No insurance policy in the construction industry is more discussed – and cussed – than the infamous Commercial General Liability (“CGL”) policy. Unfortunately, many people do not have a good working understanding of the CGL policy or options that would provide more protection. As a result, a builder may pay for a loss that could have been included in the coverage of the CGL policy. This article will attempt to demystify arguably the most important, and often most confusing, workhorse in the typical insurance stable.
Because the purpose of a CGL policy is to protect a builder from damage claims by third parties, the coverage limits should be enough to cover foreseeable losses. The typical limits of a CGL, which can be modified, are $1 million for each occurrence, $2 million for general aggregate limit, and $2 million for products-completed operations aggregate (“damages that occur after construction is completed”). Also, construction CGL policies are often modified by endorsements to tailor coverage, such as adding an owner as an “additional insured.”
Any endorsement should be reviewed carefully because it may include unexpected limitations. For example, an endorsement may impose unanticipated limits on the rights of an additional insured, such as limiting the endorsement to ongoing operations, or take away typical CGL rights, such as coverage for certain indemnity obligations.
The unique role of a CGL policy is to “pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” Additionally, a CGL policy requires the insurer to defend and indemnify the builder. The duty to defend means the insurer will defend the builder if the builder gets sued and the claim is potentially covered by the policy. The duty to indemnify means the insurer agrees to reimburse the builder for damages covered by the CGL policy. The duty to defend is often the more valuable right as the cost to defend a lawsuit can easily exceed the amount eventually paid on the claim.
Whether a third-party demand will be covered depends on the facts of the loss, the CGL policy, and the builder’s conduct. A builder can jeopardize its CGL coverage by failing to comply with the policy’s conditions. As a result, a builder should — on a timely basis — report any potential claim, cooperate with the insurer, and comply with other policy conditions. Once the claim is received by the insurance company, it will verify such matters as whether the named insured is involved, which CGL policy is triggered, and whether the project was included in the policy.
Next, because only an “occurrence” can be covered, the insurer will analyze whether the loss was caused by “an occurrence” during the policy period. “An occurrence” is defined as an accident and does not include a loss caused by intentional or foreseeable acts. A claim that otherwise satisfies the policy terms will be covered unless it falls within one of the policy’s exclusions.
A discussion of the exclusions can be confusing because it involves terms of art, references to policy paragraphs, and exceptions to exclusions. Nevertheless, a builder should be familiar with some overarching principles such as:
- Generally, the CGL policy will cover a builder’s contractual indemnity obligations for tort liability of another, or if the liability would otherwise be imposed by law.
- If the property the builder was working on was damaged by the work (“Builder Damage”), the Builder Damage will not be covered. If the Builder Damage causes damage to “other property,” the “other property” should be covered. As an example, if during the construction of a wall it falls and damages a passing automobile and its driver, the cost to rebuild the wall would not be covered, but the damage to the vehicle and driver should be covered.
- If the wall falls after the work is complete, the damage to the automobile and driver would still be covered, and, in this case, the cost to rebuild the wall would be covered if the wall had been constructed by a subcontractor rather than the builder. If the builder had built the wall, however, the costs to rebuild would not be covered.
While these general principles provide an overview of CGL policies, the answer to whether a claim is covered will depend on the individual facts and policy terms. Admittedly, CGL policies are complicated, but because obtaining the wrong policy terms can be financially devastating, the builder should seek the advice of an insurance professional or attorney when dealing with these issues.