CGL Exclusions: Contractual Liability, Business Risk ...media.straffordpub.com/products/cgl-exclusions-contractual-liability... · •When is a Policy Limitation an Exclusion?

CGL Exclusions: Contractual Liability,

Business Risk, Third-Party Over, Pollution

and Data Breach ExclusionsAdvocating Scope of the Exclusions From the Policyholder and Insurer Perspectives

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TUESDAY, OCTOBER 23, 2018

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

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

Timothy P. Kilgore, Senior Counsel, Jackson & Campbell, Washington, D.C.

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© Copyright 2018. Friedman P.A. All Rights Reserved.

CGL EXCLUSIONS: CONTRACTUAL LIABILITY, BUSINESS RISK, THIRD-

PARTY OVER, POLLUTION AND DATA BREACH EXCLUSIONS

Strafford PublicationsOctober 23, 2018

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

[email protected]


TYPES OF COMMERCIAL LIABILITY COVERAGE

• Commercial General Liability

• Umbrella/Excess Liability

• Director’s & Officers

• Errors & Omissions (Professional Liability)

• Fiduciary/Employee Benefits

• Worker’s Compensation/Employer’s Liability

• Employment Practices Liability

• Commercial Auto

• Pollution

• Cyberliability

6


CGL POLICY OVERVIEW

• Declarations Page

• Insuring Agreement

• Definitions

• Conditions

• Exclusions

• Endorsements

7

© Copyright 2018. Friedman P.A. All Rights Reserved.8






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

13


CONTRACTUAL LIABILITY EXCLUSION

14


LIABILITY INDEPENDENT OF CONTRACT

Claims For Defective Work Not Barred by Contractual Liability Exclusion:

Ewing Constr. Co. v. Amerisure Ins. Co., 420 S.W.3d 30 (Tex. 2014)

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

Pa. Nat’l Mut. Cas. Ins. Co. v. St. Catherine of Siena Parish, 790 F.3d 1173 (11th Cir. 2015) (Alabama)

15


WHAT IS AN “INSURED CONTRACT”?

16


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., 541 Fed. Appx. 770 (9th Cir. 2013)

• Illinois Rule: Virginia Surety v. Northern Ins. Co. of New York, 866 N.E.2d 149 (Ill. 2007)

17


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

18


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

19


2013 ISO “INSURED CONTRACT” REVISION

20


POLLUTION EXCLUSION

• “Sudden and Accidental” Pollution Exclusion

• Absolute Pollution Exclusion

• Total Pollution Exclusion

21


“SUDDEN AND ACCIDENTAL” POLLUTION EXCLUSION

22


“ABSOLUTE” POLLUTION EXCLUSION

23


INSURANCE POLICY INTERPRETATION

Williston Corbin

Strict Constructionist Reasonable Expectations

Plain Meaning Contextual

“Construction” “Interpretation”

“Conservative” “Liberal”

24


POLLUTION EXCLUSION SPLIT OF AUTHORITY

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

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

• Hamlet Camp: Connecticut, District of Columbia, Georgia, Hawaii, Idaho, Kentucky, Michigan, Missouri, Montana, New Mexico, Oregon, Pennsylvania, Rhode Island, Tennessee, Utah, and Washington

25


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)).

26


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.

27


CONSIDERING THE CONTEXT

• Is the Substance Naturally Occurring?

• Is the Policyholder Conducting Normal Business Activities?

• Bottom Line: Is This Traditional Environmental Pollution?

28


POLLUTION EXCLUSION: NEW FRONTIERS

• Chinese Drywall: Travco Ins. Co. v. Ward, 736 S.E.2d 321 (Va. 2012)

• Odors: Scottsdale Ins. Co. v. Morrow Valley Co., LLC, 411 S.W.3d 184 (Ark. 2012)

• Spray-Foam Insulation: Cincinnati Specialty Underwriters Ins. Co. v. Energy Wise Homes, Inc., 120 A.3d 1160 (Vt. 2015)

• Ejaculate: Chestnut Assocs., Inc. v. Assur. Co. of Am., 17 F.Supp.3d 1203 (M.D. Fla. 2014)

• Manure: Hirschhorn v. Auto–Owners Ins. Co., 809 N.W.2d 529 (Wis. 2012); Wilson Mut. Ins. Co. v. Falk, 857 N.W.2d 156 (Wis. 2014)

29

© 2018 Jackson & Campbell, P.C.

Business Risk, Employment, and

Data Breach Exclusions

www.jackscamp.com

October 23, 2018

Strafford Publications

Timothy P. Kilgore

JACKSON & CAMPBELL, P.C.

1120 20th Street, N.W.

Suite 300 South

Washington, D.C. 20036

(202) 457-1632

[email protected]


BUSINESS RISK EXCLUSIONSIn every construction project, the owner and contractor incur risks or exposure to loss. Some of

these risks can be shifted to insurers-others cannot. The owner has the risk that the contractor will

fail to properly perform his contractual obligations. This risk can be shifted by the owner either

securing, or requiring the contractor to provide, a performance bond. The owner likewise has the

risk the project may be destroyed by fire, explosion or the like during construction. The contractor

may have a similar risk. Either or both may shift that risk to an insurer by acquiring a builder’s risk

policy. Again, such losses are generally beyond the effective control of either the contractor or

owner ... [The] risk of third party personal injury or property damage claim[s] due to defective

workmanship or materials may be shifted by the contractor purchasing a comprehensive general

liability insurance policy. ... However, in addition to and apart from those risks, the contractor

likewise has a contractual business risk that he may be liable to the owner resulting from failure to

properly complete the building project itself in a manner so as to not cause damage to it. This risk

is one the general contractor effectively controls and one which the insurer does not assume

because it has no effective control over those risks and cannot establish predictable and

affordable insurance rates…

When read together, these [business risk] provisions exclude coverage when there has been no

physical injury to tangible property other than the insured’s work.

Standard Constr. Co., Inc. v. Maryland Cas. Co., 359 F.3d 846 (6th Cir. 2004).

31


BUSINESS RISK EXCLUSIONS

• Intended To Eliminate Coverage For Faulty Work And Repair

• “[D]iminution in value and cost of repair are not two separate harms

– they are two different ways of measuring the same harm and thus

if the insured’s defective work is not covered as measured by

diminished value, it is not covered as measured by cost of repair…In

sum, …the nature of repairs cannot convert non covered damage

into covered damage.” Semtech Corp. v. Royal Ins. Co. of Am., No.

cv 03-2460, 2005 WL 6192907 (C.D. Cal. Oct. 11, 2005)

32



A. “Your Product” Exclusion

B. “Your Work” Exclusion

C. “Impaired Property” Exclusion

D. “Recall of Products” Exclusion

33


BUSINESS RISK EXCLUSIONSA. “Your Product” Exclusion

k. Damage To Your Product

"Property damage" to "your product" arising out of it or any 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 vending machines or other property provided to

others but not sold.

34




Bars coverage for damage to the Insured’s product

• Does not bar coverage for damage to tangible

property of others.

• Difficult to apply when Insured’s product is

incorporated into a larger product.

35




• Some jurisdictions hold that Insured’s product that is incorporated into real

property becomes real property and ceases to be “your product,” thus

nullifying this exclusion. Auto-Owners Ins. Co. v. Am. Bldg. Materials, Inc.,

880 F.Supp.2d 1265 (M.D. Fla. 2011) (newly constructed home damaged

by Chinese drywall supplied by Insured)

• This exclusion has been applied where Insured added components to

other components supplied by others, resulting in a defective product.

Atlantic Mut. Ins. Co. v. Hillside Bolting Co., Inc., 903 A.2d 513 (N.J. 2006)

(insured added its ingredients to other ingredients provided by its customer

to create soda beverage later deemed defective); Peterson v. Dakota

Holding, Inc., 738 N.W.2d. 501 (N.D. 2007) (using some parts and designs

supplied by customer, insured added parts and manufactured plastic

funnel product later deemed defective)

36



B. “Your Work” Exclusionsj. Damage To Property

"Property damage" to:

* * *

(5) That particular part of real property on which you or any contractors or

subcontractors working directly or indirectly on your behalf are performing

operations, if the "property damage" arises out of those operations; or

(6) That particular part of any property that must be restored, repaired or

replaced because "your work" was incorrectly performed on it.

* * *

Paragraphs … (5) and (6) of this exclusion do not apply to liability assumed

under a sidetrack agreement.

Paragraph (6) of this exclusion does not apply to "property damage"

included in the "products-completed operations hazard".

37



B. “Your Work” Exclusions

l. Damage To Your Work

"Property damage" to "your work" arising out of it or any

part of it and included in the "products-completed

operations hazard".

This exclusion does not apply if the damaged work or the

work out of which the damage arises was performed on

your behalf by a subcontractor.

38




"Your work":

a. Means:

(1) Work or operations performed by you or on your behalf; and

(2) Materials, parts or equipment furnished in connection with such

work or operations.

b. Includes:

(1) Warranties or representations made at any time with respect to

the fitness, quality, durability, performance or use of "your work";

and

(2) The providing of or failure to provide warnings or instructions.

39




Does not apply to “property damage” to tangible

property outside the scope of the insured’s work

• Insured’s contract for the work is important, possibly

determinative

• 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.

40


BUSINESS RISK EXCLUSIONSB. “Your Work” Exclusions

Subcontractor Exception

Providing coverage for claims arising out of the subcontractor work also made sense in

terms of meeting the moral hazard and adverse selection problems associated with faulty

workmanship claims. Although it may be unwise to provide liability coverage for a builder

directing its own crews, who may be tempted to cut corners if insured, the same rationale

did not as readily apply to modern construction that depends heavily on subcontractors

on whom general contractors depend.... Particularly if the subcontractor does soil,

concrete, or framing work, it is as a practical matter very difficult for the general

contractor to control the quality of the subcontractor work. Only if the contractor has a

supervisor at the elbow of each subcontractor at all times can quality control be relatively

assured—but this would be prohibitively expensive. Because the general contractor

depends on the subcontractor to a large degree, the general contractor is not tempted by

moral hazard to the degree that makes the consequences of faulty subcontractor work

more expensive to insure.

U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So. 2d 871 (Fla. 2007).

41




Differences between Exclusions j.(5) and j.(6)

• Exclusion j. (5) is limited to real property while Exclusion j.(6) has no

such limitation.

• Essex Ins. Co. v. Kart Constr., Inc. No. 8:14-cv-356-T-13, 2015 WL 47

30540 (M.D. Fla. Aug. 10, 2015) (the “operations” must be ongoing and

cause the “property damage” at the time it arises under Exclusion j.(5),

where as the “property damage” need not arise out of the insured’s

specific work ongoing at the time as long as the work caused the

“property damage” for Exclusion j.(6))

42


BUSINESS RISK EXCLUSIONSB. “Your Work” Exclusions

Differences between Exclusions j.(5)/j.(6) and Exclusion l.

• Exclusion l. only applies where the “property damage” occurs

after the work is completed (i.e., the “property damage” falls

within the “products-completed operative hazard”).

• Exclusions j.(5) and j.(6) only apply if the work or operation is

ongoing at the time “property damage” occurred.

• “ongoing operations” in j.(5)

• Exception to “property damage” falling within the “products-completed

operation hazard” for j.(6)

43




i. Damage To Impaired Property Or Property Not Physically Injured

"Property damage" to "impaired property" or property that has not been

physically injured, arising out of:

(1) A defect, deficiency, inadequacy or dangerous condition in "your product" or

"your work"; or

(2) A delay or failure by you or anyone acting on your behalf to perform a

contract or agreement in accordance with its terms.

This exclusion does not apply to the loss of use of other property arising out of

sudden and accidental physical injury to "your product" or "your work" after it

has been put to its intended use.

44




"Impaired property" means tangible property, other than "your product"

or "your work", that cannot be used or is less useful because:

a. It incorporates "your product" or "your work" that is known or thought

to be defective, deficient, inadequate, or dangerous; or

b. You have failed to fulfill the terms of a contract or agreement;

if such property can be restored to use by the repair, replacement,

adjustment or removal of "your product" or "your work" or your fulfilling

the terms of the contract or agreement.

45




Intended to address “passive” malfunctions or defects caused in whole or in

part by insured’s product or work.

Examples:

• Insured’s defective control panel used in manufacture of hydraulic lift

causes lift to malfunction, requiring a replacement control panel.

• Insured’s delay in supplying specified type of concrete delays completion

of a building.

46




Issues to be aware of:

• Incorporation doctrine – U.S. Metals, Inc. v. Liberty Mutual Group, 490 S.W.3d 20

(Tex. 2015) (rejecting incorporation theory and finding that defective component

installed in larger system must cause physical injury to system/other parts of it, if no

loss of use of the system results, to constitute covered “property damage”)

• Feasibility of repair/removal & replacement – where must destroy other parts of, e.g.,

a home in order to access and replace defective component covered by insurance,

cost to repair or replace the intentionally destroyed other parts are typically deemed

covered costs)

• “Sudden & accidental injury” exception - Anthem Electronics, Inc. v. Pacific

Employers Ins. Co., 302 F.3d 1049 (9th Cir. 2002) (finding circuit boards failed when

exposed to thermal stress, thus satisfying the “sudden and accidental injury”

exception to impaired property exclusion for purposes of duty to defend)

47



D. Recall Exclusion

n. Recall Of Products, Work Or Impaired Property

Damages claimed for any loss, cost or expense incurred by you or others for

the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment,

removal or disposal of:

(1) "Your product";

(2) "Your work"; or

(3) "Impaired property";

if such product, work, or property is withdrawn or recalled from the market or

from use by any person or organization because of a known or suspected

defect, deficiency, inadequacy or dangerous condition in it.

48



D. Recall Exclusion

• Commonly known as the “sistership” or “products recall”

exclusion.

• Where insured’s defective product is only a component of a

larger product and results in the larger product being recalled,

exclusion bars coverage for all costs associated with recall of

larger product as “impaired property.”

• Inapplicable to real property and physical injury to property.

49


EMPLOYMENT EXCLUSIONS

A.“Workers’ Compensation” Exclusion

B.“Employer’s Liability” Exclusion

C.“Employment-Related Practices”

Exclusion

50



A. Workers’ Compensation Exclusion

d. Workers Compensation And Similar Laws

Any obligation of the insured under a workers'

compensation, disability benefits or unemployment

compensation law or any similar law.

• Does not address liability for work-related injury or consequences of

unemployment.

51



B. Employer’s Liability

e. Employer's Liability

"Bodily injury" to:

(1) An "employee" of the insured arising out of and in the course of:

(a) Employment by the insured; or

(b) Performing duties related to the conduct of the insured's business; or

(2) The spouse, child, parent, brother or sister of that "employee" as a consequence

of Paragraph (1) above.

This exclusion applies whether the insured may be liable as an employer or in any

other capacity and to any obligation to share damages with or repay someone else

who must pay damages because of the injury.

This exclusion does not apply to liability assumed by the insured under an "insured

contract."

52



B. Employer’s Liability

• Applies to an insured’s employee’s injuries covered by workers’

compensation or, where unavailable, by employer’s liability coverage of a

workers’ compensation policy that most employers are required by law to

carry.

• Applies to claims by family members of the injured employee for, e.g., loss

of consortium.

• Even if injury sustained while employee performing work outside of

specifically designated duties, exclusion applies if the injury arises out of

duties related to the insured’s business.

• Applies to “leased employees” but not to “temporary employees” or

employees of other insured(s).

53



C. Employment-Related Practices Exclusion

This insurance does not apply to:

"Bodily injury" to:

(1) A person arising out of any:

(a) Refusal to employ that person;

(b) Termination of that person's employment; or

(c) Employment-related practices, policies, acts or omissions, such as coercion, demotion,

evaluation, reassignment, discipline, defamation, harassment, humiliation, discrimination

or malicious prosecution directed at that person; or

(2) The spouse, child, parent, brother or sister of that person as a consequence of "bodily injury"

to that person at whom any of the employment-related practices described in Paragraphs (a),

(b), or (c) above is directed.

This exclusion applies:

(1) Whether the injury-causing event described in Paragraphs (a), (b) or (c) above occurs before

employment, during employment or after employment of that person;

(2) Whether the insured may be liable as an employer or in any other capacity; and

(3) To any obligation to share damages with or repay someone else who must pay damages

because of the injury.

54



A. “Access or Disclosure” Exclusion

B. “Recording and Distribution” Exclusion

55



A. Access or Disclosure Exclusion

p. Access Or Disclosure Of Confidential Or Personal Information And Data-related Liability

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 or any other loss, cost or expense incurred by you or

others arising out of that which is described in Paragraph (1) or (2) above.

However, unless Paragraph (1) above applies, this exclusion does not apply to damages because of

"bodily injury".

As used in this exclusion, electronic data means information, facts or programs stored as or on, created

or used on, or transmitted to or from computer software, including systems and applications software,

hard or floppy disks, CD-ROMs, tapes, drives, cells, data processing devices or any other media which

are used with electronically controlled equipment.

56



A. Access or Disclosure Exclusion

• Inapplicable to “property damage,” as that definition expressly omits

electronic data.

• Includes loss of use of computer hardware caused by data breaches.

• Includes, to a limited degree, “bodily injury” but only in those jurisdictions

that do not require physical injury to accompany the mental or emotional

injury.

57



B. Recording and Distribution Exclusion

q. Recording And Distribution Of Material Or Information In Violation Of Law

"Bodily injury" or "property damage" arising directly or indirectly out of any action or

omission that violates or is alleged to violate:

(1) The Telephone Consumer Protection Act (TCPA), including any amendment of or

addition to such law;

(2) The CAN-SPAM Act of 2003, including any amendment of or addition to such law;

(3) The Fair Credit Reporting Act (FCRA), and any amendment of or addition to such

law, including the Fair and Accurate Credit Transactions Act (FACTA); or

(4) Any federal, state or local statute, ordinance or regulation, other than the TCPA,

CAN-SPAM Act of 2003 or FCRA and their amendments and additions, that

addresses, prohibits, or limits the printing, dissemination, disposal, collecting,

recording, sending, transmitting, communicating or distribution of material or

information.

58



B. Recording and Distribution Exclusion

• Questionable whether a “property damage” claim under Coverage A

can be based on violation of TCPA and other statutes identified in

the exclusion.

• This exclusion is often applied to “right of privacy” claims under

Coverage B.

59


Data Breach Exclusions• Innovack Int’l, Inc. v. Hanover Ins. Co., 280 F. Supp. 3d 1340 (M.D. Fla.

2017) (no duty to defend under Coverage B of CGL policy because invasion

of right of privacy caused by data breach was perpetrated by third-party

hackers and not insured)

• Camp’s Grocery, Inc. v. State Farm Fire & Casualty Co., No. 4:16-cv-0204,

2016 WL 6217161 (N.D. Ala. Oct. 25, 2016) (no duty to defend insured from

underlying data breach claims because no “bodily injury,” “property

damage,” or “personal and advertising injury” alleged; rejected insured’s

argument that cost to replace and reissue compromised credit cards

constitutes “property damage,” finding that loss was based on compromised

electronic data embedded within the credit cards and not by any physical

harm or damage to the credit cards)

• Hartford Cas. Ins. Co. v. Corcino & Assoc., No. cv 13-3728, 2013 WL

5687527 (C.D. Cal. Oct. 7, 2013) (insurer owed duty to defend insured for

underlying data breach claims stemming from insured’s employee’s posting

of customer confidential information on public website)

60

Documents

CGL Exclusions: Contractual Liability, Business Risk ...media.straffordpub.com/products/cgl-exclusions-contractual-liability... · •When is a Policy Limitation an Exclusion?