Property and Liability Coverage

Completing the condominium insurance picture necessitates “jigsaw puzzle” tenacity. Quite a few pieces must be snapped together to assure the proper insurance picture is presented; any missing information can leave a gaping hole in either the association’s or unit owner’s coverage picture. Regardless of the client’s status as the association or individual unit owner, the puzzle cannot be completed until the agent can connect the answers to three questions:

  • Who is responsible for what property?
  • What is the value of the insured property?
  • Who can be held liable for injury or damage?

Who Insures Which Property?

Associational responsibility is divided into three levels: “Original specifications,” “all-in” and “bare walls.”  Remember, each definition presented in this chapter is from the association’s perspective – delineating which part of the real property it is responsible to insure. Property not insured by the association must be protected by the unit owner’s insurance policy.

To fully understand the three levels of associational responsibility first requires the four categories of condominium real property be specifically described. The four categories are 1) “common elements;” 2) “limited common elements;” 3) “unit property” and 4) “unit improvements and betterments.”

Condo Real Property Definitions

“Common elements” are owned by and benefit all members of the association. Land, parking lots and the building’s structural foundations and load-bearing walls are examples of common elements. Also included in this definition are clubhouses, pool houses, pools, fences, gates, playground equipment, tennis courts and other property owned by and allocated to all unit owners. Not all property categorized as a common element is insurable in standard property policies (i. e., land), but most can be scheduled.

“Limited common elements” are beneficial to more than one but less than all unit owners. Common hallways or corridors providing access to several units, walls and columns containing electrical wiring or sprinkler piping serving or protecting multiple units or a plenum enclosure providing heating and cooling to multiple units are examples. Doorsteps, stoops, decks, porches, balconies, patios, exterior doors, and windows or other fixtures designed to serve a single unit but located outside the unit’s boundaries are often categorized as limited common elements because the appearance and safety of these fixtures directly affects multiple unit owners although connected to just one unit.

“Unit property” is defined by the association’s declarations or statute and is limited to and benefits none but the unit owner. The inside of the exterior walls, interior partition walls, countertops, cabinetry, plumbing fixtures, appliances and any other

“Unit property” is defined by the association’s declarations or statute and is limited to and benefits none but the unit owner. The inside of the exterior walls, interior partition walls, countertops, cabinetry, plumbing fixtures, appliances, and any other real property confined to the unit are examples. “Unit” property’s definition can vary widely with no universal designation.

“Unit improvements and betterments” like “unit property” benefit none but the unit owner. The three previous definitions of associational responsibility classifications require improvements and betterments be classed separately – excluding improvements and betterments from the definition of covered property under the association’s policy. A unit improvements and betterments is created by the unit owner’s engagement in any activity or improvement that increases the value of the real property within an individual unit – such as updating the flooring from carpet to hardwood or other such improvements.

Levels of Associational Responsibility Explained

Original specification requirements, known as “single entity coverage,” make the association responsible for the common elements, limited common elements, and unit property. Unit improvements and betterments are not the responsibility of the association. Connecting the pieces:

  • The association insures the common elements, limited common elements, and unit property;
  • Unit owners insure unit improvements and betterments and their personal property within the

A majority of states default to some form of original specification wording as recommended by the Uniform Common Interest Act governing the insurance requirements of condominium associations.

“All in” (“all inclusive”) statutes differ from original specification wording in one major aspect: the association’s additional responsibility to insure unit improvements and betterments. In addition to insuring common elements, limited common elements, and unit property, associations are also charged with insuring unit improvements and betterments in “all in” jurisdictions. Snapping the parts together:

  • Associations subject to “all in” wording insure common elements, limited common elements, unit property and unit improvements and betterments;
  • Unit owners insure only personal property within the

Approximately half of the states not applying “original specification” requirements utilize some form of “all inclusive” wording. Only a few of those states apply statutory terminology that could be exclusively interpreted as “all in.”

“Bare walls” wording limits associational insurance responsibility to the common elements and limited common elements.  To complete the puzzle:

  • The association insures the common elements and the limited common elements; unfinished walls (meaning the paint is insured by the unit owner); or the sub-floor and underside of the ceiling; or any other variation.
  • Unit owners are tasked with insuring unit property, any unit improvements and betterments and the owner’s personal property within the

Dividing responsibility for insuring real property may not be the most advantageous for the association or the unit owner; however, there are several states and individual associations that apply some form of bare walls wording.

NFIP – A Special Case

Two standard flood insurance policies (SFIP’s) connect in condominium forms of ownership: The Residential Condominium Building Association Policy (RCBAP) provides coverage for the association, and the Dwelling Form is purchased by the individual unit owner to cover personal property. These forms apply as per NFIP standards regardless of any statutory or associational declaration regarding insurance responsibility.

The RCBAP policy form specifically states that coverage is provided for all real property to include real property that is part of the unit. FEMA guidelines further clarify in rule IV. COVERAGE: A. Property Covered: The entire building is covered under one policy, including both the common as well as individually owned building elements within the units, improvements within the units, and contents owned in common. Contents owned by individual unit owners should be insured under an individual unit owner’s Dwelling Form. In essence, the RCBAP is “all in” coverage.

Flood insurance policies do not have to necessarily comply with statute or associational guidelines. When insuring a condominium association or unit owner, agents must be aware of the differences mandated by the NFIP.

Default Setting

Bylaws and declarations are the governing documents of all condominium or unit owner regimes. These documents supersede statute as per the subject statutes themselves. Division of ownership and insurable interest is dictated by these documents. Statutory wording is only the “default setting” if the bylaws or declarations are silent or are ambiguous regarding the insurance requirements.

Defined Values

Three distinctly different property “values” can be assigned to associational property: actual cash value, replacement cost and market value. Two are common to insurance, and one generally has no relevance in insurance, until the government or an unknowing attorney gets involved.

Actual cash value (ACV) is the cost new (replacement cost) on the date of the loss minus physical depreciation. Physical depreciation results from use and ultimate wear and tear meaning that the insured does not get paid for the “used up” value of the property.

Attention must be paid to the beginning point in the calculation of ACV, the cost new on the date of the loss. ACV is not based on the value when it was built or at any point between the construction date and the date of the loss. Only the cost new on the date of the loss matters; this is key when choosing limits.

Replacement cost is the cost to replace with new material of like kind and quality on the date of the loss. There is no allowance or penalty for age, depreciation or condition.  The insured must simply insure the property at what it will cost to buy or build it today.

Market value is negotiated between and agreed to by a willing buyer and a willing seller. It can fluctuate up and down based on the economy, condition, use or need and has little relation to the true cost to rebuild a particular structure. Normally market value has little relationship to insurance. The rise and fall of the market value does not necessarily change the cost to rebuild a building following a loss.

If the market value is the rule applied in a particular state or association’s declarations, the agent must be prepared for and be able to explain this concept regardless of the fact that such value is not normally associated with property insurance values.

Values and Coverage Provided by the Unit-Owners Form (HO 00 06)

Unendorsed the Unit-Owners Form provides replacement cost coverage on the building (Coverage “A”) and actual cash value on personal property (Coverage “C”). Coverage “A” is limited to a specified amount ($1,000 or $5,000) unless specifically increased by the unit owner. The owner’s need to increase Coverage “A” is a function of the coverage required to be provided by the association based on the level of associational responsibility defined above.

Both Coverage “A” and Coverage “C” apply Broad Form Named Perils coverage unless endorsed to cover “Special” causes of loss. Expansion to “open perils” coverage can be accomplished by attaching HO 17 31 to Coverage “C” and the HO 17 32 to Coverage “A.”

Coverage “C” can be transformed from actual cash value to replacement cost with the attachment of the HO 04 90 – Personal Property Replacement Cost Loss Settlement endorsement.

Developing Property Insurance Values

Establishing associational and unit owner property values requires knowing who is responsible for insuring which property and which valuation method (AVC, RC, or market value) is being applied.

Cost estimators are effective tools for developing accurate values in most replacement cost and actual cash value settlement scenarios, as are discussions with knowledgeable builders in the area. If market value is the method of valuation, a market analysis by a licensed appraiser may be required to develop the necessary value (it is not recommended that market value ever be used as the insurance value). The accuracy of these calculations varies based on the level of associational responsibility.

Original Specifications: Developing relevant values may be easiest when single entity requirements apply as the valuation program, and original specification requirements overlap in their result and mandate. Property valuation programs calculate the cost of rebuilding the structure utilizing modern materials of like kind and quality; original specification insurance requirements limit associational responsibility to the cost of replacing original construction materials with modern materials of like kind and quality.

All-In: All inclusive statutes and associational bylaws increase an association’s standard of care. Associations subject to this insurance settlement mandate are forced to closely monitor building and unit values (including value increases created solely by a unit owner) to avoid inadequate insurance and a possible coinsurance penalty that could arise because they (the association) are insuring all real property regardless of location or who installed it. Cost estimators work well in these associations provided the association, and the agent are aware of any individual unit owner upgrades.

Bare Walls: Conflict arises if the unit owner does not have coverage, or enough coverage, to rebuild what is defined as the “unit.” The association is only responsible for the common elements and limited common elements. To arrive at the insurance value, a cost estimator has to be completed, and the value of each “unit” must somehow be subtracted out of the calculation.

Two questions arise regarding the value of property in a bare walls association:

  • Who deciphers the definition of a “unit” allowing the unit owner, the association and the respective insurance carriers to know who is responsible for insuring what property? and
  • Who calculates the ultimate amount of coverage needed? There is no available method to produce a verifiable “unit” property value.

Attorneys, appraisers, agents and other professionals may be required to answer these questions and design the correct programs (one for the association and a separated program for each unit owner). A lot of professional expertise is required up front to avoid future disputes, and the valuation answer is still just a little better than a guess.

Legal liability is liability imposed by the courts or by statute on any person or entity responsible for the financial injury or damage suffered by another person, group, or entity. Legal obligations, or legal liability, can arise from intentional acts, unintentional acts, or contracts.

When the potentially liable parties are mutual beneficiaries and users/occupiers of the same location, the need for each party to be properly insured is of paramount importance. Residential condominium associations and individual unit owners are prime examples of this need to close all gaps in liability protection.

Essentially there are three legal liability possibilities following bodily injury or property damage at a residential condominium property. Legal liability is placed on 1) the condominium association; 2) the unit owner; or 3) jointly on the association and the unit owner.

When legal liability is assigned to only one party, whether it be the association or the unit owner, defining coverage is easy. The cost of the bodily injury or property damage is covered, subject to policy limits, by the at-fault party’s insurance policy:

  • The association’s commercial general liability (CGL) coverage pays if the association is found to be solely negligent; or
  • The unit owner’s HO-6 pays if legal liability is solely placed on the

The unit owner’s liability coverage (most commonly provided by the HO-6) is generally first dollar protection. Likewise, the association’s CGL may be written providing first dollar protection; however, many associations utilize a deductible or self-insured retention (SIR). If the association’s deductible is high, or there are several liability claims against the association, the unit owner(s) may suffer an out-of-pocket expense because of the association’s decision to use a deductible or SIR.

Unit Owner Assessments

When the association is subject to a deductible or SIR, it generally collects the resulting out-of-pocket expense by assessing all the unit owners a share of the deductible/SIR (however such division is calculated). The unendorsed HO-6 provides the insured with $1,000 for such assessment with two main requirements: 1) the loss must be one that would have been covered under the HO-6, and 2) $1,000 is all the policy will pay for assessment in aggregate for any one incident leading to an assessment.

Obviously, the association’s choice of a deductible/SIR can be detrimental to the unit owner. However, the unit owner does have the opportunity to increase the coverage for assessment by purchase of the HO 04 35 (Supplemental Loss Assessment Coverage). However, the attachment of this endorsement may not solve the unit owner’s deductible/SIR assessment problem – depending on the endorsement’s edition date approved and used in the unit owner’s state.

Attaching Insurance Services Office’s (ISO’s) HO 04 35 allows the insured unit owner to incrementally increase the loss assessment limit up to $50,000 (relatively inexpensively). However, the limit of coverage for an assessment related to the association’s use of a deductible/SIR has been historically limited to $1,000 – even when the HO 04 35 endorsement was attached. This limitation was removed in ISO’s 05/11 edition of the endorsement. The HO 04 35 05 11 extends the full amount of loss assessment coverage purchased to all assessments, including those resulting from the association’s use of a deductible/SIR.

However, the new endorsement may not yet be approved in the insured unit owner’s state (and may not be for some time), or the insurance carrier providing coverage may not be using the new wording (depending on the rules of the state). Agents cannot make assumptions; a review of the insured’s policy is required to confirm which loss assessment wording is in use or available. The difference between the old and new endorsement language can mean hundreds or even thousands of dollars to the insured unit owner’s bank account.

Joint Liability

If both the association and unit owner are held jointly liable for the injury or damage, court involvement will likely be required. The first problem the court will address is the amount of liability assignable to each party. Once liability has been assigned, the second question to be considered is what happens when liability limits differ (which they most likely will)?

Both questions can and might be governed by the legal concept of joint-and-several liability, along with how each state applies this concept. Losses are shared equally or unequally among tortfeasors based on the facts of the case, each tortfeasor’s level of “fault,” and statute. The concept of joint-and-several liability is designed to assure that the victim is fully compensated for their injury or loss.

Joint means that anyone tortfeasor can be held responsible for the entire amount (each tortfeasor is responsible for all others). Several means that each is responsible only for its share of the fault (liability can be “severed” between or among parties). Each state applies the joint-and-several liability differently:

  • 9 states apply pure joint-and-several laws: Each defendant is responsible for the entire amount regardless of its amount of fault;
  • 27 states utilize modified joint-and-several laws: One specific tortfeasor is potentially responsible for the entire only if they are judged at-fault beyond a specific level or amount. Additionally, some of these states bar recovery if the injured party is found to be a certain percentage liable; and
  • 14 states employ pure several laws: Each party shares the financial consequences based on its amount of

Generally there is a wide gap between the association’s CGL limits and the unit owner’s HO-6 liability limits; maybe as much as $900,000 ($1 million in the CGL vs. $100,000 in the HO-6). Because of this gap, the association may be called upon to cover more than their share of damages in pure and modified joint-and-several liability states.

To avoid this potential gap, the association may decide to require each unit owner to carry relatively high limits of liability coverage (maybe even an umbrella).

Many state laws related to condominium ownership prevent an association from subrogating against the unit owner if the unit owner’s negligence leads to a liability loss. Again, this could be very costly for the association from an insurance perspective; and it is even more costly if the association does not have enough protection to cover the cost of the injury or damage.

Deciding Which Party is Legally Liable

Disclaimer: This section shall not and cannot be construed as legal advice. Any ruling of negligence and legal liability must be made in a court of competent jurisdiction. The following is simply a guideline that may be useful in determining which party and therefore policy may be called upon to cover the cost of injury or damage suffered by a third party.

Where did the Injury/Damage Occur?

Arriving at the more correct answer to the question, which party (the association or the unit owner) may be ultimately responsible for paying the cost of injury or damage suffered by a third party, first requires the answer to this question. Knowing where the injury occurred provides clues as to who is most likely going to be held financially responsible.

Like analysis of the property coverage, analysis of the liability coverage requires knowledge of and a deep understanding of three definitions: common elements, limited common elements, and unit property. The definition of each (presented earlier in this article) indicates which party (the association or the unit owner) is responsible for the care and upkeep of the property; and also, who is responsible for any injury or damage suffered on the property.

Injury or Damage on or Caused by a ‘Common Element’

Because a common element benefits all unit owners, the association is nearly always going to be ultimately responsible for covering the cost of any bodily injury or property damage that occurs on a common element. This is true even if a unit owner in some way contributed to the injury or damage.

When written correctly, and depending on the state, condominium liability policies generally include unit owners as insureds or name them as additional insureds using the CG 20 04 (Additional Insured – Condominium Unit Owners). This endorsement grants all unit owners additional insured status for liability arising out of any portion of the premises not reserved for the unit owner’s exclusive use or occupancy. This means that the unit owner is an insured for any injury or damage on or caused by a common element. Further, as an insured, the insurance carrier cannot seek recovery from the unit owner if he/she is somehow responsible for causing the injury or damage on the common element.

Injury or Damage on or Caused by a ‘Limited

Common Element’

Assigning financial responsibility for an injury or accident occurring on a limited common element is a little more complicated. Largely, the rules that apply to common element apply to limited common elements (meaning the association will most commonly be held financially responsible); however, there are gray areas.

Of particular interest and problem are those defined limited common elements that benefit only one unit owner, such as stairs, stoops, balconies, decks, etc. Although these elements benefit one unit owner, often the association is responsible for the care and maintenance of these features.  Might there be joint negligence or liability assignable to both parties?

Picture a unit owner and his guests sitting on the deck enjoying the evening. They decide to move the party inside nearer the food. As one of the guests crosses the threshold from the deck into the unit, he trips on “something” and breaks his arm in the fall. Which party will be held responsible?

The injury occurred leaving a limited common element and moving into unit property. Based on statute, the associations bylaws, and policy wording, who knows? Some situations may require court involvement.

As stated previously, most situations involving limited common elements will follow the rules for common elements. However, some may end up in a court of competent jurisdiction to decide if one or both parties will be held responsible for the injury or damage.

Injury or Damage on or Caused by Unit Property

Like assigning responsibility for injuries that occur on or caused by common elements, it is rather simple to assign financial responsibility for injury occurring within a unit or caused by unit property. The unit owner will be held responsible, and his HO-6 will be called upon to pay for any injury or damage within the unit or caused by defined unit property.



Loss Assessment Coverage

A personal insurance coverage that many people do not understand is Loss Assessment Coverage.

Every association has a set of bylaws, and in those bylaws the association’s board is given the authority, under certain circumstances, to make assessments against the individual unit owners. There are two reasons an association might need to make an assessment:

  1. If the association needs additional funds to complete a community improvement
  2. If the association finds itself with inadequate association insurance to cover a particular claim
  3. It is this second type of assessment which can be insured on your individual unit owner’s insurance policy.

First of all, we should reassure everyone that it is very unlikely that the association would have inadequate insurance. The board takes its fiduciary responsibility very seriously and obtains expert advice about the types of coverage to purchase.

Having said that, the purpose of insurance is to protect you against this unlikely event. In simple terms, what loss assessment coverage on your personal policy does is this: If you receive an assessment from the association to help pay for loss or claim against the association, and if that claim would have been covered by your insurance policy if it had been made against you directly then the loss assessment coverage will pay the assessment, up to the limit you have purchased

Example: There is a fire in an association building which for some reason either had no insurance or inadequate insurance. The association assesses each unit owner $2,000 as their share of the total cost. Because fire is a covered peril on your personal insurance policy (if the fire had been in your home instead of the association building, it would have been covered), your policy will pay the assessment. Note that the limit of coverage that is needed is only for the individual unit owner’s assessment amount – not the total amount the association needs to collect. So if there is a $1,000,000 assessment in a 500 unit community, each unit owner would be assessed $2,000, and that is what the unit owner’s policy would cover. Be aware that the loss assessment coverage available from most insurance companies will pay up to $1,000 for an assessment that is due to the application of the association’ insurance deductible. However, again remember that $1,000 limitation is for each unit owner’s portion of the deductible, not for the whole deductible.

Example: There is a devastating fire in the community which kills or injures many people, and it is determined that the cause of the fire was the association’s responsibility. There are so many claims that the association’s liability insurance limit is used up and there is an assessment against each unit owned to cover the difference. Because those claims would have been covered if the injuries had occurred in your home, the policy will pay the assessment.

Example that is not covered: The association decides to build new tennis courts and assess the cost to all unit owners. This would not be covered because your insurance policy would not ever pay for you to build yourself a new tennis court.

Example that is not covered: The association suffers a flood loss that is not adequately insured. This assessment would not be covered even if the unit owner has a flood insurance policy because flood insurance policies never include loss assessment coverage.

We are often asked whether a unit owner’s personal umbrella policy would cover an assessment that is due to liability claims against the association (such as the injuries and deaths in the example above). That answer is no because the umbrella policy covers claims made directly against the unit owner for their own personal liability. In this case, the unit owner is not liable to the claimant, as co-owners they are financially liable to the association.

Also, assessments are only covered when they are made against ALL unit owners. If there is an assessment made only against your unit, because of the specifics of the need for the assessment that would not be covered no matter what the reason for the assessment.


Completed Homeowners Operations

Completed operations in a general liability insurance policy covers damage or bodily injury resulting from work not properly done by a company. For many businesses this insurance is a good idea because it protects the company from large losses that otherwise might cause bankruptcy or severe stress on a business. This insurance is a way for a business to reduce risk by paying an insurance company a premium.

  1. Coverage Details
    • Completed operations coverage covers a business for work that was not properly done. There is usually a limit to the insurance coverage, a maximum amount the insurance company will pay. This amount typically includes a maximum amount per instance and a maximum amount for all claims for the year. This is known as an aggregate amount. For example, a company could have coverage for $1,000,000 per incident and an aggregate coverage of $4,000,000. If a claim resulted in damage of $900,000, then the entire claim would be covered, and the aggregate coverage would have $3,100,000 remaining after the claim.

Cost of the Insurance

  • The cost of completed operations insurance varies with the type and size of the business. Insurance companies factor in the expected frequency of claims as well as how potentially large the claims may be. Insurance companies will look at a business’ claims history and industry trends in damages to set a price for the coverage. The coverage may be based on the company’s revenues for the year. In addition, the insurance company may do an audit at the end of the year and adjust the price based on changes in sales volume.


  • A company makes control rooms and sells them directly to consumers. The rooms are designed to store expensive wines. The company buys completed operations coverage. After shipping the control room to a customer, the room is assembled, and wine is stored in the room. However, because the room was built with several errors, the wine is ruined. Because the damage was caused by the company’s faulty product and occurred off-premises, the claim would be covered.


  • A business is usually covered for damage that occurs during the policy period. This is an important point because there could be a lag between the end of a policy period and when a claims event takes place. For example, a builder could complete a house during a policy period of January 1 through December 31. Then after the policy period ends, the builder might choose not to renew the coverage and sells the business. Meanwhile, in March of the following year, the house built during the policy period develops a major problem. This damage would not be covered even though the house was built during the policy period.

What are Products and Completed Operations Liability Insurance?

Products liability may be included in the basic general liability coverage form, or be written on its own. It protects manufacturers, wholesalers and distributors against exposure to lawsuits by people who may have been injured or suffered other losses because of their product. It provides coverage for the policyholder against claims stemming from products sold, manufactured or distributed.

Completed operations responds to bodily injury or property damage claims that would occur after the completion of a project, resulting from the negligence of the work performed. For example, if a contractor were to build a deck, and fail to secure the railing property, and someone were to lean on the railing and suffer bodily injury, the completed operations portion of the general liability policy would respond. It is important to note however, that this does not cover the faulty work itself, just the resulting bodily injury and or property damage.

Coverage for “ongoing operations” not synonymous with contractor’s completed work

An additional-insured endorsement added to a subcontractor’s general liability policy conferred no greater coverage to its contractor for property damage once the subcontractor had completed its work, an appeals court in Mississippi decided (Noble v. Wellington Associates Inc.November 19, 2013, Maxwell, ).

Background. Noble Real Estate hired subcontractor Harris Construction Company to perform dirt work and site preparation work for a new home Noble was building. As part of Noble and Harris’s agreement, Harris obtained an additional-insured endorsement to its commercial general liability insurance policy with Ohio Casualty Insurance and named Noble as an additional insured. But the insurance provided under the endorsement was limited to liability caused in whole or in part by Harris’s ongoing operations performed for Noble.

Harris’s work operations performed for Noble ended in March 2006. More than a year and a half after Harris had completed its work, the Salyers entered a contract to purchase the home. The Salyers noticed cracks in the home, so they had an engineer perform a structural analysis. Because the engineer concluded the home had no foundation problems, the Salyers went through with the purchase. After they moved in, they noticed the problems were worse. Another engineer determined there were foundation problems, partially linked to the fill dirt beneath the slab. After having to pay another contractor to shore up the foundation, the Salyers sued Noble.

After a federal suit started by Noble’s own CGL insurer, including him, his insurance agent and the agency, ended with judgment in favor of all three of those parties, Noble amended his original state-court complaint to add Harris’s insurer, Ohio Casualty Insurance Company. In addition to claiming breach of contract and bad faith, Noble argued that Ohio Casualty was bound to provide coverage, even if there was no coverage under the additional-insured endorsement, because Noble reasonably believed there was coverage based on Ohio Casualty’s previous actions connected to a lawsuit against Harris and Noble concerning another Noble-built house. The state court judge found that there was no coverage under the additional-insured endorsement for the Salyers’ property damage claim against Noble because the endorsement only covered liability for property damage caused by Harris’s “ongoing operations,” thus concluding that when Harris ended its work in March 2006, Noble’s coverage under the endorsement also ended. Since the Salyers’ damage did not arise until after Noble built and sold the house, it was not covered. Noble appealed.

Additional-Insured Endorsement. The endorsement limited the insurance provided to the additional insured to liability caused in whole or in part by Harris’s ongoing operations performed for that insured. The endorsement also limited coverage, excluding “‘property damage’ occurring after (1) All work on the project was performed by or on behalf of the additional insured[s] at the site where the covered operations have been completed; or (2) That portion of ‘Harris’s work’ out of which the damage arises has been put to its intended use by any person or organization.” The certificate of insurance sent to Noble informed him that, as “certificate holder,” he was a “named Additional Insured in regard to General Liability required by written contract.” The certificate explicitly stated it was being issued for Noble’s information only, did not confer on Noble any rights, and did not alter coverage.

Decision. The court determined that the endorsement protected Noble against lawsuits arising out of accidents occurring during the time Harris performed dirt work—it was not a bond guaranteeing Harris’s dirt work. Because the endorsement was unambiguous in covering only liability that arose from “ongoing operations,” and because the homeowners’ damage did not arise until well after Harris had completed its operations, the homeowners’ claims against Noble did not trigger coverage under the additional-insured endorsement.

Therefore, the court concluded that the lower court had properly granted Ohio Casualty judgment on Noble’s coverage-based claims. The court also found that judgment was correctly granted in favor of all other parties for the remainder of Noble’s action.

The Scope of Ongoing Operations Additional Insured Endorsements: Broader than Expected

Additional insured endorsements come in all shapes and sizes. Some cover the sole negligence of the additional insured. Others cover the additional insured only for the named insured’s negligent acts. Still others cover particular projects or a particular activity. In every case, the language of the endorsement and the jurisdiction’s interpretation of that language governs the scope of the coverage provided.

One type of additional insured endorsement expressly excludes coverage for completed operations: another includes language purporting to limit the scope of coverage provided to the “ongoing operations” of the named insured. Courts addressing these endorsements often direct their analysis at interpreting the phrase “arising out of” and whether these endorsements provide coverage for the additional insured’s own negligence. Andrew L. Youngquist, Inc. v. Cincinnati Ins. Co., N.W.2d 178, 184-5 (Minn. Ct. App. 2001)(holding that the phrase “arising out of your ongoing operations” covers the additional insured’s own negligence); also Mikula v. Miller Brewing Co., N.W.2d 613 (Wis. App. 2005). As several courts make evident, these “ongoing operations” additional insured endorsements more often than not will cover claims arising out of the insured’s completed work despite the endorsement’s apparently clear language limiting coverage to ongoing operations.

“Ongoing Operations” Language

Here are two examples of “ongoing operations” additional insured endorsements:

WHO IS AN INSURED (Section II) is amended to include as an insured the person or organization shown in the Schedule, but only with respect to liability arising out of your ongoing operations performed for that insured and then only as respects any claim, loss or liability arising out of the operations of the Named Insured, and only if such claim, loss or liability is determined to be solely the negligence or responsibility of the Named Insured.

* * *

WHO IS AN INSURED (Section II) is amended to include as an insured, any person, organization, trustee, estate or governmental entity to whom or to which you are obligated by:

  1. virtue of a written contract; or
  2. The issuance or existence of a permit;

to provide insurance such as is afforded by this policy, but only with respect to liability arising out of:

  1. your ongoing operations performed for that insured; or
  2. facilities used by you;

and then only for the limits of liability specified in such contract, but in no event for limits of liability in excess of the applicable limits of this policy.

However, such person, organization, trustee, estate or governmental entity shall be an insured only with respect to occurrences taking place after such written contract has been executed or such permit has been issued.

All other Terms and Conditions of this Insurance remain unchanged.

Insurers have frequently asserted that both of these endorsements provide coverage only for ongoing operations. Insurers rely upon these endorsements to deny coverage for completed work. However, most courts interpreting the phrase “ongoing operations” have rejected this limitation on coverage. Interestingly, courts that don’t interpret “ongoing operations” have limited coverage on this basis. Pro Con Construction, Inc. v. Arcadia Ins. Co., A.2d 108 (N.H. 2002)(finding that the named insured’s ongoing operations to be painting and that the injuries alleged were not connected to painting operations so there was no coverage for the additional insured). also Fleniken v. Entergy Corp., So. 2d 64 (La. Ct. App. 2001)(noting that the injury occurred while the named insured was performing its operations).

“Ongoing Operations” language eliminates coverage for completed operations

In Pardee Construction Company v. Insurance Company of the West, 92 Cal. Rptr. 2d 443 (Cal. Ct. App. 2000), the court explained that the revision of the endorsement to specifically include “ongoing operations” “effectively precludes application of the endorsement’s coverage to completed operations losses.” Pardee at 456.

The plaintiff homeowner’s association sued Pardee for construction defects in a multi-phase residential project. Pardee tendered its defense, as an additional insured, to the four insurers that issued policies to the four subcontractors whose work was allegedly defective. Each insurer either denied or failed to acknowledge any responsibility to Pardee. The trial court granted summary judgment in favor of the insurers, reasoning that “the policies did not incept until after construction of the project was complete and thus were not issued to provide Pardee coverage as to it.” Pardee at 448.

In finding that three of the four insurers’ policies required a defense of Pardee, the appellate court considered the language of the additional insured provisions and found that “the unambiguous language of the policies and endorsements provides Pardee with coverage for the completed operations of the named insured subcontractors.” Id. at 454. The court explained that there was no language in the endorsements “expressly limiting the time frame of the additional insured coverage to the time of the ongoing operations of the named insured.” Id. (citation omitted).

The court then explained how the insurers could have used language to exclude coverage for the subcontractor’s completed operations. The court first cited the evolution of the ISO additional insured form, suggesting that the insurers could have used a form employed since the mid 1980s that explicitly excluded coverage for completed operations. Next the court cited the 1993 ISO form, with its revisions to “expressly restrict coverage for an additional insured to the ‘ongoing operations’ of the named insured.” Pardee at 456. In explaining the change, commentators noted that “it was never the intention of insurers to provide additional insureds with completed operations coverage” and the prior language inadvertently accomplished that result. Id. at 456, n.16.

Citing industry commentators, the court noted that “these endorsements provide coverage only with respect to ‘your ongoing operations,’ which effectively eliminates coverage for completed operations” and the failure to include this, or any, limiting language manifested the insurers intent not to exclude coverage to Pardee for completed operations. Id.

“Ongoing Operations” is not limited to work in progress

Pardee clearly explained the effect of the revised form and how the use of “ongoing operations” was intended to restrict coverage to “work in progress only” so that “when the named insured’s operations for the additional insured are no longer ‘ongoing,’ the additional insured no longer has coverage.” Pardee at 456, n.16. Despite this, other courts considering this language in practice have found coverage for completed work.

In Valley Insurance Company v. Wellington Cheswick, LLC, 2006 WL 3030282 (W.D. Wash. 2006), a condominium association sued the owner, developer and general contractor alleging construction defects. The construction contract required that the subcontractors name the owner, developer and general contractor as an additional insured under the subcontractors’ general liability policies. Pursuant to the additional insured endorsements, the owner, developer and general contractor sought a defense and indemnification from the subcontractors’ general liability carriers.

Two of the subcontractor policies contained additional insured endorsements that limited coverage to claims arising out of the named insured subcontractor’s, ongoing operations. These insurers declined coverage because the defects alleged by the association occurred after the work had been completed. The insurers argued that the purpose of the “ongoing operations” language “was to limit additional insured coverage to losses that occurred while the contractor was onsite or while work was actually in progress.” Wellington at 5.

In considering that argument, the court explained that the underlying complaint alleged that the owner, developer and general contractor were liable for damages resulting from improper construction by the subcontractors. The court noted that the phrase “ongoing operations” was not defined in the policies at issue. The court then looked to the dictionary for the common and ordinary meaning. Citing the Merriam-Webster online dictionary, the court found that “ongoing” was defined as “being actually in process” and “operations” was defined to mean the “performance of a practical work or of something involving the practical application of principles or processes.” Id. (citation omitted).

After reviewing these definitions, the court determined that the “the common and ordinary meaning of this phrase is simply those things that the company does.” Wellington at 5 (citing Marathon Ashland Pipe Co. v. Maryland Cas. Co., 243 F.3d 1232, 1238 (10th Cir. 2001)). The defendants’ liability for the property damage “arises from the ongoing operations performed by the subcontractors. While the property damage may not have occurred during those ongoing operations, the alleged liability did.” Id. Thus, the court held that the owner, developer and general contractor were additional insureds under the policies at issue.

Similarly, in Wausau Underwriters Insurance Company v. Cincinnati Insurance Company, 2006 WL 2990205 (2d Cir. 2006), Cincinnati argued that “ongoing operations” “‘connoted actions currently in progress’ such as ‘active work’.” Wausau at 1 (emphasis in original). Cincinnati argued that because the subcontractor was no longer providing the contracted-for plowing and salting work, that the claim (a slip and fall in the additional insured’s parking lot) did not arise out of the named insured’s ongoing operations. The court rejected this argument, stating that “New York courts have not adopted such a narrow definition of ‘ongoing operations’.” Id.


Wellington and Wausau’s determination that an additional insured endorsement provides coverage for “ongoing operations” even if the work out of which the liability arises had been completed ignores the definition of “ongoing” and improperly relied upon the Marathon court’s construction of the definition.

Marathon did not address whether the phrase “ongoing operations” addressed ongoing or completed operations. The issue in Marathon was simply whether the phrase “ongoing operations” encompassed the type of operations being performed by the named insured at the time of the events giving rise to Marathon’s liability.

Marathon was sued by a temporary employee hired by SSI, Marathon’s building erection subcontractor. In its 30-year relationship with SSI for building erection, Marathon had regularly asked SSI to hire temporary employees to be supervised by Marathon. SSI had a policy of general liability insurance with Maryland Casualty and, as required by its service contract, included Marathon as an additional insured under its general liability policy. Marathon sought coverage under SSI’s Maryland Casualty policy for the temporary employee’s claim.

Maryland Casualty argued that the phrase “your ongoing operations,” contained in the additional insured endorsement, was limited to building erection work as referenced in the endorsement’s schedule. Maryland argued that because the temporary employee was not injured during SSI’s performance of building erection, but rather while SSI was providing the services of the employee unrelated to building erection, that Marathon was not an additional insured. Because “ongoing operations” was not defined in the policy, the court looked to the dictionary to determine the plain and ordinary meaning of the term.

The court explained that “[t]he common and ordinary meaning of this phrase is that a company’s ‘ongoing operation’ is simply those things that the company does, as opposed to the meaning suggested by Maryland Casualty which would limit ‘ongoing operations’ to mean only the core or most prominent operations that a company might undertake.” Marathon at 1238. In finding coverage, the court noted that the “occasional nature of [SSI’s hiring] activity does not negate the fact that it was an ‘ongoing operation’ for SSI.” Id. The court concluded that “at the very least, this limitation is ambiguous as to whether the parties intended to cover the risks associated with SSI’s activities in this regard and therefore must be read in favor of the insured.” Id. at 1239.

Similarly, in Wausau, the Second Circuit relied upon a prior New York Appellate Division decision which focused on the scope, not the timing, of the contractor’s work. The earlier case held that a pipe rupture resulting in a scalding injury arose out of the contractor’s “ongoing operations” even though the contractor was not actively testing or installing a valve at the time of the incident because “‘[u]nder any plain meaning of the word, the contractor’s work was ‘ongoing’ as long as the tests designed to assure proper performance remained undone’.” Wausau at 1 (citing Perez v. New York City Housing Authority, 754 N.Y.S.2d 635, 636 (N.Y. App. Div. 2003)).


Courts frequently broadly construe the scope of additional insured endorsements. Insurers relying on a distinction between completed operations and “ongoing operations” in their GL policies should exercise caution when applying their understanding of the meaning of those phrases to additional insured endorsements that contain those phrases. Despite the apparently clear limitation of the phrase “ongoing operations,” some courts have broadly construed additional insured endorsements containing that term to include both “ongoing operations” and completed operations.

What is the difference between an additional insured for ongoing operations and for completed operations?

Most contractors have a standard practice for obtaining an additional insured status under other parties’ liability policies. It is still common for contractors to require the additional insured coverage to extend to completed operations. This standard practice protects the contractor and owners from losses that occur during the course of construction as well as claims arising out of the completed project (damages found after the project is completed).

The Insurance Services Office, Inc. (ISO) and others in the industry advised that it was never the intention for the insurance industry to provide additional insureds with completed operations coverage. In 1993, ISO changed the coverage provided to additional insureds by revising many of their additional insured endorsements. They specifically revised the endorsements by removing the “your work” reference. This change would rule out the additional insured claims for completed operations. ISO amended their additional insured endorsement to apply only to the liability arising out of the contractor’s “ongoing operations” for the additional insured. This caused a huge gap for many and forced ISO to correct this. In 2001, ISO developed an additional insured form that provided coverage for completed operations.

What does this really mean? Often times damage resulting from a subcontractor’s work does not arise for years after the work has been completed. When that claim occurs, a suit is often filed against both the general contractor and the subcontractor. The general contractor will tender the defense back to their subcontractor. Assuming the loss is a covered loss and filed in a timely manner, the coverage afforded the general contract by the subcontractor is dependent upon the additional insured endorsement issued. If that subcontractor has the general contractor listed as an additional insured for their “ongoing operations” only, the general contractor will have no coverage under the subcontractor’s policy. If the subcontractor has the general contractor listed as an additional insured for their completed operations or “your work”, the general contractor may have coverage under the subcontractor’s policy.

Although the contractors still require the additional insured status to respond to completed operations claims, they are continuously faced with the challenge of understanding if the correct additional insured endorsement and wording is used.


Various Insurance Topics

Ed owns Ed’s Electrical, an electrical contracting business. Ed has been hired by a property owner, Prime Properties, to install new lighting in an office building Prime owns. Two of Ed’s employees complete the work. Two weeks later Prime Properties complains to Ed that the lights are not working properly. Ed’s crew makes two separate trips back to the job site in an attempt to fix the problems. Unfortunately, Prime is not satisfied. The company claims that Ed’s employees failed to install the switches correctly and that the fixtures were placed in the wrong location.

Prime Properties sues Ed’s Electrical for breach of contract and demands compensation. Ed’s Electrical has purchased a standard general liability policy. Ed forwards the lawsuit to the insurer, which quickly denies coverage. Ed is stunned. Why isn’t the claim covered?

Breach of Contract Versus an Occurrence

In its lawsuit against Ed’s Electrical, Prime Properties contends that the electrical contractor failed to fulfill the terms of its contract. Ed’s company did not do what it had promised to do, and now the property owner wants restitution.

Ed’s liability policy covers damages that Ed’s company is legally obligated to pay because of bodily injury or property damage caused by an occurrence (accident). Prime’s lawsuit does not cite any bodily injury or property damage, nor does it mention an accident. Thus, the breach of contract claim does not qualify for coverage under Ed’s liability policy.

As a general rule, lawsuits based only on breach of contract are not covered under general liability policies. Liability policies do not guarantee that your work will be done in accordance with a contract. (A project owner may require you to guarantee that you will complete your work as promised in your contract by purchasing a completion bond.) The quality of your work is under your control. Thus, the chance that your work may be faulty is a risk you undertake as a business owner.

In some cases, a lawsuit may seek damages for breach of contract suit and for bodily injury or property damage. For example, suppose that Prime Properties’ lawsuit claims that Ed’s Electrical not only breached the contract, it is also responsible for fire damage caused by faulty wiring. Soon after Ed’s employees installed the lighting fixtures, a wire leading to one of the lights overheated. The hot wire ignited a fire that caused $10,000 in property damage. In this case, Ed’s liability policy should cover the property damage claim.

Faulty Work Exclusions

As noted above, liability policies cover claims or suits because of bodily injury or property damage caused by an occurrence. Liability policies also contain exclusions that eliminate coverage for certain suits arising from your faulty work. These exclusions are complex, and courts do not always interpret them in the same way. Here are some basic concepts to keep in mind. These are general rules and exceptions may apply in some circumstances.

  • If your work is faulty, your policy will not cover the cost of redoing it. For example, you are hired to install a concrete walkway. Unfortunately, you used the wrong kind of concrete. The portion of the walkway you have completed buckles and the property owner demands that you redo it properly. Your liability policy will not pay the cost of redoing your faulty work.
  • If you are working on a part of a building and accidentally cause damage to the specific part you are working on, your policy will not cover that damage. For example, you own a plumbing business and are hired to replace a boiler in a commercial building. While installing the new boiler, you accidentally break a valve on it. If the building owner demands that you replace the valve, your policy will not cover the claim.
  • If work you have completed sustains property damage, your policy will not cover that damage. For example, suppose you operate a masonry business. You are hired by a homeowner to install a brick wall. Because you used the wrong type of mortar, the brick wall collapses after it is completed. If the homeowner demands that you redo the wall (or pay the cost of hiring another contractor), the claim will not be covered by your liability policy.


The three exclusions listed above generally do not apply if your faulty work causes bodily injury to a third party or damages property other than your work. For instance, in the boiler scenario described above, suppose that the broken valve flies across the room and shatters a window on the wall opposite the boiler. Because property other than the valve has been damaged due to an occurrence, the damage to the window should be covered.

Likewise, if damage to your completed work injures a third party or causes damage to other property, the injury or damage should be covered. For instance, suppose that the brick wall described above collapses onto the homeowner’s car, damaging the vehicle. Your liability policy should cover the damage to the car.

Damage to work you have completed may also be covered if the damaged work was performed for you by a subcontractor. For example, suppose that you have hired a subcontractor to construct the brick wall rather than doing the work yourself. The subcontractor performs shoddy work, the wall collapses, and you are sued for property damage by the homeowner. Because the work was performed by a subcontractor, the property damage claim may be covered.

Manufacturers and Sellers

Does your firm manufacture a product or sell products made by someone else? If the answer is yes, your company could be hit with a product liability claim. That is, a person could seek compensation from you on the basis that a product you made or sold is defective, and that it injured that person or damaged that person’s property.

For example, suppose that you own Chic Chairs, a small company that manufactures ergonomic chairs for office or home use. Your company was recently sued by a customer named Chuck, who claims that he was injured by a Chic chair he purchased. Chuck claims that he was sitting in his chair when it unexpectedly tipped backward, dumping him onto the floor. Chuck claims that the defective chair caused him to sustain a head injury and he is seeking $25,000 in damages.

Contractors and Service Providers

Perhaps your firm does not make or sell a product but performs work for someone else. In this case, your firm could be the subject of a completed operations claim. That is, someone could claim that work you completed is faulty and that your faulty work injured him or her or damaged his or her property. Here is an example:

Capital Concrete performs concrete work for general contractors and commercial property owners. Capital Concrete was recently sued by a customer, Prime Properties. Last year Prime Properties hired Capital Concrete to construct an elevated walkway at an upscale apartment building Prime owns. The walkway connected the parking garage to the building’s side entrance. Two months after Capital Concrete completed the work the walkway collapsed. The broken concrete damaged a stone patio, some expensive statuary, and several plants. Prime Properties is demanding $30,000 in damages from Capital Concrete to cover the property damage.

Negligence, Strict Liability, or Breach of Warranty

Some claims involving products or completed operations are based on negligence. Others are based on strict liability or breach of warranty. When strict liability applies, you may be held liable even if the claimant cannot prove you were negligent. In a breach of a warranty claim, the claimant typically alleges that you violated a warranty (guarantee) you made at the time of sale. For example, Tom works for a retailer that sells Chic Chairs. Tom is trying to sell a chair to Chuck. He tells Chuck that a Chic Chair can withstand 500 pounds. In fact, an elephant could sit on one, and it would not break. Chuck, who weighs 295 pounds, purchases a chair based on Tom’s guarantee. Chuck takes the chair home and sits in it. The chair collapses, injuring Chuck. Chuck sues the furniture store for bodily injury, alleging breach of warranty.

Claims arising out of your products or completed work are covered under your general liability policy. Coverage for such claims is included under Bodily Injury and Property Damage Liability. The latter is designated Coverage A under the standard ISO commercial general liability form (CGL), on which most liability policies are based. Claims arising out of your products or completed operations are covered unless they are specifically excluded by an endorsement.

The CGL does not cover every claim or suit involving your product or completed work. For a claim to be covered, all of the following criteria must be satisfied:

  • The claim must allege bodily injury or property damage. If no bodily injury or property damage has occurred, the claim will not be covered.
  • The claimant must contend that the bodily injury or property damage arose out of your product or completed work. In other words, there must be a direct connection between the product defect and the injury or damage.
  • The bodily injury or property damage must take place away from premises you own or rent. It must also occur when the product is no longer in your physical possession or after your work has been completed.

A claim that doesn’t meet the above criteria is not a products-completed operations claim. Yet, the claim may still be covered by your policy. For example, suppose you are giving some visitors a tour of your Chic Chairs factory. A visitor is injured when he sits in a defective chair. The visitor demands compensation. The claim will likely be covered under Bodily Injury and Property Damage Liability. However, the injury occurred on your premises so that the claim will be covered as a premises liability claim, not a product liability claim.

Similarly, suppose that Capital Concrete is in the process of constructing the elevated walkway when the partially-completed structure collapses. The damage to Prime Properties’ statuary, plants and stone patio will likely be covered by Capital Concrete’s general liability policy under Coverage A. However, the damage has arisen from Capital Concrete’s ongoing operations, not its completed operations.

Policy Limits

Claims arising out of your products or completed work are subject to both the Each Occurrence limit and the Products-completed Operations Aggregate limits in your policy. The aggregate limit is the most your insurer will pay under your policy for damages or settlements arising from your products or completed operations.


If your product or completed work is faulty or is not what you promised, your liability policy will not cover the cost to remake or redo it. The following three exclusions make this clear. They are located in the “exclusions” section under Coverage A.

Damage to Your Product

Your liability policy does not cover claims based on damage to your product or a part of your product. For a claim to be covered, it must involve damage to property other than your product. For instance, suppose that a customer purchases a chair made by Chic Chairs from a retailer. The customer then files a claim against Chic Chairs, alleging that the chair he bought was broken when he took it out of the box. Because no property other than the product has been damaged, the claim will not be covered under Chic Chair’s liability policy.

Damage to Your Work

Likewise, your policy will not cover claims for property damage to your completed work. In the first Capital Concrete example, the elevated walkway collapsed after Capital had completed it. Suppose that Prime Properties sued Capital Concrete for the damage to the walkway only. The walkway was Capital’s completed work; thus, the claim would not be covered under Capital Concrete’s liability policy. If Prime Properties sought compensation for damage to other property (like the statuary and the plants) that was damaged by the collapsed walkway, that damage would be covered.

The Damage to Your Work exclusion contains an exception for work performed by subcontractors. This exception is designed to protect contractors from claims stemming from defective work performed by subcontractors. If Capital Concrete had hired a subcontractor, Crazy Concrete, to build the walkway, and Capital was sued because of Crazy Concrete’s faulty work, the claim would probably be covered.

Damage to “Impaired” Property

This exclusion can be confusing. Essentially, it excludes damage to property that is defective or unusable because it contains your defective product or defective work. Such property can be restored to use by removing your defective work or product. For example, Capital Concrete was hired by a general contractor to construct the concrete foundation of a new building. Other contractors constructed the remainder of the building. Unfortunately, Capital used the wrong type of concrete, and the foundation has cracked. The building is now unusable. If the building owner demands that Capital Construction repair the foundation, Capital’s liability insurer is unlikely to pay the cost of the repairs.

Like many small businesses, your company has probably purchased a commercial liability policy. Many insurers that issue liability policies utilize standard forms published by an organization called the Insurance Services Office or “ISO.” In addition to policy forms, ISO provides statistical and technical information to insurers.

There are two main reasons why insurers use ISO forms. One is convenience. Developing policy forms is a time-consuming task that many insurers prefer to avoid. The second reason has to do with risk. When an insurer drafts its own policy language, a court may interpret it differently than the way the insurer intended. The insurer may have to cover claims it did not intend to cover. ISO forms tend to be less risky because much of the language they contain has already been analyzed by the courts.

The ISO Commercial Liability Coverage Form or CGL is the basis of an ISO liability policy. The most important coverage afforded by the CGL is Coverage A, which covers bodily injury and property damage. The policy also covers Personal and Advertising Injury (Coverage B) and Medical Payments (Coverage C), which are explained in separate articles.

Coverage A: Bodily Injury and Property Damage Liability

For the purposes of this discussion, we will assume that your firm is covered under an ISO liability policy as the named insured, meaning the person or entity listed in the policy declarations. The CGL covers sums your firm is legally obligated to pay as damages because of bodily injury or property damage. That is, it covers claims or suits against your company by a person or organization that has sustained bodily injury or property damage as a result of your firm’s negligence.

For Coverage A to apply, you must be legally responsible for the injury or damage. The CGL will not cover payments you make voluntarily. Coverage A is broad, covering all bodily injury or property damage caused by an occurrence unless the injury or damage is precluded by an exclusion.

Covers Your Premises, Work, or Operations

Coverage A applies to claims that arise out of injury or damage that occurs on your premises, or that arises out of your work or operations. Here is an example of an injury that occurs on-premises.

Doris operates Divine Delights, a coffee shop that sells cakes and cookies made on the premises. Bill, a customer, enters the store and is heading to the counter when he trips over a chair. Bill injures his knee in the fall. Three months after the accident he files a claim against Divine Delights, demanding reimbursement of his medical expenses related to his knee injury. The shop’s liability policy covers the claim.

Covers Work Off-premises and Completed Work

Some firms perform work or operations at customers’ homes or places of business. For example, Capital Construction has been hired to refurbish wall paneling in the interior of an office building. A Capital employee is moving a table saw at the job site when he accidentally drops it. The saw falls to the floor, damaging several tiles. If the building owner later sues Capital Construction for the cost to repair the floor tiles, Capital’s liability policy should cover the suit.

In the previous example, the damage to the floor was a result of work in progress. That is, the damage occurred while Capital Construction was performing ongoing operations. Bodily injury or property damage may also arise from completed work or operations. In other words, injury or damage may result from faulty or defective work that has been finished.

Suppose that Capital Construction builds an eight-foot fence around a tasting room at a winery. During construction, Capital employees fail to install the proper footings. Two years after the fence has been completed it collapses, injuring a winery customer. The customer sues Capital Construction for bodily injury. Capital’s general liability insurer pays the claim because Capital’s policy includes completed operations coverage.

Also, Covers Faulty Products

Some claims arise from faulty products. Divine Delights (in the first example) sells baked goods to the public. Suppose that Divine sells cherry pies. Stuart buys one of the pies and takes it home. Later that day, he is eating a piece of pie when he breaks a tooth on a cherry pit. Stuart’s tooth cannot be repaired, so it is removed and replaced with a dental implant. Stuart sends Divine Delights his dental bills and demands reimbursement. Again, Divine’s CGL policy should cover the claim.

If a lawsuit covered by Coverage A is filed against your firm, your insurer will provide an attorney to defend you. Covered costs include attorneys’ fees, court costs, premiums on certain bonds, and interest charged on the judgment. All of these charges are included under a coverage called Supplementary Payments. They are covered in addition to the policy limit.

Does your company perform work for other firms? Does it hire other companies to perform work for you? If the answer to either question is yes, then you have probably signed a contract containing an indemnity agreement. An indemnity agreement is a promise by one party to assume the liability of someone else. That is, Party X agrees that if Party Y is sued by Party Z, Party X will indemnify (reimburse) Party Y for costs that result from Party Z’s lawsuit. An indemnity agreement is also called a hold harmless agreement.

Here is an example:

Busy Builders is a general contractor that has been hired by a property owner called Prime Properties to refurbish an office building. Busy Builders hires Edwards Electrical to rip out the old wiring in the building and replace it with new wiring. Busy knows that if Edwards Electrical makes a mistake while performing the electrical work, someone might be injured or someone’s property might be damaged. Moreover, the insured party might seek compensation for the injury or damage by suing not only Edwards Electrical but Busy Builders as well. To protect itself against such suits, Busy Builders requires Edwards Electrical to sign a contract that contains an indemnity agreement.

The indemnity agreement states that if someone sustains bodily injury or property damage because of Edwards’ negligence in performing the wiring work, and that party sues Busy Builders, Edwards will pay for the loss. The contract requires Edwards to assume liability for any damages that are assessed against Busy Builders as a result of the lawsuit. Edwards will also be responsible for defending (or paying the cost of defending) Busy against the lawsuit.

Busy Builders wants to ensure that Edwards Electrical will have the funds it needs to pay for any potential claims. Thus, in addition to the indemnity agreement, Busy also includes a provision in the contract that requires Edwards to purchase liability insurance. The contract specifies the type of coverage (standard general liability) and the limits of liability that Edwards Electrical must purchase.

Contractual Liability

The liability that one party assumes on behalf of another via a contract is called contractual liability. In the above example, Busy Builders uses a contract containing an indemnity agreement to transfer the risk of potential lawsuits to Edwards Electrical. As this example demonstrates, a contract can be used as a mechanism for transferring risk.

In the Busy Builders scenario, Edwards Electrical is an electrical contractor that has been hired to do electrical work. Because Edwards will be doing the wiring work, it is in a better position than Busy Builders to prevent losses related to the wiring work. For this reason, Edwards assumes the risks that such losses may occur.

An indemnity agreement transfers from Party A to Party B the financial consequences of a loss. It does not eliminate Party A’s liability for the injured person. In the Busy Builders example, Edwards Electrical has agreed to pay any damages and defense costs that result from lawsuits against Busy that arise out of Edwards’ work. The agreement will not prevent lawsuits by third parties against Busy Builders, nor will it affect Busy’s liability to an injured third party. It merely transfers, from Busy Builders to Edwards Electrical, liability for the financial consequences of the lawsuit (damages and defense costs).

Liability Coverage

Many companies engage in contracts as a normal part of their business. Examples are property leases, equipment leases, easements, and elevator maintenance agreements. Many of these contracts contain indemnity agreements. Because these agreements are so common, they are covered by the standard ISO general liability policy. Contractual liability coverage is included in the policy under Coverage A, Bodily Injury and Property Damage Liability.

Contractual Liability Exclusion

If you looked at Bodily Injury and Property Damage Liability Coverage in your liability policy, you would probably think that it did not cover contractual liability. This is because Coverage A contains a contractual liability exclusion. This exclusion 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, this exclusion contains two exceptions. These exceptions provide coverage for:

  • Liability the insured would have in the absence of the contract. For example, suppose that you rent a forklift from an equipment rental company. You are using the forklift to move some crates outside your warehouse when you accidentally hit a truck belonging to your next-door neighbor.  You have probably signed a rental agreement that imposes some liability on you for damage you cause to the forklift and to other property. Even if the rental agreement did not exist, you would be legally liable for the damage you have caused to the forklift and to your neighbor’s truck.
  • Liability assumed by an insured under an insured contract if the injury or damage occurs after the contract has been executed. The insured contract is a defined term in the policy.

Here is a full explanation of the meaning of insured contract. Insured contracts are covered as an exception to the exclusion. Thus, you are automatically covered for any contract you engage in during the policy period that meets the definition of insured contract.

Note that contractual liability applies only to bodily injury or property damage. If you assume liability under a contract on behalf of someone else for claims that allege personal and advertising injury, the claims will not be covered under your liability policy. Contractual liability is specifically excluded under personal and advertising injury liability coverage (Coverage B).

The term insured contract has a specific meaning under the standard general liability policy. This term includes six categories of contracts. These contracts are covered automatically under the standard liability policy.

An insured contract includes the following types of contracts:

  • Lease of Premises: When you sign a lease of premises, the lease gives you the right to use the premises for the purposes outlined in the lease in exchange for a fee. While a lease of premises qualifies as an insured contract, the lease may contain provisions that are not covered by the policy.

For example, suppose that you lease a building from someone else. The lease requires you (the tenant) to indemnify the building owner if you accidentally cause a fire that damages the building. An agreement to indemnify the premises owner for damage by fire is not an insured contract. If you accidentally start a fire that damages the building, and the lease requires you to reimburse the owner for the damage, your policy will not cover that part of the lease.

Fire damage to rented premises for which you are legally liable under common law (and not because of a contract) is covered by the policy. This coverage is subject to a sublimit a (specific limit that is lower than the policy limit). It is covered under Bodily Injury and Property Damage Liability but is not included under contractual liability.

  • Sidetrack Agreement: A sidetrack is a railroad spur, a small piece of railroad track. It gives a business (such as a manufacturer) a direct connection to the main railroad track. A sidetrack agreement is a contract between a business entity and a railroad. The railroad allows the business to use the sidetrack. In exchange, the business promises to indemnify the railroad if the latter is sued by someone who suffers bodily injury or property damage due to the business entity’s negligent use of the sidetrack.
  • Easement or License Agreement: An easement allows someone to use property that is owned by someone else. For instance, Bill has no direct access to his property from the main road. Jeff lives next door to Bill. The two sign an easement agreement in which Jeff allows Bill to use Jeff’s driveway as a means of accessing Bill’s house. Bill cannot use the driveway for any other purpose. A license gives someone permission to use the property for a specific purpose. For instance, a city gives a person a license to operate a barber shop at a specific location as long as certain requirements are met.
  • Obligations Required by Ordinance to Indemnify a Municipality: Cities often pass ordinances requiring any business that is performing a potentially hazardous activity to indemnify the city should it be sued by someone who is injured as a result of that activity. For example, window washing is potentially hazardous, especially on tall buildings. A city ordinance might require all window washers to indemnify the city. If a window washer accidentally injures someone or something while performing his work and the city is sued, as a result, the window washer must pay the costs related to the suit. Because of the ordinance, the window washer is required to indemnify the city even though the washer does not have a specific contract with the city.
  • Elevator Maintenance Agreement: Building owners often hire elevator servicing contractors to maintain the elevators in their buildings. In a typical elevator maintenance agreement, the contractor agrees to indemnify the building owner in the event the contractor accidentally injures someone or causes property damage, and the injured party sues the owner.
  • Blanket Assumption of Tort Liability: This is a catch-all category that includes all contracts in which you (the named insured) assume the tort liability of someone else. That is, it includes any contract in which you agree to indemnify another party for the cost of a claim or suit against that party by someone who has suffered bodily injury or property damage due to your negligence.

For example, suppose that Larry’s Landscaping rents a lawn mower from Edwards Equipment. Edwards requires Larry to sign a contract containing an indemnity agreement. In the agreement, Larry promises to indemnify Edwards if Larry’s Landscaping accidentally causes bodily injury or property damage to a third party while using the lawnmower, and the injured party seeks restitution from Edwards Equipment. The contract meets the requirements for coverage under Larry’s Landscaping’s liability policy.

The coverage afforded to the last group of covered contracts is often called blanket contractual liability coverage. The word blanket refers to the fact that all contracts in this group are covered automatically and need not be listed on the policy. The party you agree to indemnify may be virtually anyone (including a municipality) with the following exceptions.

  1. An agreement to indemnify a railroad for bodily injury or property damage arising out of construction or demolition operations, within 50 feet of any railroad property. Suppose you are a paving contractor that has been hired by a city to repave a road that crosses a railroad track. Before you can do any work, the railroad will require you sign a contract in which to promise to indemnify the railroad for any injuries or damage you cause to others in the course of your work. The indemnity agreement is not an insured contract under your liability policy.
  2. An agreement to indemnify an architect, engineer or surveyor for injury arising out of his or her professional acts. Professional liability is not covered under your general liability policy.
  3. Agreements to indemnify someone else for injury arising out of your professional acts as an architect, engineer or surveyor. Professional acts are not covered by your general liability policy, whether they are committed by you or someone else.

Small business owners often engage in contracts that require one party to assume liability on behalf of another. For example, a building lease may require the tenant to indemnify the landlord if someone is accidentally injured as a result of the tenant’s use of the building, and the injured person sues the landlord. The liability that one party assumes on behalf of another via a contract is called contractual liability.

Contractual liability is covered under a typical commercial auto policy. This coverage is provided by an exception to a contractual liability exclusion. The exception affords coverage for liability you have assumed in an insured contract, as that term is defined in the policy. This coverage will apply if you have assumed the liability of another party, and that party has been sued as a result of an accident that results from the use of a covered auto by a driver who is insured under your policy.

Contractual liability is also covered under a general liability policy. However, that policy excludes claims or suits that arise from the ownership or use of an auto owned or operated by an insured.

Assumption of Tort Liability

One type of contract that qualifies as an insured contract under a commercial auto policy is an assumption of tort liability. The policy covers any contract (or part thereof) in which you assume the tort liability of someone else to pay for bodily injury or property damage to a third party. As long as the contract relates to your business, it should be covered automatically (without the need to notify your insurer).

Tort liability means a liability that would be imposed by law if the contract did not exist. For instance, suppose you are a plumbing contractor. You have been hired by a general contractor (GC) to do plumbing work on a new building. You have signed a contract in which you have agreed to assume liability for any claims alleging bodily injury or property damage against the GC if the claims arise out of your plumbing work. The GC is liable under common law for injuries to others if the injuries are attributed to the GC’s negligence. The contract transfers to you the financial consequences of a lawsuit against the GC if the lawsuit arises from your plumbing work.

In the above example, the GC’s transfer of risk to your plumbing company does not eliminate the GC’s liability to third parties. Suppose that the GC is sued by someone who’s been injured in an auto accident that occurs in the course of your plumbing operations. If you (or your insurer) fail to compensate the injured party as required by the contract, the GC will have to provide restitution (assuming it is liable for the loss).

An Example

Here is an example of an assumption of tort liability that would likely be covered under a commercial auto policy.

Wendy owns Wendy’s Windows, a company that sells and installs windows. Wendy’s firm has been hired by Premier Properties to replace the windows in an apartment complex Premier owns. Wendy has signed a contract requiring her to assume liability for the cost of any claims or suits against Premier alleging bodily injury or property damage that arises from Wendy’s work on the project. In the contract, Wendy assumes the responsibility to pay damages assessed against Premier as well as the costs of defending it against lawsuits. Wendy’s Windows is insured for auto liability under a standard commercial auto policy.

One day, Wendy is using her truck (a covered auto under her policy) to transport windows across the apartment complex’s parking lot. She is backing up her truck next to the building when she inadvertently hits Tom, an apartment resident. Tom sustains a serious leg injury. He sues Wendy and Premier Properties for bodily injury. His suit alleges that the accident resulted from both Wendy’s negligent driving and Premier’s negligent hiring of an incompetent contractor (Wendy).

Wendy’s assumption of Premier Properties’ tort liability would likely qualify for coverage as an insured contract. This means that Wendy’s auto insurer will pay the costs of defending Premier against Tom’s suit as well as any damages (or a settlement) assessed against Premier.

Indemnification of a Municipality

An assumption of tort liability includes a contract that requires you to indemnify a municipality in connection with work you have performed for that municipality. For example, suppose that the city of Podunkville has hired your plumbing company to install new piping in a city-owned building.

You have signed a contract that requires you to indemnify Podunkville should the city be sued for bodily injury or property damage that you cause to a third party while performing your plumbing work. The contract requires you to indemnify the city for damages and defense costs it incurs as a result of such lawsuits.

Suppose that in the course of your plumbing work for Podunkville, you are driving a covered auto when you inadvertently cause a collision with another vehicle. The driver of the other vehicle is injured and sues both you and Podunkville for bodily injury. Your assumption of the city’s tort liability should qualify as an insured contract under your auto policy. Thus, your insurer should pay the city’s defense costs plus any damage that results from the suit.

Many businesses sign contracts that contain an indemnity agreement (also called a hold harmless agreement). In an indemnity agreement, one party agrees to indemnify (reimburse) another for damages arising from certain claims or lawsuits. Typically, Party A agrees that if Party B receives a demand for damages from someone who has been injured because of A’s work, A will indemnify B for any damages imposed on B.

Indemnity agreements assign liability to the party that is better able to control risks. Suppose that Prime Properties is a property owner. Prime Properties hires Capital Construction, a construction contractor, to refurbish a building owned by Prime. Capital is doing the construction work, so it is in a better position than Prime Properties to control construction-related risks. An indemnity agreement will ensure that Capital Construction (and not Prime Properties) assumes liability for construction-related risks.

Cost of Claims or Suits

When Prime Properties hires Capital Construction to perform work on Prime’s behalf, Prime is concerned about costs it might have to assume if Capital accidentally injures someone or damages someone’s property while performing its work for Prime. For example, suppose that Capital Construction has erected a scaffold next to the building it is refurbishing. One day, Jim, an employee of Capital, is on the scaffold busily hammering nails into the wood frame of the building. Bill, who works in a building near the job site, stops by to see how the refurbishment is progressing. Bill is standing near the scaffold when Jim accidentally drops his hammer. The hammer hits Bill in the head.  Bill sustains a serious head injury due to the accident. He sues both Prime Properties and Capital Construction for negligence.

If a court determines that negligence on the part of Prime Properties contributed to Bill’s injury, Prime will have to pay damages to Bill. Also, Prime will incur legal costs in defending itself against the lawsuit. If Prime Properties has general liability insurance, its insurer will likely pay the damages assessed against it as well as the costs to defend it. Even so, these costs and expenses will have a negative impact on Prime Properties’ loss history.

Covers Damages and Defense Costs

Prime Properties does not want its liability insurer to pay claims that arise from Capital Construction’s work. To protect itself and its liability insurance, Prime includes an indemnity agreement in its contract with Capital. The indemnity agreement will likely require Capital to assume liability for damages against Prime. Also, it will require Capital to defend, or pay the cost of defending, Prime against claims or suits that arise from Capital’s work.

Amount of Liability Transferred Varies

Indemnity agreements vary in the amount of liability they transfer from one party to another. In the previous example, Prime Properties does not want to pay damages because of bodily injury or property damage that Capital Construction causes to third parties while performing its construction work for Prime. Thus, the parties sign a contract containing an indemnity agreement. Prime Properties requires Capital Construction to assume liability for any claims or suits against Prime that seek damages for bodily injury or property damage and arise out of Capital’s work for Prime.

Prime Properties wants to obtain as much protection from lawsuits that it can under the indemnity agreement. To that end, it may require Capital Construction to assume liability for damages that arise from:

  • negligence committed by Capital Construction;
  • negligence committed jointly by Capital Construction and Prime Properties;
  • negligence committed solely by Prime Properties.

The amount of liability Capital Construction assumes depends on several factors. One is Capital Construction’s bargaining position relative to Prime Properties’. If Prime has more bargaining power, it may convince Capital to accept contract terms that benefit Prime.

Another factor that may affect Prime’s ability to transfer liability is state law. Laws called anti-indemnity statutes limit the amount of liability that may be transferred from one party to another. In some states, Prime may be prohibited by an anti-indemnity statute from transferring to Capital Construction any liability other than liability for Capital’s own negligence. In other words, the law may prevent Prime Properties from transferring liability for negligence committed by Prime and Capital Construction jointly as well as liability for negligence committed solely by Prime. Anti-indemnity statutes generally apply to construction contracts only.

Contractual Liability Coverage

A business is covered for liability it assumes in an indemnity agreement under contractual liability, coverage, which is included in a general liability policy. Its assumption of liability is covered under the policy as long as the contract meets the definition of insured contract in the policy.

The term insured contract has a specific meaning under the standard general liability policy. This term includes six categories of contracts. These contracts are covered automatically under the standard liability policy.

An insured contract includes the following types of contracts:

  • Lease of Premises: When you sign a lease of premises, the lease gives you the right to use the premises for the purposes outlined in the lease in exchange for a fee. While a lease of premises qualifies as an insured contract, the lease may contain provisions that are not covered by the policy.

For example, suppose that you lease a building from someone else. The lease requires you (the tenant) to indemnify the building owner if you accidentally cause a fire that damages the building. An agreement to indemnify the premises owner for damage by fire is not an insured contract. If you accidentally start a fire that damages the building, and the lease requires you to reimburse the owner for the damage, your policy will not cover that part of the lease.

Fire damage to rented premises for which you are legally liable under common law (and not because of a contract) is covered by the policy. This coverage is subject to a sublimit a (specific limit that is lower than the policy limit). It is covered under Bodily Injury and Property Damage Liability but is not included under contractual liability.

  • Sidetrack Agreement: A sidetrack is a railroad spur, a small piece of railroad track. It gives a business (such as a manufacturer) a direct connection to the main railroad track. A sidetrack agreement is a contract between a business entity and a railroad. The railroad allows the business to use the sidetrack. In exchange, the business promises to indemnify the railroad if the latter is sued by someone who suffers bodily injury or property damage due to the business entity’s negligent use of the sidetrack.
  • Easement or License Agreement: An easement allows someone to use property that is owned by someone else. For instance, Bill has no direct access to his property from the main road. Jeff lives next door to Bill. The two sign an easement agreement in which Jeff allows Bill to use Jeff’s driveway as a means of accessing Bill’s house. Bill cannot use the driveway for any other purpose. A license gives someone permission to use the property for a specific purpose. For instance, a city gives a person a license to operate a barber shop at a specific location as long as certain requirements are met.
  • Obligations Required by Ordinance to Indemnify a Municipality: Cities often pass ordinances requiring any business that is performing a potentially hazardous activity to indemnify the city should it be sued by someone who is injured as a result of that activity. For example, window washing is potentially hazardous, especially on tall buildings. A city ordinance might require all window washers to indemnify the city. If a window washer accidentally injures someone or something while performing his work and the city is sued,  as a result, the window washer must pay the costs related to the suit. Because of the ordinance, the window washer is required to indemnify the city even though the washer does not have a specific contract with the city.
  • Elevator Maintenance Agreement: Building owners often hire elevator servicing contractors to maintain the elevators in their buildings. In a typical elevator maintenance agreement, the contractor agrees to indemnify the building owner in the event the contractor accidentally injures someone or causes property damage, and the injured party sues the owner.
  • Blanket Assumption of Tort Liability: This is a catch-all category that includes all contracts in which you (the named insured) assume the tort liability of someone else. That is, it includes any contract in which you agree to indemnify another party for the cost of a claim or suit against that party by someone who has suffered bodily injury or property damage due to your negligence.

For example, suppose that Larry’s Landscaping rents a lawn mower from Edwards Equipment. Edwards requires Larry to sign a contract containing an indemnity agreement. In the agreement, Larry promises to indemnify Edwards if Larry’s Landscaping accidentally causes bodily injury or property damage to a third party while using the lawnmower, and the injured party seeks restitution from Edwards Equipment. The contract meets the requirements for coverage under Larry’s Landscaping’s liability policy.

The coverage afforded to the last group of covered contracts is often called blanket contractual liability coverage. The word blanket refers to the fact that all contracts in this group are covered automatically and need not be listed on the policy. The party you agree to indemnify may be virtually anyone (including a municipality) with the following exceptions.

  1. An agreement to indemnify a railroad for bodily injury or property damage arising out of construction or demolition operations, within 50 feet of any railroad property. Suppose you are a paving contractor that has been hired by a city to repave a road that crosses a railroad track. Before you can do any work, the railroad will require you sign a contract in which to promise to indemnify the railroad for any injuries or damage you cause to others in the course of your work. The indemnity agreement is not an insured contract under your liability policy.
  2. An agreement to indemnify an architect, engineer or surveyor for injury arising out of his or her professional acts. Professional liability is not covered under your general liability policy.
  3. Agreements to indemnify someone else for injury arising out of your professional acts as an architect, engineer or surveyor. Professional acts are not covered by your general liability policy, whether they are committed by you or someone else.

Harry operates a large retail hardware store in a building he leases from Buildings Inc. Harry’s lease requires him to insure the building under a commercial property policy. The policy lists both Buildings Inc. and Harry’s business, Harry’s Hardware, as insureds. The lease also requires Harry to purchase a general liability policy that includes Buildings Inc. as an additional insured.

Late one night a fire breaks out in the building when the store is closed. Firefighters determine that  the fire broke out in a bag of recyclables. The bag contained both a 9-volt battery and steel wool, which reacted to produce a fire. The fire caused $200,000 in damage to the building.

The liability policy that covers Harry’s Hardware includes a $250,000 limit for a coverage called Damage to Premises Rented to You. The fire resulted from the hardware store’s negligent storage of recyclables. If Building’s Inc. demands that Harry’s Hardware pay for the fire damage to the building, the claim should be covered by the hardware store’s liability policy.

However, the fire damage to the building is also covered under the commercial property policy that Harry has purchased as required by the lease. Which policy will apply first?

Other Insurance Provisions

General liability policies cover certain risks that may be more appropriately covered by other types of policies. The coverage afforded for Damage to Premises Rented to You is an example. Physical damage to a building is best covered by a commercial property policy. However, if no property coverage exists or if the property policy has been used up, the liability coverage will apply.

Many insurance policies contain clauses that explain how they will respond to claims that may be covered by other policies. These clauses are typically entitled Other Insurance.

In a typical general liability policy, the Other Insurance clause states that the policy provides primary (first line) insurance. However, this provision contains exceptions.

When Your Policy Provides Excess Coverage

A typical liability policy provides excess coverage for losses covered by:

  • Fire or other property insurance covering your work, For example, you are an electrical contractor and are installing electrical wiring in a building that is under construction. All of the contractors involved in the project (including you) are insured for physical damage to the building during its construction under a builders risk policy (a type of property coverage). If you accidentally cause damage to the building during its construction, the builders risk policy will apply first. Your liability policy will cover damage caused by your negligence on a secondary basis.
  • Fire or other property insurance covering premises you rent (or occupy without a lease with the owner’s permission). In the opening example, Harry is insured under a commercial property policy for damage to the building he rents from Buildings Inc. Because the fire damage is insured under a property policy, that policy should apply first. Harry’s liability policy will apply on an excess basis.
  • Other insurance you have purchased to cover your liability as tenant for property damage to premises you rent (or occupy without a lease with the owner’s permission) For example, suppose that you are forced to move from your current location. While looking for a new location, you rent office space under a short-term lease. Your temporary landlord requires you to purchase a legal liability policy (a type of property policy that covers your legal liability for damage to property in your care). If you accidentally cause property damage to the building that is covered by your legal liability policy, the latter should apply first. Your general liability policy will apply as excess coverage.
  • Any other insurance that covers your liability for the use of aircraft, autos or watercraft. For example, a typical liability policy covers bodily injury or property damage you accidentally cause to others while operating small watercraft you do not own (as long as you are not using the boat to carry passengers for a fee). Suppose that your company owns a yacht. You have purchased a marine policy that covers your liability for the use of your boat as well as boats you do not own. You rent a small boat and inadvertently cause an accident in which someone is injured. If the injured person files a claim, your boat policy should apply first. Your general liability policy will apply on a secondary basis.
  • Coverage provided to you as an additional insured. For example, Buildings Inc. is an additional insured under Harry’s Hardware’s liability policy for claims arising out of Harry’s use of the leased building. Suppose that Building’s Inc. is sued by a company that claims its building suffered smoke damage from the hardware store fire. The lawsuit alleges that Buildings Inc. is partly liable for the fire because it knew about Harry’s improper storage of recyclables but did nothing to remedy the situation. Because the claim arose out of Harry’s use of the rented building, Harry’s liability policy (which covers Buildings as an additional insured) should respond to the claim first. If Harry’s liability coverage is used up, then Building’s Inc.’s own liability policy should apply to the claim on an excess basis.

In some cases, the Other Insurance provisions in your liability policy may conflict with those in the other policy. For instance, both policies may state they apply on an excess basis. Such conflicts may be resolved by state laws that dictate the order in which policies apply. Alternatively, conflicts may be resolved by a court.

Does your company lease property or do work for other businesses? If so, you may have signed a contract that required you to add another business to your general liability policy as an additional insured. Additional insured status is a requirement in many building leases, construction contracts, and other business agreements.

An additional insured is simply a party added to your policy as an insured. To be covered under your liability policy, a party must have a business relationship with your company that is a potential source of liability for that party. For example, a landlord has a business relationship (lease of property) with its tenant. A landlord may be sued for bodily injury or property damage that results from an accident caused by the tenant’s negligence. Thus, landlords are frequently covered as additional insureds under their tenants’ liability policies.

Endorsement Needed

Some insurers’ liability policies contain wording that automatically covers certain types of additional insureds. If your policy does not contain this wording, an endorsement will be needed to add another business to your policy as an insured. The type of endorsement your insurer will use depends on the relationship between you and the additional insured. For instance, if the additional insured is your landlord, your insurer will probably use an endorsement covering lessors of premises. If the additional insured is a vendor that sells your product, the insurer will use a vendors endorsement.

Endorsement Language Determines Coverage

The scope of coverage afforded to an additional insured under your policy depends on the language contained in the endorsement. Many insurers use standard additional insured endorsements provided by ISO. Whether it is an ISO endorsement or one devised by the insurer, the endorsement will restrict coverage to claims stemming from the property you are leasing, the product you are selling, the job you are performing, etc.

For example, suppose that you are the owner of Terrific Tax Services. You have just signed a contract to lease space in a commercial building. The contract requires you to add your new landlord, Buildings Inc., to your general liability policy as an additional insured. Buildings want to make sure it will be covered under your policy if you accidentally harm someone or damage someone’s property while using your rental space, and Buildings is sued as a result.

Your insurer issues an endorsement adding Buildings Inc. to your policy. Because Buildings is your landlord, the endorsement limits coverage to claims against Buildings Inc. that arise out of the ownership, maintenance or use of use of the part of the building leased to you. Buildings Inc. is an insured only in its capacity as your landlord. If it is sued in its capacity as another tenant’s landlord, your policy will not cover the suit.

It is now one year later and Bill, a customer of yours, is visiting your office. Bill trips on a loose edge of the wall-to-wall carpet and falls, breaking his leg. Bill subsequently learns that the carpet problem has existed for months. You loosened it accidentally while moving a computer. You notified Buildings of the problem, but your landlord had not gotten around to fixing it. Moreover, you did not take steps, such as covering it with a piece of furniture, to prevent someone from tripping on it. Bill files a lawsuit seeking damages for bodily injury. The suit names both you and Buildings Inc. as defendants.

Because the accident arose out your use of the leased office space, your liability policy should cover the claim. As an insured under your policy, Buildings Inc. should be covered for its share of the damages awarded to the Bill. Your insurer should also pay Buildings’ defense costs; these costs should not reduce your policy limit. Buildings Inc. is entitled to coverage as long as it fulfills the duties imposed on insureds under your policy. For example, Buildings Inc. must cooperate with your insurer when it investigates Bill’s claim.

Sharing Your Policy Limits

It is important to understand that Buildings Inc. and any other additional insured included in your policy will share the limits provided to you under your policy. Suppose that Bill’s lawsuit results in $25,000 in damages and that the court requires you and Buildings to each pay $12,500. The $25,000 in damages will be subject to the “each occurrence” limit. It will also reduce your “general aggregate” limit. This limit represents the amount of insurance that remains to pay damages because of other injury or damage that occurs during your policy period.

Endorsement Limitations

In recent years new restrictions have been added to many additional insured endorsements. These restrictions have narrowed the scope of coverage provided to some additional insureds.

Suppose that Buildings Inc. hires a Peerless Piping, a plumbing contractor, to install new sewer pipes outside Buildings Inc.’s office complex. Buildings requires Peerless Piping to insure Buildings Inc. as an additional insured under Peerless’ liability policy. Peerless’ insurer adds an additional insured endorsement to Peerless’ liability policy. The endorsement covers Buildings for claims seeking damages for bodily injury or property damage. The claims are covered only if the injury or damage is caused wholly or partly by acts or omissions of Peerless Plumbing. That is, Buildings is covered only if the claim results from something Peerless Plumbing did, or from something Peerless Plumbing and Buildings did jointly. If Buildings is sued for something that only Buildings did, the claim will not be covered. This limitation is often referred to as a sole negligence exclusion. It excludes coverage for negligence attributed solely to the additional insured.

Finally, the additional insured endorsement that covers Buildings Inc. under Peerless Plumbing’s liability policy contains another restriction. It limits coverage to acts or omissions committed in the course of the plumbing contractor’s ongoing operations for Buildings Inc. If Buildings Inc. is sued due to an accident that occurs after Peerless has finished the piping work, Buildings will not be covered under the additional insured endorsement.

Errors and omissions liability insurance (or E&O insurance for short) covers claims that arise from your negligent acts or your failure to provide the level of advice or service that was expected. It is also called professional liability insurance. The word professional is often associated with lawyers, bankers, physicians and other people who require extensive education and training to perform their duties. Yet, you need not be a doctor or lawyer to have a professional liability exposure. Virtually any business that performs a service or provides advice to others in exchange for a fee could be sued on the basis that it failed to fulfill its professional obligations. Here is an example.

Sample E&O Scenario

Peter owns and manages Peerless Programming, a small company that provides computer programming services. Peerless develops customized software programs to meet the needs of each client. The company is insured for liability under the standard ISO general liability policy. Peter considered buying errors and omissions liability coverage last year but decided it was not necessary.

Thus, Peter is shocked when he receives notice of a lawsuit against his company. The plaintiff is Harry’s Hardware, a small chain of hardware stores. Harry has hired Peerless Programming to create an inventory management and tracking system. Peerless completed the system and installed it at the hardware chain six months ago. Harry’s has now filed a lawsuit claiming that the program cannot be used because it is full of bugs. The suit also alleges that Peerless failed to adequately test the program and that its negligence has cost Harry’s thousands of dollars in lost work time. Harry’s seeks $100,000 in damages.

Harry’s lawsuit is unlikely to be covered under Peerless Programming’s general liability policy. For one thing, the lawsuit does not seek damages for bodily injury, property damage or personal and advertising injury. Moreover, the injury alleged (financial loss) was not caused by an occurrence, as that term is defined in the standard liability policy. With no coverage for the lawsuit under its general liability policy and no errors and omissions coverage, Peerless may be stuck with a large out-of-pocket expense. This may include money it has to pay as damages or settlement as well as any legal expenses it incurs.

Common Features of E&O Policy

If you are a “traditional professional” like a physician or attorney, you may obtain errors and omissions coverage under a policy form that is specific to your profession. For instance, an attorney will likely be insured under a lawyer’s professional liability policy. If you are a “non-traditional professional” like a consultant or real estate broker, your coverage may be written on a nonspecific policy form called a miscellaneous professional liability policy.

There is no standard E&O policy, so policy forms may vary considerably from one to the next. Yet,  E&O policies do have certain features in common.

Claims-made: Most errors and omissions policies are claims-made. This means that they limit coverage to claims made during the policy period. Some policies also limit coverage to claims reported during the policy period. Many E&O policies specify a retroactive date in the declarations. This should be the inception date of your first claims-made E&O policy. If a retroactive date is listed, then your policy will cover a claim only if it results from an act, error or omission that was committed on or after that date. The retroactive date should remain the same each time your policy is renewed.

Insuring Agreement: The coverage your policy provides is summarized in the insuring agreement. This clause typically begins with the words “We will pay.” The insuring agreement is a statement outlining what the insurer promises to do in exchange for the premium. A typical E&O insuring agreement states something like this:

“We will pay on behalf of the insured loss that the insured becomes legally obligated to pay for any claim first made during the policy period that arises out of a wrongful act.”

This means that the insurer will pay damages or a settlement that you are required to pay because of a claim based on a wrongful act. The words “pay on behalf” mean that your insurer will pay these costs upfront rather than reimbursing you.

The term wrongful act usually means a negligent act, error or omission that you allegedly committed while performing or failing to perform professional services. Professional services may be defined in the policy “definitions.” Alternatively, the type of services covered may be described in the declarations. An example is “software consulting services.” The description of covered services is important because it determines the types of activities for which you are covered. Make sure that the description accurately reflects the services you provide.

Defense: One of the most important coverages included in an E&O policy is defense coverage. The policy should state that the insurer will defend you against covered claims. If defense is not covered, you will be stuck paying defense expenses out of your pocket. Depending on the specific policy terms, defense costs may or may not reduce the policy limits. The cost of defending claims can be substantial. Thus, look for a policy that covers defense outside the limits.

Exclusions: Here are some exclusions that are commonly found in E&O policies.

  • Punitive damages
  • Dishonest, fraudulent or criminal acts committed by you or another insured
  • Wrongful acts you were aware of before the policy inception date
  • Wrongful acts or claims you reported under a previous policy
  • Bodily injury or property damage
  • Fee disputes
  • Profits you have gained illegally
  • Failure to maintain insurance

This is not a complete list. Your policy may include additional exclusions.

Limits and Retention

Most E&O policies contain a limit that applies to each claim. This limit is the most the insurer will pay for damages or settlements arising out of a single claim. The policy may also contain an Aggregate limit. This is the most the insurer will pay for all damages or settlements arising out of all claims combined. If defense costs are subject to the limits, each Claim and Aggregate limits will include defense costs as well.

Some E&O policies include a retention. A retention is a type of deductible. It is the amount you must pay out of pocket for each claim before your insurance will apply.

Under most liability policies purchased by small business owners, the insurer has a duty to defend. If you are sued by a third party that seeks damages because of an act that is covered by the policy, the insurer must defend you against the lawsuit.

In the standard ISO general liability policy, the insurer’s duty to defend you against suits for bodily injury or property damage is outlined in the insuring agreement under Coverage A, Bodily Injury and Property Damage Liability. The policy affords the insurer the right and duty to defend you (or any other insured) against any suit when the suit seeks damages for bodily injury or property damage caused by an occurrence. The insurer also has a duty to defend you under Coverage B, Personal and Advertising Injury Liability. The insurer must defend you against suits seeking damages for personal and advertising injury caused by a covered offense.

Duty to Defend is Separate from Duty to Indemnify

The insurer’s obligation to defend you is separate from its duty to indemnify. That is, the insurer must indemnify you (pay damages or settlements), and it must provide a defense against lawsuits that are covered by the policy.

For example, suppose that you own a hardware store. Bill, a customer, is badly injured when a stack of paint cans falls on him from an overhead shelf. Bill files a lawsuit against your company. His suit claims that the bodily injury he sustained on your premises resulted from an accident (falling paint cans) caused by your negligence. Bill has filed a suit seeking damages for bodily injury or property damage caused by an occurrence. Assuming that his injury occurred while your liability policy was in force (and that the occurrence took place in the coverage territory), your insurer should defend you against Bill’s lawsuit.

Suppose that Bill’s lawsuit seeks $50,000 in damages. Can your insurer simply pay Bill the $50,000 he wants and then close its file? The answer is no. Your insurer must fulfill its duty to defend. This means that the insurer must conduct a full investigation of the claim. It must also provide you an attorney and pay for your defense.

Insurer’s Right to Control your Defense

The liability policy gives the insurer both the duty and the right to defend you. Because it has the right to defend you, the insurer maintains control over your defense. It decides what defense strategy to follow and which attorney to assign to your case. Your insurer also decides whether to offer the plaintiff a settlement or to proceed with a trial.

In the hardware store example cited above suppose that your brother-in-law (Tom) is an attorney. You tell your insurer that you want Tom to manage your defense and that Tom will send the insurer a bill for his services when the suit has been resolved. Will your insurer agree to this arrangement? No! Your insurer will not relinquish control of your defense to someone else.

Defense Costs Not Subject to Limits or Exclusions

In most general liability policies, expenses the insurer incurs to defend you are not subject to the limits in the policy. Such expenses are covered as Supplementary Payments. The amount your insurer pays to defend you against a lawsuit may exceed the amount the insurer pays in damages or a settlement. Some claims involve defense costs only.

As a general rule, your insurer must provide a defense if the allegations in the complaint are covered by the insuring agreement in the policy. If the insurer believes that the claim is precluded by a policy exclusion, it must continue to defend you until it can demonstrate that the claim is not covered.

For example, suppose that you employ a worker named Sandy. Sandy is injured on the job and sues your firm for bodily injury. She demands $50,000 in compensation. You forward Sandy’s claim to your insurer. Your insurer believes that Sandy is an employee of yours. If Sandy is indeed an employee, her claim will be excluded via the “employers liability” exclusion in your policy. You argue that Sandy is an independent contractor, not an employee and that the exclusion does not apply. Your insurer must continue to defend you until the matter of Sandy’s status has been resolved. If a court determines that Sandy is an employee, your insurer may not have to pay her any damages. However, it will still have to pay for your defense.

Declaratory Judgment or Reservation of Rights

When a controversy exists between you and your insurer over an issue concerning your policy, your insurer might ask a court for a declaratory judgment. A declaratory judgment is a decision by a court on the issue at hand. The court’s decision is binding on both you and the insurer. Generally, an insurer will seek a declaratory judgment before it pays any damages.

An alternative to a declaratory judgment is a reservation of rights letter sent to you by the insurer. A reservation of rights typically states that the insurer will defend a claim but that it reserves it right to deny coverage for all or part of the claim in the future. If you receive a reservation of rights letter, a declination letter may soon follow.

There are two basic types of liability policies: occurrence policies and claims-made policies. Most liability policies purchased by small business owners are occurrence policies. An exception is professional liability (errors or omissions) policies, which are typically written on a claims-made basis. This article will explain the differences between claims-made and occurrence policies. It will demonstrate these differences by comparing Bodily Injury and Property Damage Liability Coverage as it is provided under two ISO liability policies: the standard occurrence policy and its claims-made cousin.

Occurrence Policy

If your firm has purchased basic liability coverage, your policy is likely written on the standard ISO commercial general liability policy (CGL). The standard ISO policy is an occurrence form. It covers damages that you (or any other insured) become legally obligated to pay because of bodily injury or property damage. For a claim to be covered, the alleged bodily injury or property damage must:

  1. Be caused by an occurrence that takes place in the coverage territory (which is essentially the United States and Canada);
  2. Occur during the policy period; and
  3. Be unknown to the insured before the policy begins.

The CGL is silent as to when claims must be filed. Thus, the policy covers claims made during the policy period or at any time after the policy has expired. A major advantage of an occurrence policy is that it may cover claims made long after its expiration date.

Note that the CGL does not specify a time period when the occurrence (accident) must happen. Thus, bodily injury or property damage that occurs during the policy period is covered, whether the occurrence that caused it took place during the policy period or before the policy began.

Claims-made Policy

Companies typically purchase claims-made policies because occurrence coverage is either not available or is too expensive. Some coverages, such as directors and officers liability, are available only on claims-made policies. While other coverages, like liquor liability insurance, may be available on either type of form, the claims-made coverage is likely to be considerably cheaper.

ISO offers a claims-made version of the commonly-used ISO CGL form described above. Like the occurrence version, the claims-made CGL covers damages that the insured becomes legally obligated to pay because of bodily injury or property damage. To be covered, bodily injury or property damage must be caused by an occurrence that takes place in the coverage territory, which has the same meaning outlined above. However, coverage applies under the claims-made form only if:

  • The bodily injury or property damage did not occur before the Retroactive Date if one is shown in the Declarations, or after the end of the policy period; and
  • A claim for damages is first made against any insured during the policy period or any Extended Reporting Period that is provided.

Key Characteristics of Claims-made Policy

The above paragraphs demonstrate two key characteristics of a claims-made policy. First, it may specify a retroactive date; this is the earliest date on which injury or damage may occur and still be covered under the policy. The retroactive date is usually the inception date of your first claims-made policy. This date should remain the same each time your claims-made coverage is renewed. It should not be advanced (moved up) as this will reduce your coverage. Some claims-made policies do not have a retroactive date. Because a retroactive date represents a coverage restriction, it is best to purchase a policy that does not include this feature.

The second key characteristic of a claims-made policy is that claims must first be made during the policy period. A claim is typically “made” on the date that you (or your insurer) first receive or record it.

Claims-made to Occurrence Policy

Coverage gaps can occur if you switch from a claims-made policy to an occurrence policy. For example, suppose that you have been insured under a claims-made general liability policy from January 1, 2012, to January 1, 2013. When your policy expires you elect to renew it under the standard occurrence-based policy. Your occurrence policy runs from January 1, 2013, to January 1, 2014.

On December 15, 2012, Ed, a customer of yours, is visiting your office when he trips on a loose piece of carpeting. Ed falls and injures his back. On March 15, 2013, you are notified that Ed has filed a lawsuit against your firm. He claims that his injury resulted from your negligence since you failed to properly maintain the carpet. Jim seeks $50,000 in damages. The claim is not covered under your previous claims-made policy because you were not notified of the claim until after the policy had expired. The claim is not covered under your occurrence policy either since Ed’s injury did not occur during the current policy term.

Extended Reporting Period

The coverage gap cited above could have been avoided if you had purchased an extended reporting period. An extended reporting period or ERP extends the time period during which claims may be made or reported to the insurer. It does not extend your policy. A short-term ERP (typically 60 days) may be provided if your insurer cancels or non-renews your policy, or if it advances the retroactive date on your renewal policy. The ERP may also apply if your insurer replaces your claims-made policy with an occurrence policy.

Claim Reporting Requirements

All claims-made policies stipulate that claims must be made during the policy period. Many policies (including the ISO claims-made CGL) do not specify a time period for reporting claims. Rather, they simply state that claims must be reported as soon as practicable (or a soon as possible). These policies are known as pure claims-made policies. Some policies are more restrictive, requiring claims to be made and reported to the insurer during the policy period. These policies are called claims-made-and-reported policies. A pure claims-made policy is preferable to one that applies on a claims-made-and-reported basis since the former affords broader coverage.

What happens when the owner of a business decides to retire or the business closes its doors, and a claim against the business is made after the business closes? Most commercial general liability (CGL) policies are occurrence policies. This means that injuries or damage that occur during a covered policy period are covered by the CGL policy in place during that period. When a business closes, or the owner retires, CGL coverage is typically dropped. The owner, understandably, sees no reason to continue to pay expensive premiums on a policy to insure a closed business.

Any claims against the business for damages that occurred during a covered policy period would be covered. However, what happens if the damage (and subsequent claim) occurs after the last policy period when no coverage is in place? This often happens with contractors or manufacturers.

For example, a masonry contractor completes a wall in 2004. At the time the wall is built the contractor is insured by a standard occurrence CGL policy. The contractor retires at the end of 2004 and terminates his policy at the end of 2004. Because of mixing error, the mortar in the wall becomes weak and fails in 2006 collapsing and causing injuries and property damage. Note in this example the occurrence and injury occurs after the policy was canceled at the end of 2004. The contractor is sued. The CGL insurer from the last policy period has no obligation to defend or insure the loss. The contractor has no coverage.

Some business owners believe that coverage would exist because the wall was built during a period when the contractor had insurance. However, this is not accurate. The CGL policy is only applicable if the occurrence and injury occurred during the policy period and not merely because that work was completed in the policy period.

Discontinued operations and products coverage is insurance coverage that covers occurrences and damage occurring after the end of CGL coverage when the business ceases operations. It can be critical coverage for certain businesses such as specialty manufacturers and building contractors where occurrences, damage, and injury can and often do happen well after the business is no longer an active business.

The coverage is typically offered on a declining percentage of annual CGL premium. So, as an example, in the first year, the coverage may cost the same as the CGL policy, 10-25% less in the second year, less in the next year and so on. The coverage is often tailored to state law limitations periods such as repose statutes or statutes of limitations. If the state law is that a builder cannot be sued ten years after completion of a building than discontinued operations insurance would be tailored to a ten year period.

If you are a business owner and considering retiring or closing your business than it is a good idea to discuss this coverage with your insurance professional. Many owners are mistakenly advised by non-insurance professionals to purchase “tail” coverage or that any work performed in a covered period is insured forever. A qualified insurance professional can explain what is covered and what is not and point out specific policy language. “Tail” coverage cannot be purchased for an occurrence policy is meant for a claims-made policy typically in the context of a professional liability policy. Moreover, as noted above, losses and damage occurring outside of the policy period, regardless of whether the work was performed during the policy period, are not covered.

A commercial general liability policy’s success is predicated on its ability to protect business owners from the potentially devastating impact of commercial risk.

General liability insurance is the most prevalent form of business liability insurance. These policies are designed to protect businesses you represent against occurrences when someone alleges they were injured or their property was damaged as a result of a client’s negligence.

The Commercial General Liability (CGL) policy excludes some types of liability coverage, worker’s compensation, professional liability, liability related to operating an automobile or truck, and corporate directors and officer’s liability. These liabilities are covered by other specially created policies.

The CGL also excludes all coverage for pollution claims. Firms that use toxic materials in the manufacturing process or store or transport them must purchase a special environmental liability policy. Many businesses keep gasoline on the premises for their own use. Because storage tanks can leak over time, allowing gasoline to seep into wells and other water supplies, federal law requires all tank owners to have insurance or show some other means of paying for potential claims. Also excluded are claims resulting from damage to the property of others in the business owner’s care, custody, and control. This is because coverage for such damage is covered under property policies.

Manufacturers of products subject to product recall, such as food items or toys, should consider purchasing a special policy to cover this exposure. Products are excluded from the CGL policy because of the costs incurred in a recall.

Coverage for administering certain kinds of professional services or failure to render such services may also be excluded from the CGL policy, depending on the extent of services provided. Legal actions that do not involve a claim for bodily injury, property damage, personal injury, or advertising injury, are not covered. The CGL policy does not cover most contract disputes, actions by governmental agencies charging that a business has failed to abide by regulations or statutes, and charges of pollution.

Also, claims for back taxes or a penalty for failure to provide a safe workplace is not covered by the CGL policy.

The most common exclusion on the typical general liability insurance policy is claims of professional negligence or errors and omissions. If the damage resulting from serious negligence on the part of a client or one of their employees resulted in non-physical damage, your general liability insurance will not cover the suit.

A Business Owner’s Policy typically includes general liability insurance that covers bodily injury, personal injury, property damage, and advertising injury. This often includes advertising copyright infringement; invasion of privacy; defamation of character, such as libel and slander. A Business Owner’s Policy also will include property insurance that covers both their own and others’ vital commercial property.

Malpractice Coverage

In talking about physicians and attorneys, an obvious form of professional liability insurance is malpractice coverage. Most health care providers need to buy professional liability insurance. Nearly all states require that physicians have liability insurance. Even in states that don’t, physicians usually have to have insurance coverage in order to get privileges to see patients at a hospital. In some contexts, however, physicians can choose to go without coverage, but that is a risky proposition, to say the least.

Commercial general liability insurance provides an extensive coverage for loss exposures such as operations and premises liability, products liability and contingent liability. However, agents need to be informed of the potential coverage exclusions which lessen commercial liability coverage. Detailing these exclusions is key to properly informing clients of both the benefits of commercial liability coverage and where gaps may need to be addressed through other means.

Coverage A provides important legal and financial security to the client if the business operations of the latter have caused any harmful damage to a third party. Coverage B protects the insured from personal and any advertising-related injury liability. Coverage C pays the hospital and physician expenses of others who happen to be injured on the commercial premises of the insured, regardless of fault.

Business Pursuits Factor

Various insurance companies view different types of activities as “business pursuits,” even if the activities are part-time, freelance in nature, or intermittent horse boarding, riding instruction, landscaping, auto repair, boat deliveries, or child care.

Some insurers may also look at “business pursuits” as an insured’s regular trade or occupation. Others do not. Some insurers look to the continuity and business motive of the business as a key element before determining that a “business pursuit” is involved. Is it a hobby or is it a for-profit venture?

Example: One policy prevented coverage “[a]rising out of or in connection with a business engaged in by an insured.” An exclusion in a freelance landscaper’s insurance policy prevented coverage for bodily injury “arising out of business pursuits of an insured.

Earthquake Insurance: To Buy or Not To Buy

Many community associations have inquired over the years as to whether they should buy earthquake insurance, considering that the costs fluctuate so much and at times are quite high. After networking with attorneys all over the state of California that had to deal with the problems involving reconstruction, collection of special assessments, and disputes with insurance companies in the aftermath of the Loma Prieta and Northridge quakes, I have come to believe that associations should purchase earthquake insurance if they can get it, even if the price is high. The Value of Earthquake Insurance The reason: Associations that did not have coverage experienced severely exacerbated problems, and many did not recover. The homeowners who wish to rebuild and keep their homes are the biggest losers when there is no insurance. The ones who purchased with little invested are the “winners”—they tend to walk away and leave the others with the full burden of rebuilding.

Why not spread the risk fairly by engaging all of the owners in the development in preparing for “the big one”? I have been asked since to speak to many associations about the considerations behind the decision to buy or not to buy, and I have shared the floor with insurance representatives who are able to find earthquake insurance, some even with a 10 percent deductible or a “per building” deductible (which is more desirable than a “per development” deductible) for a sum of money that is sufficiently affordable. By the way, my rule of thumb as to affordability in 1996-2001 when I first started writing about this was that an affordable master policy to be somewhere in the range of $400 – $600 per year per unit for homes priced in the neighborhood of $200,000-$300,000. In later years, with rising values in the median statewide market value of a home being more like $500,000 and up, I opined that the cost for master protection in the range of $1000-$1500 per unit per year to be affordable and worthwhile for the master EQ coverage.

I recognize that property values are deflated today but does that change my taste for risk? Not really. I base my thoughts on what I am willing to pay to get the coverage, given a condo I own on or near a fault. At this time in 2011 it is worth it is worth about $400,000, having ranged in value from $200,000 to $700,000 over the year; and I (like anyone else owning a condo) can cover my share in our association’s deductible which might (considering various alternative loss scenarios) be $10,000-$50,000 per unit through an earthquake policy purchased from the California Earthquake Authority (CEA).

My share of an uninsured earthquake loss of $150,000-$400,000 (again, considering various loss scenarios), coupled with responsibility in a share for those who would not stay and pay, would probably cause me to lose the property; and I do not want to lose the property. There are certain to be many owners in any mature common interest development that have struggled to buy property and built up some equity, even in the current market. They deserve consideration. The Risks of Forgoing Earthquake Insurance A board has to take into consideration the interests of the community and not make decisions based on individual interests. It does not make sense to let those who have put little down on the property (who are more likely to oppose the coverage because their investment is small) dictate what protections to forego.

Even if many are “underwater,” those who have worked hard to earn equity and want to stay and weather the recession and protect their interests deserve the benefit of some sharing of the risks by all other owners. Unfortunately for those owners who want the protection of master coverage, many boards, when they face the increases in the premiums for earthquake insurance, or cuts in coverage, or are bombarded in today’s economy by owners who have lost equity, lose their objectivity. The neighbor’s pleas or personal interests of directors (if they own an “underwater” unit) sway them. However, it is extremely important to consider the risks involved in saying “NO” to EQ coverage.

Those risks are Lawsuits: If there is an earthquake, the board members, and the association could be sued and the directors and officers liability carrier would deny coverage because “failure to insure adequately ” is not a covered item, and guess who would pay to defend the lawsuits! Extra Costs Caused by the “Walk-Aways”: If the association has no coverage and there is an earthquake, owners “little invested” or without equity will likely choose to “walk away” leaving behind a trail of problems and expenses for those that stay. Even those that want to stay will have a very difficult time as losses will likely exceed amounts for which they can insure through available CEA “gap” coverage.

“Stand Alone” policies are not what they seem: Private “stand-alone” (non-CEA) unit coverage which is purportedly being offered for individual homeowners whose associations are uninsured is not a solution for rebuilding, considering how difficult it would be to rebuild one single unit in a four, five or six-unit building. Besides, from what I am told, the quotes given to owners for “stand-alone” earthquake coverage are astronomical; and some policies sold purportedly as “stand-alone” products will really only pay if there is underlying master coverage. If your association’s CC&Rs require that the board purchase earthquake insurance coverage, then it should be purchased unless the CC&Rs are amended.

If the association cannot bear the cost of the premiums or the board finds that the owners want a change, then an amendment should be put to a vote of the members. If it is not, then there is a fiduciary duty issue for failure to fulfill the obligation required by the CC&Rs. Ignoring the governing documents is not the answer.

However, I caution boards not to jump at the chance to eliminate the coverage or the documentary obligation without considering all possible options and doing some due diligence. In fact, the extent of the “due diligence” could well be a factor in defending a board that is sued. Making the Prudent Business Decision Here is something you might not have considered—educate the owners before taking a vote or saying “no” to master coverage so that you can get valid feedback from any survey or vote. Associations can bear high deductibles in the EQ master policies (which can equate to quite a savings in premiums) if owners are encouraged, possibly even required (by a CC&R amendment if needed) to purchase the CEA gap coverage. (CEA does not call it that—it is just a way of defining it as coverage that fills the gap opened up by the EQ deductible and other costs that might fall on individual owners in condos.)

The CEA offers residential policies to owners (called “Condominium” policies even if the development is townhouses or other common interest development attached housing) that cover personal property, building coverage for the owner’s unit, loss of rent and/or relocation costs, and perhaps most pertinent, loss assessment coverage that is paid to the owner to cover any Association-imposed special assessment to cover the deductible or rebuild.

One can purchase such an affordable policy even if the association does not have master coverage, and there are choices in the amount of coverage available, up to $100,000 for loss assessment in a condo valued at over $135,000. The policy would cover up to a $100,000 of one unit’s share in a deductible or, even if there is no master coverage, would be payable to an owner if the condo units are not rebuilt. The information on options and costs can be found on the CEA website at (link is external). Since these are “residential” policies, they are less expensive than the “commercial policies” available to the associations. That is why it makes sense to give some thought to consider a higher deductible on the master policy – because it could be subsidized individually by owners with a less expensive residential “gap coverage” policy.

For example, the condo I own carries master coverage. It is a 100-unit condo on or very near a fault and the master policy costs each of us $450 per unit per year. I have a CEA policy to cover up to a $75,000 loss assessment deductible that costs me about $350 per year. For under $1000.00 per year on the combined policies, I could get up to $100,000 loss assessment coverage. If the majority of owners in any condo development were so “enrolled,” we could withstand a pretty considerable loss. If the development is totaled and not rebuilt, I could walk away with enough to pay the mortgage off and then some. Boards need to be willing to consider this as an option for the owners and to educate the owners of all the possibilities before saying “no.” Of course, I understand that economic times make it hard for people to bear extra expenses and thus have caused property values to be depressed to a point that there are more properties than ever “underwater.” However, I also should point out that many owners have already or are in the process of walking away from “underwater” properties, and many of those coming in as new owners are investors.

Why should they not share in the cost of protection for everyone else by sharing the costs of master earthquake insurance coverage? All this said, for any association that is having difficulty getting earthquake insurance or that is having difficulty justifying the cost, boards, before you “Just say NO,” the following minimal steps should be taken. If there ever is a lawsuit for failure to push EQ insurance, it will be important to be able to argue that the decision was a “prudent business decision.” The board of directors should investigate as follows: Obtain risk analysis for type of development and geological location. Procure multiple bids from insurance companies for earthquake insurance, or from an insurance broker who has access to several different companies. Educate and survey homeowners to see where they stand on the issue, providing them with meaningful facts and information the board has gathered including how they can protect themselves from high deductible gaps. Determine whether the costs involved would require an increase in regular assessments or special assessment that would require homeowner approval.

Make a prudent decision as to whether to put any measure to a vote, or decline coverage, after gathering and considering the information as described above. If the association wants to purchase earthquake insurance and the costs exceed legal limits for increases, then the association must go to the membership for approval under Civil Code Section 1366. The governing documents may require a stated percentage requirement for purchasing EQ insurance. Some boards might want to consider borrowing from the reserves to pay premiums, which requires specific steps and notice to owners and a plan to repay the reserves. It is good to get legal advice as to the requirements because there is some legal protection against individual liability for board members who consult experts when expertise is required to figure out the legal requirements. For those associations waiting for a state program to bail you out, you can stop waiting. The California Earthquake Authority and any other state program selling residential insurance policies will not provide master coverage for associations because associations must purchase commercial insurance.

Whether or not to purchase EQ insurance is not the only question. Some associations are considering using the money that would otherwise be used to purchase earthquake insurance for retrofitting. If your buildings could benefit greatly from retrofitting, this might be an option. However, the above considerations still apply. Perhaps if an association must pay exorbitant amounts for layers of insurance to get full protection, there might be a feasible way to combine the purchase of minimal coverage with additional monies being spent on retrofitting. At least it would be something. It is best to consult with your legal counsel and seriously discuss the legal ramifications and consult with a knowledgeable insurance agent to discuss the options available, before turning your back on the question involving the purchase of earthquake insurance.

Water Damage

Question: We have a circumstance where a homeowner was throwing a backyard football party for some of his friends. The group brought the insured’s big screen television outside for the event. During the festivities, an unexpected thunderstorm came through with high winds and pouring rain. Everyone, of course, immediately retreated indoors, but somehow forgot to bring in the television.

The television was not blown over by the high winds, but it was damaged by the rain that accompanied the windstorm.

This is an HO-3 policy. The insurer has denied payment of the cost to repair the television, citing the portion of the policy paraphrased below:

When people think of homeowners’ insurance claims, they often associate them with major disasters, but many losses are entirely preventable.

“The peril of wind does not include loss to property contained in a building caused by rain unless the direct force of wind or hail damages the building causing an opening in a roof or wall and the rain enters through this opening.”

The insurer stated that since television was not “contained inside a building,” that damage from rain would not be covered; it is only covered while inside a structure, and then only if wind first damaged the structure and created an opening for the rain to come into the home.

In our argument for coverage, we reasoned that rain was not a named peril under the policy and could not ever be covered unless it was a part of another named peril under the policy. We opined that “rain” was a part of the peril of “wind.”

We stated that we understood that there was a coverage limitation for personal property damaged by rain whilst inside of a building. However, there was no such coverage limitation on rain when the personal property was outside.

Answer: You are correct that rain is not a named peril for personal property, and there is no coverage. However, rain is not part of wind; the two are separate and can happen independently of each other. Had the carrier wanted to cover personal property that got caught in the rain, it would have made rain a named peril.

There is no coverage for this loss.

Question: Our insured has a Cause of Loss – Special Form, CP 10 30 04 02. The policyholder sustained damage to an insured building from heavy rain that caused water to flow from the roof into the interior walls and resulted in damage to the walls as well as mold inside the walls. There was no other damage to the roof or walls of the building. Will this water damage caused by the rain be insured?

Answer: The CP 10 30 contains a limitation stating that loss or damage to the interior of any building or structure caused by or resulting from rain is not covered unless the building first sustains damage by a covered cause of loss to the roof or walls through which the rain enters. In the situation you describe, there was no damage to the roof or walls. So the water damage caused by the rain would not be covered.

Question: We have an HO 00 03 05 11 with endorsement HO 32 32 06 12, which states that constant or repeated discharge, seepage, or leakage of water is excluded. This paragraph replaces a paragraph that pertained to plumbing.

Repeated wind-driven rain caused hidden damage, namely rot, and water damage to insulation that could not be seen. Would wind-driven rain is excluded if it occurred over an 8-year-period, but the insured could not see the damage? Part of the original causation may have been improper chimney flashing.

Answer: While there is an exception for mold hidden behind walls, that exception applies only when the water is caused by a plumbing, heating, air conditioning system, sprinkler system, or household appliance, or a storm drain or water, steam/sewer pipes off the premises. The endorsement removes that and in its place excludes water caused by repeated seepage or leakage. Wind-driven rain really is not repeated leakage or seepage; it is forced in by the wind. Wind-driven rain is excluded under the water exclusion. There is no coverage for this loss.

Question: We have a hurricane claim, and there was no damage to either the exterior or the interior of our insured’s condo unit. However, the insured had a patio set outside, and both the company adjuster and the independent adjuster are adamant that the furniture carried away by wind is not covered, as the policy language, under the “windstorm or hail” coverage, states “this peril does not include loss to the inside of a building or the property contained in a building caused by rain, snow, sleet, sand or dust unless the direct force of wind or hail damages the building causing an opening in a roof or wall and the rain, snow, sleet, sand or dust enters through this opening.”

When people think of homeowners’ insurance claims, they often associate them with major disasters, but many losses are entirely preventable.

Answer: The adjusters are misreading the named peril. It specifically states that the peril does not include loss to property contained in a building caused by rain, snow, sleet, sand or dust unless the direct force of the wind caused an opening in the roof or wall of the building containing the property. However, that is not what happened here. First, the property was not contained in a building; it was outside. Moreover, second, the direct cause of the loss was wind, not rain, snow, sleet, sand or dust.

There is coverage for the patio set subject, of course, to any applicable deductible.

Question: Citizens Homeowner 3 special form HO-3 01 13 section 1-perils insured against, 2, h. WE DO NOT INSURE, HOWEVER, FOR LOSS: Rain, snow, sand to the interior of the building unless a covered peril first damages the building causing an opening…

Our insured sustained damage to the interior of his home in several rooms when a rainstorm caused water to intrude into the house through the roof and under the shingles.

Citizens denied the claim per the above exclusion.

The roof, at the time of the loss, was in poor condition due to age. The wind speed at the time of the loss was in excess of 40 mph, and we believe that the 40 mph+ wind speed damaged the roof by causing the shingles to lift, which created enough of an opening for the rain to enter the house. At the time of inspection, the shingles were flat, and there was no evidence of shingle damage to the naked eye.

Should this loss be covered?

Answer: You have an issue of fact more so than policy interpretation; if the wind lifted the shingles then indeed there is coverage for the contents; if the roof just has leaks, then there would be no coverage due to faulty maintenance/wear and tear. An inspector should be able to determine whether or not the singles would lift in a windstorm.


Workers Compensation Subrogation

A claims examiner for a workers compensation carrier receives a voice mail that an employee of their insured, ABC Heating and Air Conditioning, has just suffered catastrophic injuries as a result of an on-the-job accident. The injured employee, a married 31-year-old HVAC technician, has suffered life-threatening injuries after falling from a roof during a routine service call. The injured employee was alone at the time of the accident, and there were no witnesses to the fall. Projected compensation benefits are in the high six-figure range.

What at first blush appears to be a straightforward workers compensation claim may, in fact, be a claim with significant potential for subrogation recovery, provided the carrier can identify a third party who is legally responsible for the employee’s injuries.

Workers Comp Basics

Generally, a worker who is injured in the course and scope of employment may not pursue a direct civil action for damages against the worker’s employer. (See Cal. Lab. Code § 3602.) In exchange for the right to receive workers compensation benefits pursuant to the employer’s payment of such insurance premiums, the employee forgoes any direct right of action against the employer.

However, the liability analysis does not stop there, for in many instances a third party – not the employer – is responsible for all or part of the injuries sustained by the employee. This is when subrogation comes into play.

Subrogation Rights

The state Labor Code confers employers the right to pursue responsible third parties for recovery of any and all workers compensation benefits paid to or on behalf of an injured employee. (See Cal. Lab. Code § 3852.) For purposes of subrogation, workers compensation insurers are considered to be “employers.” (See Cal. Lab. Code § 3852(b).) The employer’s right to reimbursement from any proceeds recovered from a third-party tortfeasor takes first and full priority over any recovery by the injured employee. (Cal. Ins. Guar. Ass’n v. W.C.A.B., 112 Cal. App. 4th 358, 368 (2003).)

When evaluating the subrogation potential of any matter, counsel must assess the conduct of the potentially responsible third party. But that is only the first step. In addition, there must be a thorough review of the conduct of the injured employee, the employer, or both, for though any negligence on their part will not bear on the underlying workers compensation claim, it may drastically impact the subrogation potential against a third party.

Assessing Negligence

The law imposes a general standard of care; everyone is responsible not only for the results of their willful acts but also for any injury occasioned to another by their lack of ordinary care. (See Cal. Civ. Code § 1714 (a).)

Every person also has a duty to avoid exposing themselves to an unreasonable risk of harm. Thus, when the injured party’s conduct causes or contributes to his or her own injury, it is referred to as “comparative negligence,” and it reduces the amount that a third party tortfeasor will have to pay in damages. (See Li v. Yellow Cab Co., 13 Cal. 3d 804 (1975.) This principle is central to workers compensation subrogation claims because an employee’s negligence cannot be imputed to the employer for purposes of reducing the compensation lien. (Kemerer v. Challenge Milk Co., 105 Cal. App. 3d 334, 338 (1980).)

When both an employee and the employer seek relief from a third party, a delicate balance exists. In these cases, although the injured worker and his or her employer are pursuing the same defendant(s), they seek different remedies. The employee requests damages; the employer, however, seeks recovery of workers compensation benefits paid to or on behalf of the employee as a result of his or her injury. The law gives the employer a lien for those benefits, and the lien may be asserted in a number of different ways, each of which is discussed below.

As noted above, an injured party’s negligence may reduce the ultimate award of damages. In the subrogation context, some lawyers wrongly assume that any negligence attributed to the employee is automatically imputed to the employer for purposes of reducing the employer’s lien. But that is not so. Although an employee’s negligence will reduce his or her entitlement to damages, the employee’s negligence is not imputed to the employer to lower the amount of the compensation lien, because doing so would, in effect, grant the third-party tortfeasor a double deduction for the same employee negligence. (Kemerer, 105 Cal. App. 3d at 337-339.)

However, though employee negligence will not directly reduce the employer’s lien, it can have the indirect effect of reducing the “settlement pool” from which the lien will be satisfied. This result occurs because the total damage award will be reduced by any allocation of fault to the injured worker. Furthermore, an employer seeking reimbursement must first pay workers compensation benefits in an amount equal to the employer’s own percentage of fault multiplied by the injured worker’s total civil damages before it may recover any remaining portion of its lien from a culpable third-party defendant. (DaFonte v. Up-Right, Inc., 2 Cal. 4th 593, 599 (1992).) This mathematical calculation is commonly referred to as the “employer negligence threshold.”

An example: Assume the injured worker is awarded $100,000 at a civil trial. The worker is assigned 20 percent comparative negligence. The employer, whose lien totals $20,000, is assigned 10 percent fault. The two defendants at trial are each allocated 35 percent fault.

Under this scenario, the total award of $100,000 is reduced by $20,000, which represents the plaintiff’s negligence ($100,000 x .20 = $20,000). The employer’s “threshold” is then quantified by multiplying the amount of employer negligence (10 percent) by the injured worker’s total civil damages ($80,000), yielding a “threshold” of $8,000. Only the benefits paid above this “threshold” (i.e., $20,000 – $8,000 = $12,000) are recoverable by the employer. If the calculation leads to a result in which the employer has not paid benefits exceeding the computed “threshold,” there will be no lien recovery for benefits paid.

With the passage of Proposition 51 in 1986 (Cal. Civ. Code § 1431.2), a comparative-fault system was adopted in California that permits a concurrently negligent employer to obtain reimbursement for workers compensation payments made in excess of the percentage of the employer’s fault or liability. (Associated Constr. & Eng’g Co. v. W.C.A.B., 22 Cal. 3d 829 (1978).) Although a culpable defendant is only liable for its own percentage of noneconomic damages, joint and several liability exists for all economic damages, including the compensation lien. (DaFonte, 2 Cal. 4th at 600.)

Pursuant to Labor Code section 3864, third-party tortfeasors generally are barred from receiving indemnification from concurrently negligent employers. However, pursuant to Prop. 51, judgments against third parties may take into account the employer’s negligence, and the judgment may be reduced accordingly, thus affecting the amount of reimbursement to the employer.

Passive Employer Negligence

Employers may be negligent even in the absence of affirmative misconduct. Allegations of employer negligence often reference improper or inadequate training, supervision, and/or the provision of faulty or inadequate equipment or tools. Thus, even when the employer has not engaged in affirmative negligent conduct, a seasoned plaintiffs or defense counsel can make the case that the employer’s passive conduct – failing to properly train or supervise the injured employee – contributed to the accident such that the employer’s lien should be reduced in an amount commensurate with its negligence.

With these basic concepts in mind, it is now appropriate to identify and discuss several common mistakes made by counsel and workers compensation carriers in the area of subrogation.

– Overlooked potential. When faced with a factual scenario such as the one presented at the outset of this article, it is entirely possible that the claims examiner may conclude that no third party is at fault, or that it would be impossible to prevail in a civil suit absent witnesses or evidence, even if a potentially responsible third party is identified. However, as will become apparent, these conclusions may be premised upon a faulty or incomplete understanding of the applicable evidentiary standards that must be satisfied to prevail in an action to recover the employer’s lien.

The following hypothetical arises from an actual incident. Subrogation counsel was contacted on the day of an incident in which an employee was injured. On advice of counsel, a prompt investigation (consisting of a site inspection, photographs of the accident scene, and interviews with the employer, and others) revealed that unbeknownst to the customer (who owned the building), a tenant had placed a metal guard over the exterior roof ladder only days before the accident occurred in an attempt to prevent teenagers from accessing the roof after business hours. The tenant failed to advise anyone of this change in the condition of the premises. As a result, the employee had to gain access to the roof from inside another tenant’s store. The inside access was subsequently locked by mistake, trapping the worker on the roof. The accident occurred when the worker attempted to descend the roof using the guarded exterior ladder after having been trapped for several hours.

What first appeared to be a claim with no obvious subrogation potential evolved into a case in which it was possible to demonstrate that third parties caused or significantly contributed to the worker’s injury by (1) improperly guarding the exterior ladder (a code violation); (2) failing to advise the building owner, other tenants, or service personnel of the change in condition to the property; (3) trapping the worker on the roof by inadvertently locking the inside access; and (4) by installing what amounted to a tripping hazard. The lesson: In any claim, investigate thoroughly and studiously analyze the potential existence of third-party liability.

– Delay. It is settled law that when an employee receives workers compensation benefits necessitated by third-party negligence, the employer has three options to pursue recovery of its lien from the third party. (See Fremont Comp. Ins. Co. v. Sierra Pine, Ltd., 121 Cal. App. 4th 389, 396 (2004).) The first option is for the employer to file its own independent action against the negligent third party. Second, the employer may intervene in the employee’s existing civil personal injury suit. And finally, if there does not appear to be any employer negligence, the employer may simply file a notice of lien in the injured worker’s civil action. (This latter procedure comes with a caveat. An employer who files a notice of lien is not deemed to be a party to the employee’s suit. As such, the employer exercises no control over the case. If allegations of employer negligence arise and are proven, the employer is powerless to refute them.)

The statute of limitations for an employee or employer to commence suit arising out of an employee’s personal injury is two years. (Cal. Code Civ. Proc. § 335.1.) The statute begins running from the time of the employee’s injury, not from the time that benefits are paid to the injured worker by the compensation carrier. There is no time limit governing when an employer may intervene in the employee’s existing civil lawsuit. However, to the extent the employer intervenes late in the action, the injured employee’s attorney may be able to argue that to the extent his efforts have aided the employer in proving the negligence of a third party, a portion of his fees should be paid out of the employer’s lien recovery. (Cal. Lab. Code § 3856.)

Many compensation carriers make the mistake of waiting for the injured worker to commence suit and/or perform the necessary investigation. But regardless of who commences the action, delay is the enemy of subrogation recovery. That’s because memories fade, witnesses disappear, documents become lost or misplaced, and accident scenes change. Failure to act promptly and safeguard evidence severely decreases the prospects for a successful suit, be it for damages or recovery of the lien.

– Backseat mentality. Too often, compensation carriers adopt what can best be described as a “backseat” mentality. The employer, either by design or inaction, assumes a secondary role, relying on the other parties to develop the facts, evidence, and arguments that will form the basis for the action. By so doing, the employer often finds itself in a position where it cannot exert any control. The practical result is that the other litigants treat the employer as an afterthought; moreover, a “nonparticipatory” employer sends a message that it lacks confidence in the case, or worse, the case is not to be taken seriously. Consequently, the employer may lose leverage during settlement negotiations.

– Penny-wise, pound-foolish. Subrogation is necessarily a study in economics. The employer’s recovery is limited to the actual amounts paid to the injured employee and cannot account for increases in premiums or losses of profit. (Fischl v. Paller & Goldstein, 231 Cal. App. 3d 1299, 1304 (1991).)

All expenditures, recoveries, and settlements in pursuit of subrogation are evaluated in light of the size of the lien and future exposure to the carrier. A Pyrrhic victory in the form of a legal bill that rivals or surpasses the lien rarely results in warm feelings at company headquarters, and for good reason. Such a result evidences a lack of appreciation for the economics of subrogation; counsel should pursue only cases that are good candidates for significant subrogation recovery. Each case should promise an economic return that justifies the attorney’s fees and costs necessary to achieve it.

– Inexperienced counsel. The failure to retain a seasoned litigation attorney is the single biggest mistake compensation carriers make in the subrogation arena. As the foregoing discussion illustrates, this area of law is complex and requires crossover knowledge of workers compensation and civil tort law. But make no mistake, subrogation cases are litigation matters, not workers compensation claims. Accordingly, experienced and knowledgeable litigation counsel should manage them. Engaging seasoned, trial-ready subrogation counsel is the single most important step in identifying and maximizing subrogation recovery.


Insurance Deductible

Perhaps no single duty generates more angst for the average board member than the annual task of selecting the right Master Policy coverage for the community.  Unfortunately, buying the coverage is just part of the challenge, since the purchase decision is coupled with the added responsibility of making sure the association is able to qualify for coverage year after year.  That is a careful balancing act.  The Board wants to have the broadest coverage possible to protect against the large, unforeseen catastrophe, and yet not so broad that the community is in the untenable position of having had too many claims – making the project, from the carrier’s perspective, undesirable and potentially uninsurable.

The solution?  Purchase broad protection, but couple it with a higher deductible.

The reality is, condominium associations in California are beginning to show their age.  As the graph below from the Construction Industry Research Board (CIRB) indicates, a large number of apartment and condominium projects were built during an enormous multi-family housing boom, which occurred between 1983 and 1986 (see the red line below).  Condominium projects built during this condominium “golden years” are now between 23-26 years old.  Perhaps the word “golden” may be stretching it.  If the developer scrimped on quality (and many developers did), some of the interior components of those hastily constructed projects are starting to fail and fail in a most dramatic way.

Water claims in these older buildings are commonplace and, from an insurance perspective, expensive to adjust and repair.  In the average 1980-era condominium project, there are three-decade-old supply lines leading to the sink, toilet, washing machine, dishwasher, or ice maker.  These flexible lines, which have been exposed to constant water pressure day-after-day, are failing.  Since most CC&Rs place the maintenance responsibility for those supply lines on the individual unit owner, condominium boards are understandably looking for a way to shift the responsibility for the resulting damage to the individual unit owner without putting the Master Policy in peril.  A higher deductible will do just that.

It is important to be sensitive to the fact that underwriters at commercial insurance carriers are hyper-vigilant about water loss-plagued condominium projects that, over time, might eat into their employer’s profitability.  As a result, they express no hesitance to non-renew condominium projects that have experienced multiple water damage claims.  They consider the repetitive losses to be a reliable bell weather of the future.  “Two or three water damage losses is a good predictor of a much larger claim in the Association’s future,” an underwriter says.  “Let’s get off this account now, while we still can.”  Non-renewing for them has only one hurdle:   California Insurance Code requires the carrier to provide the association 60-days’ notice of their intent to cancel.

A higher deductible can help an association in three ways:

1.) A higher deductible shifts more responsibility back to the individual unit owner for claims that occurred either:

A.) as a result of the owner’s negligence; or

B.) for losses that occurred as a result of failure of the unit owner to maintain a portion of the unit that is their obligation to fix, repair or maintain per the governing documents.

2.) A higher deductible will provide the association with a modest premium savings for the short-term.

3.) A higher deductible will provide the association with a potentially significant savings over the long-term by preserving the association’s loss history and ensuring that these smaller events do not interfere with the association’s ability to purchase competitively priced coverage year after year.

Deductible Handling Procedure:

Deciding to increase your association’s deductible to $5,000 or $10,000 may be the right decision for your community, but before you make that move, be sure your Board has established a set of rules for handling the deductible.  If your association is like the average, about six out of every ten claims submitted under a property policy have occurred due to a unit owner’s negligence, or due to the failure of a unit owner to maintain their portion of the real estate.

Consider determining exactly who is going to be responsible for the deductible, and under what circumstances.  Then, be intentional about clearly communicating this change to the owners, so that they can modify their personal coverage, if necessary.  Here is an example of how some associations handle this important issue:



Unit Owner

If the loss occurs as a result of the negligence of the individual unit owner.
If the loss occurs as a result of a failure of a portion of the unit that is within the unit owner’s care, custody, and control (according to the governing documents).


If the loss occurs as a result of the negligence of the Association.
If the loss occurs as a result of a failure of a portion of the project that is within the Association’s care, custody, and control.


D and O FAQ

1.  What is a D&O policy intended to do?

 The policy is intended to protect directors and officers against allegations of wrongful conduct when they are acting as company executives.

2.  When does wrongful conduct have to occur to be covered by a D&O policy?

Typically, most policies cover alleged wrongful acts that have taken place prior to or during the policy period. However, some policies are negotiated to expressly exclude “past acts” coverage, so the actual language of the policy must be closely reviewed.

D&O insurance is not intended to be “burning building” insurance. If a potential insured is aware of an impending claim, it may be too late to go out and get insurance to cover it, unless the potential claim is disclosed and the carrier expressly agrees to take it on. First time D&O purchasers must reveal any information they have regarding known claims or related circumstances in the application process itself. Matters disclosed in the application process will usually be excluded from coverage.

3.  Who is insured under a D&O policy?

he simple answer is that directors and officers are covered under a Directors & Officers Liability policy, but this is not a complete answer.

While traditionally only the directors and officers themselves were covered under a D&O policy, today this may be expanded to include managers and other non-executive directors, employees, and the company itself.

What about the company itself, since it may be a defendant in many claims that could be asserted against directors and officers? Today, most D&O policies for publicly traded companies also insure the company itself but only for securities claims. Most D&O policies for privately held or not-for-profit organizations include coverage for the company for an array of claims (not limited to securities claims).

4.  Who can bring the types of claims typically covered by a D&O policy?

Claims can be brought by the company’s stakeholders (owners, investors, lenders, employees and securities holders, including bondholders). Claims can also be brought by customers, consumer groups, competitors, business partners (vendors and suppliers) and government enforcement regulatory groups.

5.  Why don’t companies simply indemnify their directors and officers?

Companies generally do indemnify their directors and officers. However, sometimes companies are financially unable to provide this monetary protection or are unwilling to do so for economic or political reasons. Without corporate indemnity or insurance, directors and officers would be reduced to relying on their own personal assets to pay for the costs of defense and any resulting settlement or judgment against them. Outside directors (those that are not also employed by the company) are usually very vocal about requiring D&O coverage before agreeing to sit on a corporate board.

6.  How does the policy’s limit of liability apply?

Usually, there is a single aggregate limit of liability that applies for all claims that fall within the terms of the policy. This means that the aggregate limit is the entire amount that the carrier is willing to pay under the policy and is not changed because of the number of claims, the number of insureds, or the accumulation of defense costs. Once this limit is exhausted, there is no more coverage available under the policy for any current or future claims. To the extent that the limit is exhausted (the carrier has made payments totaling the limit of liability) prior to resolution of one or more claims, the carrier has no further obligation with respect to those pending claims. This also means that the carrier has no further obligation in connection with defense costs that may continue to be incurred.

Defense costs apply first to the deductible or retention of the policy and then serve to exhaust the available limit of coverage. It is possible that the entire policy could be spent in the defense of a claim, with no coverage remaining for any possible settlement or court award.

7.  When does the dreaded issue of allocation arise?

Whenever there is a claim that is made against both insured directors and officers and uninsured parties, allocation will arise. (Uninsured parties can include: the firm’s accountants, attorneys, underwriters, etc.). In this situation, the insurance carrier will look to allocate the costs associated with the defense, settlement, and investigation of the claim made against the insureds from those same expenses generated on behalf of the non-insureds. Allocation most commonly occurs when the corporation itself is named as a defendant but is not insured under the policy. As mentioned above, the public company corporate entity may be insured under a D&O policy, but usually only for securities claims. If a claim is brought against directors, officers and the company by someone other than a securities holder (such as a competitor), then the carrier will not provide coverage for that portion of any defense costs incurred by the uninsured entity or any settlement or judgment allocated to the entity.

Allocation may also arise when everyone is an insured under the policy, but not insured for all of the allegations that are included in the claim. This happens if either part of the claim is specifically excluded under the D&O policy or it simply falls outside the terms of the policy, for example, when a director or officer is sued in a professional rather than managerial capacity (outside the terms of a D&O policy) or part of the claim arises under the Employee Retirement Income Security Act (specifically excluded).

8.  What is typically excluded under a D&O policy?

Standard exclusions include fraud, personal profiting, accounting of profits, and other illegal compensation exclusions, pending and prior litigation, prior (late) claim notice, bodily injury/property damage, pollution, insured versus insured claims and ERISA (the Employee Retirement Income Security Act of 197 4). Insurers may also include other exclusions based on their own claims payment experience, such as hostile takeover or captive insurance company exclusions.

Some exclusions pertain to areas usually covered under some other type of insurance. ERISA violations are usually covered under a Fiduciary Liability policy; property damage may be covered under a General Liability policy, etc.

9.  Wouldn’t an exclusion for fraud or personal profiting eliminate coverage for most claims?

While a large percentage of D&O claims include allegations of fraud or illegal personal profiting (or both), the simple allegation is not enough to trigger the exclusion. Most, if not all, such exclusions require something like a court determination of guilt or an admission of guilt before the exclusion can apply. Either the words “final adjudication” or “in fact” will be used in the exclusion to indicate how high the hurdle is for the carrier to apply these exclusions.

Defense costs incurred for such a claim are typically covered by the policy until such time as the wrongful conduct is determined to have “in fact” occurred, or until there is a final adjudication. This means that a settlement without an admission of wrongdoing usually does not trigger the exclusions. In the event there actually is a finding of fraud or personal profiting, those directors, and officers who are not found guilty continue to be covered even after others may have confessed or been adjudged guilty.

10.  What’s an “insured versus insured” exclusion?

A D&O policy is intended to function as third-party coverage or to insure claims made against the directors and officers by outsiders or third parties. It is not intended to respond to claims by the insureds themselves. (These are viewed as either insider fighting or collusive suits – things that the insurance carriers want to avoid}.

There are some exceptions to the application of this exclusion. The first makes an exception for shareholder derivative suits as long as no insured (including the company) assisted in bringing the suit in any way. The second typical exception is for wrongful termination suits by officers. More recent exceptions may apply to cross-claims or claims for indemnity. Each of these exceptions means that the exclusion does not apply in those circumstances – so there is coverage.

11.  When does a claim have to be reported to the D&O carrier?

It varies, but typically, the claim has to be first asserted or “made” against the insured during the policy period. This is why D&O insurance is generally referred to as “claims made” coverage. Some D&O policies also require that the claim be reported to the  carrier during the same policy period. This is referred to as “claims made and reported” coverage. Many carriers provide some degree of a reporting “tail” to allow a short period of time after the policy expiration in which to provide notice of claims that came in during the policy period.

12.  What happens if a claim is not reported in a timely fashion?

Courts have upheld the claims-reporting requirements of D&O policies, finding such requirements to be a condition of coverage. Since the reporting of claims is solely within the control of the insured, it is an obligation of the insured to act in a timely manner. Exactly what is “timely” may vary slightly among carriers, however. Many policies require notice as soon as practicable, as long as it is still within the policy period. Carriers and courts differ on what length of time is practicable. In any event, failure to provide timely notice can and will result in loss of coverage. What would be a covered claim can become uncovered if the reporting provisions of the policy are not strictly adhered to.

13.  What precisely is a ‘ claim” under a D&O policy?

The definition of a claim varies from policy to policy, and some do not define it at all. Generally, a claim includes any written demand alleging a wrongful act by a director or officer in his or her capacity as a director or officer, seeking monetary or non- monetary damages. This may be expanded to include investigative orders, grand jury subpoenas in actions that seek to hold the individual liable and other more esoteric events.

14.  What exactly does a D&O policy cover in terms of expenses?

A D&O policy will generally either pay or reimburse the company the costs associated with the defense, investigation, negotiation, and settlement (by way of a court determination or otherwise) of a covered claim. This includes attorneys’ fees, court costs, and filing fees. It may also include expert or other specialist fees that are consented to in advance by the carrier. Most policies include the phrase “reasonable defense costs.” Therefore, some carriers may object to some element of expenses as being unreasonable (either because the amount charged is excessive, the work is duplicative, or the services rendered were unnecessary). In all events, the carrier only pays for or reimburses those expenses that are consented to in advance. In addition to expenses, D&O policies cover judgments/verdicts and settlements. Although the actual term used may differ (some carriers cover “loss” while others cover “damages”), all typically cover any court award or settlement, plus defense expenses.

15.  What will a D&O policy usually not cover as loss or damages?

Covered loss will usually specifically exclude civil, criminal or punitive fines or penalties; exemplary or multiplied damages; amounts that are without legal recourse to an insured; or amounts that are uninsurable under the law. As with many other aspects on D&O policies, this can be modified by insurers. Many now agree to pick up certain fines and penalties and agree to provide coverage for punitive damages where insurable by law, especially for securities claims.

16.  Who selects defense counsel for a covered D&O claim?

It depends: for securities claims involving public companies many D&O carrier have a pre-set list of law firms that they require the Insured to use (with pre-set, usually advantageous, rates). For non-securities claims for publicly traded companies, the insureds can usually select their own defense counsel. Carriers without pre-set lists still retain the right to consent to the counsel chosen by the insured and look for counsel that can demonstrate experience in the type of litigation at issue.

Under most D&O policies issued to privately held or nonprofit companies, the insurance carrier has both the right and duty to defend claims brought against the directors and officers in their official capacity. This usually means that the insurance carrier gets to select counsel.

17.  What happens to coverage if the company is bought or merges into another?

Most D&O policies have what are generally referred to as “change in control” provisions. Most, but not all, policies state that in the event of a change in control, the policy will remain in force for the remainder of the policy period, but, and this is a big caveat: coverage will only be provided for claims involving wrongful acts occurring prior to the change in control.

Please note that some policies actually terminate coverage altogether at the time of the change in control. It is very important to know precisely how a specific policy would respond in such a situation.

Under the majority of policies, a change in voting control is the trigger for a change in control. Some also include sale of all or substantially all assets as a trigger. A filing for bankruptcy typically does not trigger the change in control clause, nor does a substantial change in the composition of the board.

18.  Can a D&O policy be canceled by the insurance carrier during the policy?

Historically, all D&O policies could be readily canceled by either the insurer or the insured. Many state insurance commissioners believed that this ability presented a significant hazard to the insured. As a result, many states limit the situations under which an insurance carrier can cancel a D&O policy and require these specific situations to be clearly identified and detailed in each policy. Today, D&O carriers are often willing to make their policies non-cancelable as long as premiums are paid. In these cases, the insured does not need to worry about being deserted when prospects are bleak.

19.  If my D&O carrier cancels or non-renews my policy, do I have any rights?

In addition to setting out the specific circumstances and time frames in which an insurance carrier can cancel or non-renew a D&O policy, most states provide the insureds with special protected rights in these situations. These rights can often be found in the D&O policy itself.

One such provision is the right to purchase an extended period in which to report claims that would have been covered by the policy before it was canceled or non-renewed. When these claims are first asserted and reported during this extended period, they are then covered under the policy terms and limits in effect prior to the policy’s termination. This extended reporting period (ERP) is often referred to as a discovery period. Some D&O insurers make discovery available when either the insurer or the insured cancels or non-renews.

20.  What’s the “hammer clause”?

Most D&O policies have a provision stating that insureds are not permitted to settle a claim without the carrier’s approval. This is particularly relevant if the insured expects the carrier to contribute to the settlement. On the flip side, the carrier is no t going to settle without the insured’s consent. However, if the carrier believes that a settlement is in the best interests of both it and the insured, and the insured refuses to consent, then the carrier can invoke a protective clause usually referred to as the hammer clause. Pursuant to this clause, if the plaintiff and the carrier are amenable to a settlement and the insured refuses, then the carrier limits it liability to the amount that the claim could have been settled for, plus defense costs incurred to the date of the proposed settlement. If the claim ends up costing more than it could have been settled for, the additional costs are not going to be covered by the insurance.















































Willis Executive Risks Practice 8



The Luis Gonzalez Case

Luis Gonzalez was a member of a painting crew when, in September 2005, he was injured working on a three-story condominium association called “3515-17-19 Sacramento Street Homeowners Association” in San Francisco California. The HOA contracted with Bruce Parsley to paint the exterior of the building. The Covenants, Conditions, and Restrictions (CC&Rs) of the HOA mandated that the HOA “shall acquire and maintain”… [w}orker’s compensation insurance to the extent necessary to comply with any applicable law.” However, when the HOA negotiated the painting contract with Parsley, he lied and said that he maintained both general liability insurance and workers’ compensation insurance. He also provided bogus documentation of non-existent insurance. The HOA relied on these false representations and “assumed” that since Parsley was insured, he must also be licensed.

Luis Gonzales was suspended in a bosun’s chair and working near the top of the building’s interior light well when the chair’s rigging snapped and dropped him approximately 20 feet to the bottom of the shaft. He suffered serious injuries to both shoulders and numerous fractured bones. Parsley, the employer, was cited by Cal-OSHA for workplace safety violations.

Luis Gonzalez applied to the Workers’ Compensation Appeals Board since Parsley had no insurance. As determined by the Heiman case, the hiring of an unlicensed contractor who is injured, or whose employee is injured, while performing work for an HOA, creates an environment in which different employment relationships may arise with respect to “employer liability for workers’ compensation or tort damages.” (Heiman v. Workers’ Comp. Appeals Bd. (2007) 149 Cal.App.4th 724, 734 (Heiman).) In the seminal opinion, State Compensation Ins. Fund v. Workers’ Comp. Appeals Bd. (1985) 40 Cal.3d 5 (State Fund), the Supreme Court concluded that a homeowner who hired an unlicensed contractor, who was injured when he fell from a scaffold, was required to assume the status of “employer” for workers’ compensation liability because section 2750.5 requires an independent contractor be licensed as a matter of law.

“Any person performing any function or activity for which a [contractor’s] license is required . . . shall hold a valid contractor’s license as a condition of having independent contractor status.” (Fernandez v. Lawson (2003) 31 Cal.4th 31, 40 (conc. opn. of Brown, J.).) It is well established that the language of the statute “creates a rebuttable presumption affecting the burden of proof that a worker performing services for which a contractor’s license is required, or who is performing such services for a person who is required to obtain such a license, is an employee rather than an independent contractor.”

The moral of this story: Even if an independent contractor lies to you about the existence of a contractor’s license or workers’ compensation coverage, it does not rule out the possibility that the common interest development could be found to be in an employee/employer relationship at the time of loss. A minimum audit payroll “no payroll” workers’ compensation policy, in the name of the common interest development, acts as an effective safety net against these sorts of claims. Workers’ compensation “no payroll” policies are readily available in California for minimum premiums as low as $528 to $606 per year*.

*Workers’ compensation policies are subject to annual audit and premiums may exceed the quoted minimum premiums if uninsured or unlicensed contractors are reported at the conclusion of the policy period.