cgl exclusions: navigating contractual liability, business...

CGL Exclusions: Navigating Contractual Liability, Business Risk, Third-Party Over, and Data Breach Exclusions Advocating Scope of the Exclusions From the Policyholder and Insurer Perspectives

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WEDNESDAY, APRIL 16, 2014

Presenting a live 90-minute webinar with interactive Q&A

Robert Friedman, Principal, Friedman, Palm Beach, Fla.

Robert S. Marshall, Partner, Nicolaides Fink Thorpe Michaelides Sullivan, Chicago

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CGL EXCLUSIONS: NAVIGATING CONTRACTUAL LIABILITY, BUSINESS

RISK, THIRD-PARTY OVER, AND DATA BREACH EXCLUSIONS

Strafford Publications April 16, 2014

Robert H. Friedman Friedman P.A. Palm Beach, FL

[email protected]

© Copyright 2014. Friedman P.A. All Rights Reserved. 6

TYPES OF COMMERCIAL LIABILITY COVERAGE

• Commercial General Liability

• Umbrella/Excess Liability

• Director’s & Officers

• Errors & Omissions (Professional Liability)

• Fiduciary/Employee Benefits (ERISA Liability)

• Worker’s Compensation/Employer’s Liability

• Employment Practices Liability

• Commercial Auto (Fleet Coverage)

• Cyberliability (Technology Liability)

• Pollution (Environmental Impairment Liability)


CGL POLICY OVERVIEW

• Declarations Page

• Insuring Agreement

• Definitions

• Conditions

• Exclusions

• Endorsements


RULES GOVERNING EXCLUSIONS

• Insurer Has Burden to Prove Applicability

• Policyholder Must Prove Exceptions

• When is a Policy Limitation an Exclusion?

• Summary Judgment and Issues of Fact

• Waiver/Estoppel


CONTRACTUAL LIABILITY EXCLUSION


LIABILITY INDEPENDENT OF CONTRACT

Majority View: Claims For Defective Work Not Barred by Contractual Liability Exclusion

Ewing Construction Co., Inc. v. Amerisure Ins. Co., No. 12-0661 (Tex. Jan. 17, 2014)

See also Olympic, Inc. v. Providence Washington Ins. Co., 648 P.2d 1008 (Alaska 1982)


LIABILITY INDEPENDENT OF CONTRACT (cont.)

Minority (Alabama) View: Claims For Defective Work Barred by Contractual Liability Exclusion

Owners Ins. Co. v. Shep Jones Construction, Inc., No. 08-AR-514-S, 2012 WL 1642169 (N.D. Ala. May 3, 2012)

Assurance Co. of America v. Admiral Ins. Co., No. 10-0117-CG-C, 2011 WL 1897589 (S.D. Ala. May 18, 2011)


WHAT IS AN “INSURED CONTRACT”?


TRIGGERING INSURED CONTRACT COVERAGE

• Need a Contract

• Contract Must be a Type of “Insured Contract”

• Liability to a Third-Party Must be Assumed by the Contract. See APL Co. Pte. Ltd. v. Valley Forge Ins. Co., No. 11-18065 (9th Cir. 2013).

• Example


WHAT IS COVERED BY THE INSURED CONTRACT CLAUSE?

• Coverage Limited by Scope of Contractual Indemnification

• Indemnitee’s Defense Costs. See Golden Eagle Ins. Co. v. Ins. Co. of the West, 121 Cal. Rptr. 2d 682 (Cal. Ct. App. 2002)

• Indemnitee’s Sole Negligence

• Impact of Anti-Indemnity Statutes


INSURED CONTRACT v. ADDITIONAL INSURED

Insured Contract Additional Insured

Indemnitee not an Insured Indemnitee is an Insured

Includes Completed Ops Excludes Completed Ops

Sole Negligence Covered Sole Negligence Excluded

Indemnitee Defense Costs Erode Limits

Indemnitee Defense Costs in Addition to Limits

Subject to Policy Exclusions but Some Exceptions

Subject to Policy Exclusions but Severability Clause


2013 ISO “INSURED CONTRACT” REVISION


POLLUTION EXCLUSION

• “Sudden and Accidental” Pollution Exclusion

• Absolute Pollution Exclusion

• Total Pollution Exclusion


“SUDDEN AND ACCIDENTAL” POLLUTION EXCLUSION


“ABSOLUTE” POLLUTION EXCLUSION


INSURANCE POLICY INTERPRETATION

Williston Corbin

Strict Constructionist Reasonable Expectations

Plain Meaning Contextual

“Construction” “Interpretation”

“Conservative” “Liberal”


POLLUTION EXCLUSION SPLIT OF AUTHORITY

• Williston Camp: Alaska, Florida, Kansas, Minnesota, Mississippi, Nebraska, Oklahoma, Pennsylvania, South Dakota, Texas, U.S. Virgin Islands, Virginia, West Virginia, and Wisconsin

• Corbin Camp: Arizona, Arkansas, California, Illinois, Indiana, Louisiana, Maine, Maryland, Massachusetts, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, South Carolina, Utah, and Wyoming

• Hamlet Camp: Alabama, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Iowa, Kentucky, Michigan, Montana, New Mexico, North Dakota, Oregon, Rhode Island, Tennessee, Vermont, and Washington


DOERR V. MOBIL OIL CORP., 774 SO.2D 119, 134, N.16 (LA. 2000)

“our insureds would be at the State Board ... quicker than a New York minute if, in fact, everytime [sic] a bottle of Clorox fell off a shelf at a grocery store and [sic] we denied the claim because it’s a pollution loss.”

(quoting National Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 519 n. 3 (Tex. 1995)).


PIPEFITTERS WELFARE EDUC. FUND V. WESTCHESTER FIRE INS. CO., 972 F.2D 1037, 1043 (7TH CIR. 1992)

The terms “irritant” and “contaminant,” when viewed in isolation, are virtually boundless, for “there is virtually no substance or chemical in existence that would not irritate or damage some person or property.” Without some limiting principle, the pollution exclusion clause would extend beyond its intended scope, and lead to some absurd results. To take but two simple examples, reading the clause broadly would bar coverage for bodily injuries suffered by one who slips and falls on the spilled contents of a bottle of Drano, and for bodily injury caused by an allergic reaction to chlorine in a public pool. Although Drano and chlorine are both irritants or contaminants that cause, under certain conditions, bodily injury or property damage, one would not ordinarily characterize these events as pollution.


CONSIDERING THE CONTEXT

• Is the Substance Naturally Occurring?

• Is the Policyholder Conducting Normal Business Activities?

• Is the Policyholder a Polluter?


POLLUTION EXCLUSION: NEW FRONTIERS

• Chinese Drywall: Granite State Ins. Co. v. Am. Bldg. Materials, Inc. (11th Cir. Jan. 3, 2013) (unpublished)

• Dust: Mt. Hawley Ins. Co. v. Dania Distribution Ctr. Ltd. (11th Cir. Mar. 20, 2013) (unpublished)

• Odors: Barney Greengrass, Inc. v. Lumbermens Mut. Cas. Co. (2nd Cir. Nov. 4, 2011) (unpublished)

• Manure: Hirschhorn v. Auto–Owners Ins. Co., 338 Wis.2d 761, 809 N.W.2d 529, 2012 WI 20 (Wis. 2012); Wilson Mut. Ins. Co. v. Falk, 2013 Wisc. App. LEXIS 1031 (Wis. App. Dec. 11, 2013)

Business Risk, Employment and Data Breach Exclusions

Robert S. Marshall Nicolaides Fink Thorpe Michaelides Sullivan [email protected]

Business Risk - Your Product Exclusion

No coverage for Property Damage to Your Product, arising out of it or part of it

Your Product means any goods or products manufactured, sold, handled, distributed or disposed of by the named insured, others trading under its name or an entity whose assets or business is acquired by the named insured

Includes containers, materials, parts or equipment furnished in connection with the goods/products, as well as warranties/representations regarding fitness, quality, durability performance or use, and warnings/instructions

Does not include real property

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Business Risk Exclusions One risk intended to be insured under a CGL policy is the possibility that, once relinquished or completed, the insured’s goods, products or work will cause bodily injury or property damage, other than to the product or completed work itself. As a source of goods or services, the insured may face liability for failing to make good on products or work that is defective or otherwise unsuitable or lacking in some capacity. This may require the insured to pay for completely replacing or rebuilding the deficient product or work. However, CGL policies are not designed to protect against the latter risk. Rather, CGL coverage is intended to apply to tort liability for physical damages to others, and not for contractual liability of the insured for economic loss because the product or completed work is not that for which the damaged person bargained. The so-called “business risk” exclusions in the CGL policy function to mark the boundaries between “business risks” and occurrences giving rise to insurable liability.

Weedo v. Stone-E-Brook, Inc., 405 A.2d 788 (N.J. 1979)

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Business Risk - Your Product Exclusion

No coverage for damages due to Property Damage that is sustained solely by Your Product, and arises out of it or some part of it

• No coverage for costs incurred solely for the repair or removal/replacement of the insured’s product

• Does not preclude coverage for damages arising out of Property Damage to other tangible property

• Might not apply where insured’s product has been processed into something else – e.g. resin that was turned into PVC pipe

• Could apply even where a third party supplies the components and the insured’s role is limited to processing

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Business Risk - Your Work Exclusion

No coverage for Property Damage to “your work” arising out of it or any part of it

Your Work means work or operations by or on behalf of the named insured.

• Includes materials, parts or equipment, as well as warranties or representations as to fitness, quality, durability, performance, and warning/instructions

• Must be within “product-completed operations hazard” – i.e. Property Damage occurring away from insured’s own premises, after work is completed (can be tricky)

• Does NOT apply if subcontractor performed work

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Subcontractor Exception

The insurance and policyholder communities agreed

that the CGL policy should provide coverage for

defective construction claims so long as the allegedly

defective work had been performed by a subcontractor

rather than the policyholder itself. This resulted because

of the demands of the policyholder community and the

viewpoint of insurers that the CGL could be better sold

if it contained this coverage. U.S. Fire Ins. v. J.U.S.B., Inc., 979 So. 2d 871 (Fla. 2007).

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Business Risk - Your Work Exclusion

Does not apply to Property Damage to tangible property other than the insured’s work

Construction example – defective installation of roofing, windows

Exclusion bars coverage for cost to correct the defective work

Exclusion does not bar coverage for cost to remedy damage due to water intrusion

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Business Risk – Impaired Property Exclusion

No coverage for Property Damage to Impaired Property, or property not physically injured, if arising out of:

– Defect, deficiency, inadequacy, dangerous condition in Your Product or Your Work or

– Delay or failure by insured or its agent to perform a contract or agreement according to its terms

Impaired Property means tangible property, but not Your Product or Your Work, that can’t be used/is less useful, because:

• It incorporates the insured’s defective, deficient, inadequate or dangerous product or work or the insured fails to fulfill the terms of a contract or agreement, PROVIDED that

• Such tangible property can be restored to use by the repair/replacement/removal/adjustment of the insured’s product or work, or by the insured’s fulfilling the contract terms

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Business Risk – Impaired Property Exclusion

Examples:

• Claimant’s turbine is shut down due to discovery of gradual cracking in insured’s blades that need to be replaced

• Insured’s delay in supplying steel of specified strength delays completion of toll bridge

Issues to be aware of: • Incorporation doctrine

• Feasibility of repair/removal & replacement

• Sudden & accidental exception

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Business Risk – Recall Exclusion No coverage for loss, cost or expense incurred because of loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of Your Product, Your Work or Impaired Property if due to known or suspected defect, deficiency, inadequacy or dangerous condition

Does not apply to damages because of Property Damage as defined; would apply only to the extent there is a recall (or something similar) and expenses are incurred to perform inspections, repairs, and the like prior to any Property Damage

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Purpose of Exclusions – Eliminate Coverage for Faulty Work and Repair

Exclusions such as those in the policy in this case eliminate coverage for the cost of repairing the insured's own work, which is considered a business risk of the contractor. Golden Eagle Ins. Co. v. Travelers, 103 F.3d 750, 757 (9th Cir. 1996).

“[T]he nature of the repairs cannot create coverage where none exists.” New Hampshire Ins. Co. v. Vieira, 930 F.2d 696, 701 (9th Cir. 1991).

First evaluate whether “property damage” exists in the first instance. See Silgan Containers Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa, 434 Fed.Appx. 709 (9th Cir. May 27, 2011).

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Business Risk – Damage to Property Exclusion

No coverage for Property Damage to: • Property the insured owns • Property in the insured’s care, custody or control • The part of real property the insured or its

(sub)contractors are working on if the Property Damage is caused by that work

• The part of any property that must be restored, repaired or replaced because the insured performed the work incorrectly (but only if the restoration/repair/replacement is done before the work is all “completed”

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Employment Related Exclusions

The CGL policy also is not intended to insure risks attendant to the insured’s relationship with its employees, and specialized insurance products exist to control that risk. Therefore, the typical CGL policy contains three employment-related exclusions: – Employer’s Liability

– Workers Compensation

– Employment-Related Practices

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Third-Party-Over Actions

The International Risk Management Institute (IRMI) defines third-party-over action as:

“A type of action in which an injured employee, after collecting workers’ compensation benefits from the employer, sues a third party for contributing to the employee’s injury. Then, because of some type of contractual relationship between the third party and the employer, the liability is passed back to the employer by prior agreement. Depending on the nature and allegations of the action, coverage may be afforded under the contractual liability section of the employer’s commercial liability policy or the employers’ liability section of the employer’s workers’ compensation policy.”

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Employer’s Liability Exclusion

No coverage for Bodily Injury to an employee of the insured where the injury arises out of and in the course of employment by the insured or performing duties related to the conduct of the insured’s business

– Written to dovetail with the kind of employee claims that are compensable under a state workers compensation act or similar law (e.g. FELA) – thus, the phrase “arises out of and in the course of”

– Might not apply to certain third-party claims for contractual indemnity arising out of injuries to the insured’s employee

45

Employer’s Liability Exclusion

The issue of whether the claimant is an “employee” sometimes arises, as is the case with an employee supplied by temporary staffing companies or professional employer organizations. Employee is defined to include Leased Workers, but not Temporary Workers.

– Leased Worker means a person leased to the insured by a labor leasing firm under an agreement between the insured and the firm to perform duties related to the insured’s business. Some state statutes spell out whether the leasing employer is liable to the Leased Worker for Workers Compensation or for civil damages. Leased Workers are often relatively long-term.

– Temporary Worker means a person furnished to the insured to substitute for a permanent worker on leave or to meet seasonal or short-term workload conditions.

46

Workers Compensation Exclusion

No coverage for any obligation of the insured under a workers’ compensation, disability benefits or unemployment compensation law, or any similar law.

– Other types of policies for such benefits exist, or in certain cases (e.g. unemployment), collateral sources are already available to the insured

47

Employment-Related Practices Exclusion

Often included as an endorsement (CG 21 47), typically precludes coverage for Bodily Injury or Personal and Advertising Injury arising out of any:

– Refusal to employ

– Termination of employment

– Employment-related policies, practices, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation or discrimination

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Employment-Related Practice?

Where the harassment or discrimination is of a more personal nature or doesn’t necessarily impact a person’s employment status, just happens to occur in the workplace, an issue that can arise is whether or not the conduct is “employment-related” such that the liability is excluded. Golden Eagle Ins. Co. v. Rocky Cola Café Inc., 114 Cal.Rptr.2d 16 (Cal. App. 2001) (where supervisor’s defamatory statements stemmed from relationship with employee outside work, exclusion did not preclude coverage).

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Data Breach Exclusions

CGL insurers have taken the position that damages arising out of data breach claims, such as the theft or disclosure of customer information due to a hacking incident, are not covered. • Recording and Distribution of Material or Information

Exclusion

• Exclusion – Access or Disclosure of Confidential or Personal Information and Data-Related Liability (ISO 2014)

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Recording and Distribution of Material or Information in Violation of Law

“Personal and Advertising Injury” arising directly or indirectly out of any action or omission that violates or is alleged to violate:

* * *

4. Any federal, state or local statute, ordinance or regulation, other than the TCCPA, CAN-SPAM Act of 2003 or FCRA . . . that addresses, prohibits or limits the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information.

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Exclusion – Access or Disclosure of Confidential or Personal Information and Data-Related Liability

(New ISO Endorsement – May 2014)

Damages arising out of:

(1) Any access to or disclosure of any person’s or organization’s confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information; or

(2) The loss of, loss of use of, damage to, corruption of, inability to access or inability to manipulate electronic data.

This exclusion applies even if damages are claimed for notification costs, credit-monitoring expenses, forensic expenses, public relations expenses . . .

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New ISO Endorsement continued

This insurance does not apply to:

“Personal and Advertising Injury” arising out of any access to or disclosure of any person’s or organization’s confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit-card information, health information . . .

This exclusion applies even if damages are claimed for notification costs, credit-monitoring expenses, forensic expenses, public relations expenses or any other loss, cost or expense incurred by you or others arising out of any access to or disclosure of any person’s or organization’s confidential or personal information.

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Data Breach Case Law

• Zurich v. Sony, et al., Case No. 651982/2011 (Sup. Ct. N.Y., Feb. 21, 2014) (no duty to defend data breach lawsuits under invasion of privacy offense because Sony did not “publish” anything).

• Encore Receivable Mgt., Inc. v. ACE, et al., 2013 WL 334571 (S.D. Ohio) (undisputed that “recording exclusion” found in some policies applied to invasion of privacy claims for insured’s illegal recording of customer conversations – although, notably, court found “publication.”)

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