plugging holes in liability coverage - awci...1. any goods or products, other than real property,...

Plugging Holes in Liability Coverage

© 2016 Willis Towers Watson. All rights reserved.

April 19, 2016

Karen A. Reutter, CPCU, CRIS, ARM

Executive Vice President, Willis Towers Watson

North America Construction

Agenda

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• Focus on General Liability (GL)

• Brief 40 year history of GL Coverage for Construction Risk

• Brief discussion of forms

• Where gaps hide

• Key gaps to address

© 2016 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.

General Liability Coverage

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Coverage for third party losses arising out of your work or operations

• “Occurrence”

• Third Party

• Bodily Injury (BI) and/or Property Damage (PD) (Advertising and Personal Injury, too)

• Fortuitous from standpoint of insured

• Indemnity and defense dollars

• Insureds and additional insureds

• Once policy is triggered, read entire policy; some give backs to coverage by way of exceptions to exclusions

• This is very important for contractors re: business risk type of exclusions


Overview of CGL Policy Design

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From 1973 to 1986 to now in 10 minutes…

• During the past 40 years, coverage has expanded for construction-related property damage claims by narrowing exclusions

• Coverage narrowed via exclusions

• Broad insuring agreement

• Has to be an “occurrence” as defined by the policy

• Needs to be BI or PD to third party arising out of “your work”

• Damage or injury has to be fortuitous from standpoint of insured


1973 Exclusions

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(emphasis added)

• (n) Property damage to the named insured’s products arising out of such products or any part of such products;

• (o) Property damage to work performed by or on behalf of the named insured arising out of the work or any portion thereof; or

out of materials, parts or equipment furnished in connection therewith;


1973 CGL Policy

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• Courts broadly interpreted exclusions generally denying coverage for damage to work

• Treated construction project as a “product”

• Issues involved denying coverage for property damage due to insured’s work or work performed by subcontractors

• Issues involved in denying coverage for all work

• No delineation between completed operations and course of construction


1976 – BFPD Endorsement

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• Intended to address the courts’ broad denial of coverage for construction-related risks

• Endorsement for additional premium

• Intended to narrow exclusions of ‘73 form and provide some coverage for inadvertent construction defects or property

damage


1976 - BFPD

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(Continued)

• Specifically addressed the following:

• “That Particular Part”

• Delineated between work by insured and work performed by subcontractors

• Delineated between ongoing operations and completed operations

• Continued interpretation confusion

• Centered on the “faulty workmanship” exclusion


1986 CGL

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• Attempted to clarify key construction-related coverages associated with the 1973 and 1976 forms

• (Exclusion L) Specifically states that property damage arising from work performed on the insured’s behalf is covered

• Exception to the “damage to your work” exclusion

• “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.”

(emphasis added)


1986 CGL

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(Continued)

• (Exclusion J.5 & 6) Specifically addressed timing issue related to damage to “that particular part”

• Distinguishes that there is coverage for the particular part in completed operations, that the “particular part” exclusion applies during

course of construction

• (Exclusion K) Distinguishes that the product exclusion does not apply to a building or construction project by way of

excepting “real property” from exclusion


1986 CGL Exclusions

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(emphasis added)

• J. “Property Damage” to:

(6) That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly

performed on it

Paragraph (6) of this exclusion does not apply to “property damage” included in the “Products-Completed Operations” hazard

• “Your Product” means:

(a) Any goods or products, other than real property,…


Brief Description of Forms

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• Why forms change over time

• Legal trends, case law (forms and endorsements)

• Social policy

• Clarification of coverage (also, dovetail coverage)

• Standard vs. non-standard or manuscripted (e.g., General Liability vs. Builders Risk)

• Filed vs. non-filed (Standard markets vs. non-standard markets)


Where Gaps Hide in Coverage

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• Definitions

• “Insured”

• Conditions

• Exclusions


Key Gaps to Address

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• Definitions of “Occurrence”

• Definition of “Your Product” (exclusion K clarification)

• Broad Named Insured language

• Employees as Insureds (Health Care Professionals)

• Knowledge of Occurrence endorsement

• Amend Representations (unintentional failure to disclose hazards)

• Amend duties in the event of occurrence, offense, claim or suit


Definition of “Occurrence”

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Section V – Definitions

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

conditions.

Add: Notwithstanding case law holding that defective construction may not constitute an “occurrence”, an “occurrence” shall

include any circumstance where a defect or deficiency in “your work” results in damages because of “property damage” so long

as the “property damage” was not intended by you.


Definition of “Your Product”

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Section V – Definitions

21. “Your Product”:

A. Means:

1. Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by:

A. You;

B. Others trading under your name; or

C. A person or organization whose business or assets you have acquired; and

2. Containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products.

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

C. Does not include vending machines or other property rented to or located for the use of others but not sold


Definition of “Your Product”

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Add:

d. Does not include “your work” or any part of it.

Language is designed to address interpretation by some courts that “your product” in Exclusion K includes buildings in the

context of a general contractor

“Your Work” in the ISO form is defined as:

Work or operations performed by your or on your behalf; and materials, parts or equipment furnished in connection with such

work or operations


Broad Named Insured Language

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• Named Insured in CGL policy is defined as the person or entity specified in the Declarations page of the policy

• Current or past JVs of LLCs are not covered unless specifically listed as a Named Insured on the Dec. page

• There is no standard ISO form for Broad Named Insured language but most insurers have these and expect to provide

• BFNI provides automatic coverage for all subsidiaries, affiliated, controlled or allied companies or corporations of the Named

Insured

• Helps avoid oversights in adding new acquisitions or newly formed organizations to the policy

• Helps avoid errors in listing related entities


Employees as Insured – Health Care Professionals

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Section II – Who is an Insured

Paragraph 2.a.(1)(d) – delete

Reads in part: No employee or volunteer worker is an insured for “Bodily Injury” arising out of his or her providing or failing to

provide professional health care services

Addresses circumstance where contractor employs a nurse, doctor, or other healthcare professional. Standard ISO wording

provides protection for the insured but not the health care professional


Knowledge of “Occurrence”

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• Limit the obligation for reporting a claim to a few or even one person or position

• Duties exist, as outlined in the CGL policy and are put upon “you” or an “insured” in event of a claim, suit, offense or

occurrence

• Sample: Knowledge of an “accident”, “occurrence”, offense, “injury”, claim or “suit” by you agent, servant or “employee” will

not be considered to be your knowledge of such unless the following person or person in the following position (s) shall have

knowledge of the “accident”, “occurrence”, offense, “injury”, claim or “suit”

• Person or Position: Risk Manager


Duties in Event of Occurrence

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Section IV – Commercial General Liability Conditions

Paragraph 2. is amended as follows:

Add:

e. The failure to comply with any condition under this insurance, including but not limited to, giving notice of, or providing

information and documents in connection with, an “accident”, “occurrence”, offense, “injury”, claim, or “suit” shall not invalidate

any claim made by the insured, injured person or any other claimant, if it was not reasonably possible to comply with such

condition, or the failure to comply with such condition has not prejudiced us. The burden to prove such prejudice shall be on us.


Unintentional Failure to Disclose: Representation

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Section IV – Commercial General Liability Conditions

Paragraph 6, is amended as follows:

Add:

d. Your failure to disclose all hazards or prior “occurrences” existing as of the inception date of the policy shall not prejudice the

coverage afforded by this policy provided such failure to disclose all hazards or prior “occurrences” is not intentional


Key Gaps to Address: Exclusions

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• Expected or Intended Injury exclusion – exclusion 2.a.

• Mobile Equipment exclusion – exclusion 2.h.

• Damage to Property exclusion – exclusion 2.j.

• Alienated Premises – j.(2)

• Care, custody and control – j.(4)

• Damage to Your Work exclusion – exclusion l

• “That particular part” language

• CG 2294

• Contractors Professional Liability “coverage” exclusion

• CG 2279

• CG2280

• CG2243


Expected or Intended Injury Exclusion

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Section 1 – Coverages, Coverage A, Bodily Injury and Property Damage Liability,

2. Exclusions, a. Expected or Intended Injury is deleted and replaced with the following:

a. Expected or Intended Injury, “bodily injury” or “property damage” expected or intended from the standpoint of the insured

This exclusion does not apply to “bodily injury” or “property damage” resulting from the use of reasonable force to protect

persons or property.


Mobile Equipment Exclusion

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h. Mobile Equipment

“Bodily injury” or “property damage” arising out of:

1. The transportation of “mobile equipment” by an “auto” owned or operated by or rented or loaned to any insured; or

2. The use of “mobile equipment” in, or while in practice for, or while being prepared for, any prearranged racing, speed,

demolition, or stunting activity


Damage to Property Exclusion

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Section 1 – Coverage, Coverage A, Bodily Injury and Property Damage Liability,

2. Exclusions, j. Damage to Property, paragraphs (5) and (6) are amended as follows:

Exclusion j.(5) and j.(6) are clarified as follows:

• The language “that particular part” in Exclusions j.(5) and j.(6) precludes coverage only for damage to the segregated portion of the

property on which the insured, or its contractors or subcontractors working on its behalf, are actively performing work at the time of the

loss

• The language “that particular part” does not mean the entire project regardless of whether or not the insured is acting as a construction

manager or a general contractor


Damage to Property Exclusion: Alienated Premises

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Alienation or Premises Modification – Turnkey Jobs

Exclusion J.(2) Property Damage to:

Premises you sell, give away or abandon, if the “property damage” arises out of any part of those premises. Exception: (2) does

not apply if the premises are “your work” and were never occupied, rented or held for rental by you.

• Broad Exception for “your work”

It is agreed that paragraph (2) of exclusion J. of Coverage A (Section I) of this policy does not apply if the premises are “your work”

• Limited Exception for “your work”

It is agreed that paragraph (2) of exclusion J. of Coverage A (Section I) of this policy does not apply if the premises are “your work” and

were not occupied, rented or held for rental by you for more than 12 months after completion


Damage to Property Exclusion: CCC

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• J.4: “Property Damage” to personal property in your care, custody and control of the insured

• Intent

• Rigger’s Liability

• Sublimit

• Exclusion deleted


Damage to Your Work Exclusion

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• Exclusion 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.

• Will want to narrow it down to “that particular part”

• CG 2294



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(Continued)

I. Damage to your work “property damage” to that particular part of “your work” arising out of it or any part of it and included in

the “products-completed operations hazard.”

The language “that particular part” means only the segregated portion or component part of the property which must be restored,

repaired or replaced because “your work” was incorrectly performed on it.

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

contractor or subcontractor.



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(Continued)

Commercial General Liability CG 22 9410 01

This Endorsement changes the policy. Please read it carefully.

Exclusion – Damage to work performed BY subcontractors on your BEHALF

This endorsement modifies insurance provided under the following:

Commercial General Liability Coverage Part

Exclusion I of Section I – Coverage A – Bodily Injury and Property Damage Liability is replaced by the following:

2. Exclusions

This insurance does not apply to:

I. Damage to Your Work

“Property damage” to “your work” arising our of it or any part of it and included in the “products-completed operations

hazard”.


Professional Liability and CGL

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• No Exclusion in standard form

• Exclusions are attached with some exceptions

• CG 2243, CG 2279, CG 2280

• “means, methods, techniques and sequencing”

• CG 2280 – these terms are not included; plus, coverage for work done on your behalf

• Still no “economic loss”

• Market realities


Take - Aways

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• There are gaps in coverage

• Not just liability

• Coverage changes based on legal trends, social policy and the need for coverage clarification

• Coordinate policies

• Balance sheet protection


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