred from the broad form general liability endorsement's automatic coverage for newly acquired organizations, it is perfectly clear under the current coverage forms.

Analysis

There are a few points to discuss here. The extent of this exclusion depends on the meaning of the words “your work” and “products-completed operations hazard”. The definitions are discussed in another section of this tab; see Commercial General Liability Definitions. Also, note that this exclusion applies only to work within the products-completed operations hazard. Thus, exclusion (l) has no bearing on operations in progress. And, the exclusion does not apply if the work was done by a subcontractor.

An example of how exclusion (l) could apply is as follows. The named insured is a general contractor who has built an apartment house with the services of numerous subcontractors. After the building is completed and put to its intended use, a defect in the building's wiring (put in by a subcontractor) causes the building, including work of the general contractor and other subcontractors, to sustain substantial fire damage. The named insured is sued by the building's owner. Although the named insured's policy excludes damage to “your work” arising out of it or any part of it, the second part of exclusion (l) makes it clear that the exclusion does not apply to the claim. That is because the work out of which the damage arose was performed on the named insured's behalf by a subcontractor. Note that clause (6) of exclusion (j) also would not apply to the loss, since clause (6) is stated not to apply to property damage within the products-completed operations hazard. Thus, barring the application of some other exclusion or adverse policy condition, the loss should be covered, including the part out of which the damage arose.

Analysis

Exclusion (m) is a substantially reworked version of the so-called “failure to perform” exclusion from the 1973 general liability policy; because the current version uses the term “impaired property,” it may come to be known by that name. The exclusion is aimed at the same types of losses as the 1973 version, but ISO has attempted to eliminate some defects in the prior exclusion that allowed coverage in cases where none was intended.

Because the exclusion begins by excluding impaired property, that term must be understood. (See Commercial General Liability Definitions for more detailed information on that term.) Impaired property, by definition, is restricted to tangible property that, on the one hand, cannot be used or is less useful, but, on the other hand, can be restored to use. For example, assume that a product made by the named insured is incorporated into another product made by another manufacturer. If the named insured's product is defective or deficient and this results in the other product's being made less useful or totally unusable, the first part of the definition of impaired property is met. Then, if that other product can be restored to use by repairing or replacing the named insured's product, the definition is satisfied and exclusion (m) applies. Both parts of the definition have to be present. If the property has been damaged to the extent that it is not only unusable but also cannot be repaired or replaced, the impaired property exclusion does not apply.

Clause (2) of exclusion (m) speaks of a delay or failure by the insured to perform a contract in accordance with its terms. For example, if the insured contracted with a party to deliver oil for engines and then fails to deliver so that that party can not use the engines, the insured will not have coverage due to exclusion (m) for any resulting claim for loss of use of the engines, because the engines can be restored to use by fulfilling the terms of the contract.

The exception to exclusion (m) states that the exclusion does not apply to loss of use of other property arising out of sudden and accidental physical injury to the named insured's product or work after it has been put to its intended use. For example, if an apartment building became untenantable after being occupied due to an explosion of a steam boiler that was defectively installed by the named insured, the exclusion would not apply to the owner's claim for resulting loss of use of the building.

Unlike the failure-to-perform exclusion of the 1973 policy, exclusion (m) makes no mention of warranties or representations of the named insured. The absence of such terminology should avoid the types of court decisions that have held the failure to perform exclusion to apply only to claims based on contractual grounds and not to claims alleging negligence.

Analysis

Exclusion (n) is the current CGL forms' counterpart to the 1973 “sistership liability” exclusion. While the intent behind the exclusion has remained the same, the current version has been reworded to be more explicit in some respects. For example, the reference to any loss, cost or expense incurred by you or others makes it clear that such expenses are excluded whether the named insured's product or work is withdrawn by the named insured or by someone else, such as a governmental agency or a distributor or seller of the named insured's product.

Analysis

This is meant to draw a distinct line between coverage A and coverage B. Coverage B (personal and advertising injury liability) has usually been associated with other than bodily injury under the terms of the CGL coverage forms. However, some judicial decisions have blurred the distinction between bodily injury and other than bodily injury, by equating mental distress or emotional injury with bodily injury. And, a question has arisen whether someone who is physically hurt (for example, a broken arm) due to the personal injury offense of false arrest or detention can seek coverage under the CGL form for both personal injury coverage (B) and bodily injury coverage (A). This exclusion declares that such bodily injury is not to be covered under coverage A. This exclusion's intent is reinforced by the definition of “personal and advertising injury” which now includes consequential bodily injury; see Commercial General Liability Definitions.

Analysis

This wording provides what the CGL coverage forms call fire damage coverage, which is the same thing as fire legal liability coverage. Note that exclusions (a) and (b) are applicable to this type of coverage. Exclusion (a) applies to expected or intended injury or damage and would, for example, eliminate fire damage coverage in cases of arson. Exclusion (b) is the contractual liability exclusion, which has caused some misunderstandings in connection with fire legal liability coverage. A question that often arises is if this contractual exclusion applies in the situation where an insured as a tenant agrees in his lease to be responsible for any fire damage he might cause to the leased premises. There are two points to be made on this issue.

First, the language of the exclusion of contractual liability coverage is concerned only with liability that is assumed (that is, liability incurred when one promises to indemnify or hold harmless another) and does not deal with liability that results from a breach of contract. The language in exclusion (b) is for those specific obligations of the insured wherein the insured has contracted to be responsible for the legal liability of another entity. If the insured has agreed to be responsible to his landlord for any fire damage, he has not assumed the landlord's liability to another party; he has agreed to be responsible for fire damage he has caused to the landlord's premises or building. So the contractual liability exclusion language is not relevant to the situation where an insured tenant agrees to pay for fire damage to leased premises.

Second, one of the exceptions to exclusion (b) states that the exclusion does not apply to liability for damages that the insured would have in the absence of a contract or agreement. Therefore, if the insured tenant through his negligence causes fire damage to premises he rents, exclusion (b) does not apply since the insured would be liable for the damage regardless of what the lease says and regardless of whether a lease even exists.

In summary then, an insured tenant need not be concerned that exclusion (b) is going to affect the fire legal liability that he has agreed to in a lease. The language of the exclusion and the intent of the coverage form both present firm support for such coverage.