FORGOTTEN BUT IMPORTANT
CGL POLICY CONDITIONS
Nine conditions that can sometimes
have profound implications
Insurance policy conditions may not be sexy or flashy, but they do contain important provisions that impact the way the contract will respond to real claims against the insured.
By Paul Martin, CPCU
The Commercial General Liability (CGL) Coverage Form published by the Insurance Services Office and used by countless insurance companies to provide liability protection for the operation of businesses and nonprofits is a complex document. It can take many years to master its provisions intellectually, and many more to develop the ability to explain it to others. The exclusions alone have to be dissected over and over to truly understand their applicability and scope.
But beyond the insuring agreements, exclusions, “who is insured” provisions, and definitions found in the form, there are nine conditions that apply to the contract that can sometimes have profound implications on a claim, on the operation of an exclusion, or on the response for key customers. Some of the conditions are fairly easy to grasp. Some are much more involved.
Let’s explore each of these conditions and explore the impact they can have on coverage for a claim or the response of the insurance company.
- This is the easiest of the conditions to understand. In short, should the insured go bankrupt or insolvent, it does not relieve the insurance company of its obligations.
- Duties in the Event of Occurrence, Offense, Claim or Suit. This condition has a lot to it, and the requirements that it outlines have teeth. The insured is obligated to provide the insurance company with the details of the occurrence—the when, where, who, and what—in a way that is interestingly described as, “as soon as practicable.” This standard is not defined within the policy itself but has been interpreted by courts. One of the best ways of helping others understand this standard is to ask: Did the insured do anything in reporting the claim or suit to the insurance company that compromised their ability to defend the insured? Within reason, of course. Next comes a description of what kinds of information the insured is obligated to provide to the insurer. Copies of legal papers should be passed along, given that the insurance company’s authorization to obtain any kinds of records or other information is required. And here’s a big one: “Cooperate with us in the investigation.” Lack of cooperation by the insured could relieve the company of its obligations under the insuring agreement. Adjusters have used this condition to get information. Sometimes an insured may be fearful of consequences related to regulators or others who might pursue them beyond simply the damages or injury. The last two duties are also important. The insured must agree to assist the insurance company in any effort to recover monies from those liable to the insured. And the insured must make no voluntary payments or assume any obligations, other than for first aid, without the consent of the insurance company.
- Legal Action Against Us. This is an interesting condition of the policy that brings up an often-overlooked way that civil tort claims are handled as a practical matter. When a tort claim is made against the insured, it is being made against them, not their insurance company. The insurance company may be standing in the insured’s shoes in court, so to speak, but the claim is against the insured. This condition outlines under what circumstances the company may be sued by the insured. In short, it requires the insured and others to have completely complied with all of the terms of the policy.
- Other Insurance. This is a condition that insurance agents need to understand better. A lot of irritating conversations about CGL coverage and certificates of insurance could be avoided if professionals would just read this closely. It starts by clearly stating that the policy is the primary source of meeting the insured’s obligations. Then it outlines the situations where coverage is excess over other liability insurance policies. It states that the CGL coverage is excess over other fire, extended coverage, builders risk, installation risk or other coverage for the insured’s work. This carves out excess basis for building projects, which makes sense. Then it says the CGL is excess over a landlord’s property insurance coverage when the insured is a tenant. It also outlines that coverage, if applied, would be excess over the liability coverage of an auto, watercraft, or aircraft. Finally, it states that coverage is excess when the insured is added to someone else’s policy as an additional insured for the insured’s work, operations, products or completed operations. This is an important point. There are so many who work with insurance and insurance policies that don’t get this last provision. A misunderstanding of this condition is the reason why so many requests from contractors that subcontractors add endorsements that affirmatively state that the sub’s CGL will be primary are totally unnecessary. This language was added with the 1998 edition of the CGL form. Instead of insisting that subcontractors change their policy, contractors should look to this exclusion and relax. You are excess.
- Premium Audit. This condition is likely the least known by small business owners. The fact that the insurance company can audit the insured’s books to determine the correct premium is the way insurers are getting the right premium. Of course, this can work both ways. This is also a rare spot in the policy that references the rules and rates of the Commercial Lines Manual that are not technically part of the contract but important aspects of how insurance is regulated by the states.
- This condition says that the insurance company relies upon the representations of the insured in terms of their operations when issuing the policy. Should a misrepresentation be relevant to the company’s willingness to issue the policy in the first place, it could technically be grounds for voiding the contract. It’s interesting that the references to the insured’s representations are tied to the information included on the declarations page or, in other words, at the beginning of the policy. Should the insured’s operations change during the policy period, this would not necessarily be a misrepresentation.
- Separation of Insureds. This condition is one that impacts the applications of exclusions in the policy. For example, the first Coverage A exclusion—Expected or Intended Injury—is impacted by this condition in a big way. Let’s consider the condition language: Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies: As if each Named Insured were the only Named Insured; and b. Separately to each insured against whom claim is made or “suit” is brought. Think about it. If each insured is considered as a separate insured, then the actions of one insured shouldn’t impact another. But it depends upon the language. Consider the Expected Injury exclusionary language: This insurance does not apply to: a. Expected Or Intended Injury. “Bodily injury” or “property damage” expected or intended from the stand-point of the insured. This exclusion does not apply to “bodily injury” resulting from the use of reasonable force to protect persons or property. Did you notice that the language says “the standpoint of the insured”? That small definite article “the” makes all the difference. That one word is identifying specifically the noun to which the sentence applies. One insured may have meant to injure others, the others may not have. For one the claim is excluded, for the others the claim is not excluded.
- Transfer of Rights of Recovery Against Others to Us. This is another condition that is not well understood. And yes, it is about the insurance company’s ability to subrogate against responsible parties after a loss. What it makes clear is that the insured can’t impair the company’s right to subrogate “after loss.” This means that they can before a loss. If waivers of subrogation in contracts are agreed to before a loss, the insurance company is barred from recovery after a loss. The condition also outlines that the insured will cooperate with the subrogation rights of the company when appropriate.
- When We Do Not Renew. This last condition outlines that the company promises to give the insured 30 days’ notice before they are kicked to the curb at renewal. Insurance policy conditions may not be sexy or flashy, but they do contain important provisions that impact the way the contract will respond to real claims against the insured. Smart insurance professionals should acquaint them-selves with these in the CGL and educate customers about their impact.
Paul Martin is director of academic content at The National Alliance for Insurance Education & Research headquartered in Austin, Texas. Paul works to develop, maintain, and deliver quality educational programs for the organization. Paul has over three decades in the insurance and risk management industry.
The National Alliance offers additional information on the CGL in its CISR Commercial Casualty I and CIC Commercial Casualty courses. To learn more, visit www.scic.com.