25 Apr Understanding the Commercial General Liability Insurance Policy
We regularly represent policyholders who are seeking to recover insurance proceeds due to them under a wide variety of individual and business policies. Outside of litigation, we are also asked frequently to counsel clients about insurance that may be available to cover risks and losses in their business and personal lives. One of the most frequently litigated policies that we encounter for our business clients is the commercial general liability policy, commonly known simply as the “CGL” policy. The CGL is a standardized policy that provides protection for a business against third-party claims for “bodily injury” or “property damage,” among other things.
Examples of claims that can trigger coverage under a CGL policy include negligence claims for personal injury damages, negligence claims for property damage and product liability claims. Coverage disputes involving CGL policies are common, so it is important for businesses to have a general understanding of the application of the CGL policy and some of the problem areas that frequently arise.
A. What Constitutes “Bodily Injury” and “Property Damage”?
“Bodily injury” is defined in the CGL policy to mean “bodily injury, sickness or disease sustained by a person, including death.” “Property damage” means “physical injury to tangible property, including all resulting loss of use of that property,” as well as “loss of use of tangible property that is not physically injured.” While “bodily injury” is fairly self-evident in most cases, whether a particular loss constitutes “property damage” for coverage purposes is commonly disputed.
Particularly in the construction context, one issue that commonly arises is whether and to what extent there is liability insurance coverage for faulty workmanship on the part of the insured.
The general rule is that claims against an insured seeking recovery for repairs to allegedly shoddy workmanship are not covered by liability insurance. See, e.g., Builders Mut. Ins. Co. v. Mitchell, 210 N.C. App. 657, 661, 709 S.E.2d 528, 532 (2011) (any damages representing the cost to repair the insured’s faulty workmanship itself are not covered by the insured’s CGL policy because such costs do not constitute “property damage”); Production Systems, Inc. v. Amerisure Ins. Co., 167 N.C. App. 601, 606, 605 S.E.2d 663, 666 (2004) (“The term ‘property damage’ in an insurance policy has been interpreted to mean damage to property that was previously undamaged, and not the expense of repairing property or completing a project that was not done correctly or according to contract in the first instance.”).
The rule is different, however, if the claims seek the cost to repair other property that was previously not damaged or defective, but was allegedly damaged by the insured’s faulty work. See, e.g., Mitchell, 210 N.C. App. at 663, 709 S.E.2d at 533 (affidavit alleging that contractor’s faulty work on a roof and gutter system caused damage to previously undamaged portions of the home, resulting in damage to interior property, was sufficient to create a jury question regarding CGL coverage for those resulting losses).
In addition to the definitions of “occurrence” and “property damage,” courts have also relied on several exclusions in the CGL policy to find no coverage for the cost to repair the insured’s shoddy work. See, e.g., Breezewood of Wilmington Condominium Homeowners’ Ass’n, Inc. v. Amerisure Mut. Ins. Co., 2009 WL 1877465 at *8 (4th Cir. 2009) (CGL policy excluded coverage for damage to insured’s completed property caused by insured’s faulty workmanship based on the exclusion for “property damage” to “your work”).
B. What Is An “Occurrence” That Triggers Coverage?
To be covered under a CGL policy, the alleged bodily injury or property damage must be caused by an “occurrence” that takes place during the policy period. That term is defined to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”
Whether there has been an “occurrence,” and if so, in what policy period(s), is also a subject of frequent litigation. Since many cases involve injuries that develop over time and/or do not show up until long after the defendant’s alleged misconduct, there is a substantial body of case law addressing the often thorny question of which policy year(s) are triggered by a particular loss.
The general rule is that, “where the date of the injury-in-fact can be known with certainty, the insurance policy or policies on the risk on that date are triggered.” Gaston County Dyeing Mach. Co. v. Northfield Ins. Co., 351 N.C. 293, 303, 524 S.E.2d 558, 564 (2000) (date of injury-in-fact from rupture of pressure vessel and leak was the trigger of product liability coverage under manufacturer’s CGL policy). In so holding, the Supreme Court rejected application of a bright-line rule that property damage occurs for insurance purposes when the injury manifests or is discovered. See id. at 303-04, 565. (“In determining whether there was a single occurrence or multiple occurrences, we look to the cause of the property damage rather than to the effect…. Therefore, when, as in this case, the accident that causes an injury-in-fact occurs on a date certain and all subsequent damages flow from the single event, there is but a single occurrence; and only policies on the risk on the date of the injury-causing event are triggered.”); see also Hutchinson v. Nationwide Mut. Fire Ins. Co., 163 N.C. App. 601, 605, 594 S.E.2d 61, 64 (2004) (“even in situations where damage continues over time, if the court can determine when the defect occurred from which all subsequent damages flow, the court must use the date of the defect and trigger the coverage applicable on that date”); Western World Ins. Co. v. Wilkie, 2007 WL 3256947 at *5 (W.D.N.C. Nov. 2, 2007) (where multiple injured claimants were exposed to E.Coli over time at a petting zoo, and the cause of the condition was ongoing negligence by the defendant, there was but a single “occurrence” for coverage purposes).
Recent decisions in the construction context, however, highlight that the inquiry can be much more complicated when dealing with a situation where the date of injury is uncertain. See, e.g., Harleysville Mut. Ins. Co. v. Hartford Cas. Ins. Co., 90 F. Supp.3d 526, 547 (E.D.N.C. 2015) (“When, as in this case, the alleged accidents that caused the injuries-in-fact occur on dates that are not certain, there are possible multiple occurrences. Thus, all policies on the risk on the possible dates of those injury-causing events are triggered…. The key difference leading to a multiple trigger of coverage rather than single trigger of coverage is that the dates of the injuries-in-fact are inherently uncertain and cannot be established as a single trigger of coverage.”).
The point is that careful analysis may be required to determine which policy or policies are potentially on the hook when there is a long time between the defendant’s negligent actions and the manifestation of the resulting harm.
C. What Is “Personal and Advertising Injury” Coverage?
Separate from the bodily injury and property damage coverage, CGL policies also cover “personal and advertising injury,” which is defined to include a very specific list of claims: (i) false arrest, detention or imprisonment; (ii) malicious prosecution; (iii) the wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies by or on behalf of its owner, landlord or lessor; (iv) oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services; (v) oral or written publication of material that violates a person’s right of privacy; (vi) the use of another’s advertising idea in an “advertisement”; or (vii) infringing upon another’s copyright, trade dress or slogan in an “advertisement.”
Unlike bodily injury and property damage coverage, these “personal and advertising” offenses do not need to be caused by an accident to trigger CGL coverage. Rather, coverage is triggered if and when the alleged offense occurs during the policy period. There are a number of specific exclusions for “personal and advertising injury” coverage, including, for example, injury caused by the insured with the knowledge that the act would violate the rights of another and result in injury, injury arising from the publication of material known by the insured to be false, injury arising from criminal misconduct by the insured and contractual liability.
D. What Are Some of the Most Common CGL Coverage Disputes?
1) Breach of Contract Claims
CGL policies include a contractual liability exclusion, which bars most coverage for injury or damage for which the insured is obligated by reason of assumption of liability in a contract. This exclusion does not apply if the insured would have been liable in the absence of the contract. It also does not apply to certain defined types of “insured contracts,” including a pre-occurrence agreement to assume the tort liability of another party.
2) Intentional Misconduct
CGL policies, like most liability policies, generally seek to exclude coverage for intentional misconduct by the insured. There can be significant questions, however, regarding what constitutes “intentional” misconduct that bars coverage.
With regard to CGL policies, one provision that comes up in cases where intentional misconduct is at issue is the definition of an “occurrence,” which requires any covered injury or damage to have been caused by an accident. A carrier may argue, for example, that if a plaintiff seeks punitive damages, the conduct at issue could not, by definition, have been merely an accident.
There is substantial case law in North Carolina analyzing what is – and is not – an accidental “occurrence” for coverage purposes. Notably, it has been held that the term “occurrence” includes injury resulting from an intentional act, provided the injury is not intentional or substantially certain to be the result of the intentional act. See North Carolina Farm Bureau Mut. Ins. Co. v. Stox, 330 N.C. 697, 709, 412 S.E.2d 318, 325 (1992) (finding coverage where insured intentionally shoved a co-worker, but the resulting injury was not intended by the insured). A CGL policy also has an exclusion for bodily injury or property damage that is “expected or intended from the standpoint of the insured,” but courts that have construed the exclusion have applied the same analysis as in connection with analyzing the existence of an accidental “occurrence.” See id. at 703-04, 322 (“it is the resulting injury, not merely the volitional act, which must be intended for this exclusion to apply”). Whether an event was “expected or intended” is viewed from the subjective standpoint of the insured, with a focus on whether resulting damage or injury was expected or intended. See Washington Hous. Auth. v. North Carolina Hous. Auths. Risk Retention Pool, 130 N.C. App. 279, 285, 502 S.E.2d 626, 630 (1998).
In contrast, some intentional conduct is so inherently harmful that courts reject out of hand any claim by the insured that a resulting injury was not expected or intended. See, e.g., North Carolina Farm Bureau Mut. Ins. Co. v. Allen, 146 N.C. App. 539, 553 S.E.2d 420 (2001) (the intentional action of firing a handgun at a person in close proximity was sufficiently certain to cause injury that the insured should have expected injury to occur); Patti v. Continental Cas. Co., 126 N.C. App. 643, 486 S.E.2d 233 (1997) (no coverage for wrongful termination claim where the employer “obviously intended to terminate” the employee, and “it ‘may be inferred as a matter of law’ that [the employer] knew it was probable that she would suffer injuries” as a result); Henderson v. U.S. Fidelity & Guar. Co., 124 N.C. App. 103, 111, 476 S.E.2d 459, 464 (1996), aff’d, 346 N.C. 741, 488 S.E.2d 234 (1997) (intentional misrepresentations by home builder to purchasers regarding flooding problems “were so substantially certain to cause injury and damage as to infer an intent to injure as a matter of law”); Lyles v. City of Charlotte, 344 N.C. 676, 681-82, 477 S.E.2d 150, 154 (1996) (no coverage under intentional act exclusion for Woodson claim, which by definition requires proof that the defendant-insured knew or should have known that its actions were substantially certain to cause death or serious bodily injury).
Accordingly, even if the injured plaintiff pleads a claim in negligence, she may plead herself out of coverage if the facts allege conduct by the defendant-insured that is substantially certain to cause injury or damage. See, e.g., State Auto Ins. Cos. v. McClamroch, 129 N.C. App. 214, 220-21, 497 S.E.2d 439, 443 (1998) (“Defendants were intentionally engaged in targeted residential picketing with the intent of inflicting sufficient emotional distress to coerce Dr. Kaplan from engaging in the legal, though controversial, activity of performing abortions. An intent to injure is the only logical conclusion to be inferred from defendants’ conduct. The addition of the negligence claim is not sufficient to invoke coverage, because the amended complaint merely alleges ‘but a different characterization of the same willful act’”). In short, the label assigned to the cause of action is not dispositive in determining, for coverage purposes, whether the injury or damage was accidental or intentional.
3) Failure to Give Timely Notice
CGL notice provisions typically require the insured to give notice to the carrier of a claim or suit “as soon as practicable.”
North Carolina courts employ a three-part test to determine whether an insured has complied with that standard. The trier of fact must first decide whether notice was given as soon as practicable. If not, the trier of fact must decide whether the insured has shown that it acted in good faith. This is a subjective inquiry, focused on whether the insured was aware of its possible fault but nonetheless purposefully and knowingly failed to notify the insurer. If the insured meets the good faith test, then the burden shifts to the carrier to show that its ability to investigate and defend the claim was materially prejudiced by the delay in notice. See Pulte Home Corp., 185 N.C. App. at 172-74, 647 S.E.2d at 621-622 (good-faith test met despite six-month delay in notice to CGL carrier, where insured offered evidence that the delay was a function of its internal policies for processing claims).
Accordingly, most coverage issues involving failure by a business to give timely notice under a CGL policy typically come down to whether or not the insurer can show that it was prejudiced by the delay. That said, it is good practice for the insured to err on the side of caution and give notice as soon as it can, to avoid this issue altogether.
4) Pollution Coverage
The standard CGL policy contains a pollution exclusion, the language of which has evolved over time. Most CGL policies today include an “absolute” pollution exclusion that precludes coverage for any bodily injury or property damage “arising out of actual, alleged or threatened discharge, dispersal, release or escape of pollutants,” which is broadly defined to include “any solid, liquid, gaseous, or thermal irritant or contaminant.” Businesses that have a particular need for this type of protection, based on the nature of their work, will generally obtain some type of specialty pollution coverage (e.g., UST policies that cover clean-up costs and third-party claims relating to contamination released from underground storage tanks).
Even under a standard policy, however, disputes can arise regarding what is considered to be a “pollutant” for purposes of the pollution exclusion. The term has been construed broadly enough to encompass sedimentation from runoff at a construction site. See Pennsylvania Nat. Mut. Cas. Ins. Co. v. Triangle Paving, Inc., 973 F. Supp. 560, 564 (E.D.N.C. 1996), aff’d, 121 F.3d 699 (4th Cir. 1997). In another case, however, the Court of Appeals refused to define vapors from a chemical used by a resurfacing contractor in the ordinary course of its business as a “pollutant” for coverage purposes. See West American Ins. Co. v. Tufco Flooring East, Inc., 104 N.C. App. 312, 321-23, 409 S.E.2d 692, 698 (1991), overruled in part on other grounds, Gaston County Dyeing Mach. Co., 351 N.C. at 303, 524 S.E.2d at 565 (the pollution exclusion “relates to the use of some form of unwanted or waste material upon the site” and “was not meant to refer to any raw material brought upon the premises by the insured for the purpose of normal business activity”); but see New NGC, Inc. v. Ace American Ins. Co., 2015 WL 2259172 (W.D.N.C. May 13, 2015) (finding that pollution exclusion with wording different from that in Tufco Flooring applied to claims against drywall manufacturer alleging that the company’s drywall was defective because it emitted high levels of sulfur).
So, it should not necessarily be assumed that a claim involving alleged pollution or contamination will be barred by the pollution exclusion in a CGL policy. That determination will require a careful review of the terms of the particular exclusion, as well as the specific facts relating to the nature of the insured’s business.
Disputes frequently arise regarding the proper construction of definitions, exclusions and other terms in insurance policies, and CGL policies are certainly no exception. This post includes just a sampling of the issues that are frequently disputed under such policies. A slight difference in the construction of a word here or a phrase there can mean the difference between complete protection and financial ruin for a small business policyholder.
At Parry Tyndall White, we have significant experience helping individual and business policyholders recover insurance proceeds that are due to them, including claims under CGL policies and other types of liability policies. If you believe that you or your business has been wrongly denied coverage or has otherwise suffered damages from an insurance company’s refusal to live up to its policy obligations, please give us a call at 919.246.4676 to set up a free initial consultation.