Commercial general liability (CGL) insurance policies insure against risks related to unforeseen accidents or property damage. These policies, however, are limited to covered “occurrences” and contain complex exclusions and exceptions to coverage that render the policies difficult to interpret and apply in practice. As a result, policyholders and insurers often end up litigating whether coverage applies. This article addresses commonly litigated aspects of the CGL policy and what to expect following an insurer’s denial of coverage.
Who is Insured?
The standard CGL policy provides coverage for certain claims involving the insured’s products, premises, and operations as well as claims for personal or advertising injuries. Who is an “insured” is not always limited to the policyholder. Specifically, CGL policy coverage is often extended to parties other than the policyholder/named insured through policy endorsements. The party can either be added as an “additional named insured” or covered through a “blanket additional insured endorsement”, which requires the insurer to defend and indemnify anyone the primary insured has agreed to indemnify through an “insured contract” as defined in the CGL policy.
An additional named insured is specifically identified in the policy and has the same privileges and protection as the policyholder. The main difference between the named insured and additional named insured is that the additional named insured may not be responsible for premiums or the right to cancel coverage.
An additional insured may also be added through a “blanket additional insured” endorsement. A blanket additional insured endorsement allows the named insured to generally describe the parties to which they are extending coverage. The coverage provided to an additional insured is often limited to specific liabilities arising out of the named insured’s operations, premises or other activities as described in the endorsement. Moreover, a common requirement is that the named insured was contractually obligated to add the additional insured, so the scope of the additional insured coverage is usually limited to the terms of that contractual agreement.
What is Covered?
The industry primarily uses standard forms promulgated by the Insurance Standards Organization, Inc. (ISO) for commercial general liability protection. This makes it easier for insurance brokers to compare coverage offered by different insurers and for courts to interpret policies based on an established body of case law involving the same provisions in various circumstances. The ISO promulgates forms for homeowners, contractors, and operating companies, each insuring against different risks but which generally include similar “coverage parts.”
Coverage Part A is the core coverage of the CGL policy. It protects the insured from exposure arising out of “bodily injury” or “property damage” caused by an “occurrence” during the policy period. An “occurrence” is defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions. This section often excludes coverage for expected or intended injury, contractual liability, pollution, worker’s compensation, damage to property and damage to the insured’s work.
Coverage Part B covers personal and advertising injuries caused by an offense arising out of the insured’s business that was committed in the “coverage territory” within the policy period. The key exclusions under this section are injuries arising out of intentional acts, breach of contract and injuries related to the knowing publication of false material.
Coverage Part C covers medical payments for bodily injuries sustained on the insured’s premises or caused by the insured’s operations, regardless of fault. Covered expenses include first aid, hospital bills, funeral services and other related expenses. The coverage exclusions in this section include injuries to the insured, its employees or tenants, and injuries arising out of an athletic activity.
What is Excluded from Coverage?
Damage to Property and “Your Work” Exclusions
CGL policies typically contain two exclusions intended to avoid guaranteeing the quality of a contractor’s work, as opposed to guaranteeing against property damage or injury caused to others as a result of negligent work.
The “damage to property” exclusion disclaims coverage for:
That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations; or
That particular part of any property that must be restored, repaired or replaced because “your work” was incorrectly performed on it [but this exclusion does not apply to “property damage” included in the products-completed operations hazard].
The “your work” exclusion disclaims coverage for “property damage to [the insured’s] work arising out of it or any part of it and included in the products-completed operations hazard.”
New York courts have interpreted these provisions to exclude coverage for the insured’s faulty workmanship itself and any damage that it caused to the insured’s own work product, but not to exclude coverage for damage caused to a third-party’s property that is outside of the scope of the insured’s work.
CGL policies in New York frequently exclude coverage for bodily injury or property damage arising out of work performed by a subcontractor on behalf of the insured, unless a prior written contract exists between the parties which requires the subcontractor to indemnify and hold harmless the insured in the event of a loss. This language is often contained in an endorsement specific to New York policies with the goal of limiting liability under New York’s scaffold law, which imposes strict liability on contractors and property owners for construction related injuries. If a CGL policy contains such an endorsement, it is important to ensure all subcontractors have signed contracts or hold harmless agreements which indemnify the owner and general contractor and provide coverage under their policies if one of their workers are injured.
The Employer’s Liability Exclusion and Action-Over Claims
The employer’s liability exclusion excludes coverage for bodily injury to an employee of the insured. The exclusion is in place to direct such claims toward worker’s compensation insurance. However, while worker’s compensation claims provide the sole remedy for a worker’s claims against his or her employer, New York’s Workers Compensation Law permits injured workers to sue the owner of the property where they were injured. The owners then seek indemnification from the contractor or their insurer and file a third-party complaint against the contractor for the resulting claim. This is known as an “action over”, and it largely defeats the purpose and protections that were intended from the exclusion of channeling worker injury claims through the worker’s compensation insurance system.
Particularly due to the frequency of lawsuits arising under New York Labor Law 240 and 242, these “actions over” claims create one of the greatest risks that property owners and contractors must be protected against. Cheap CGL policies exclude actions over and leave the insured exposed.
Where “action over” coverage is provided, it is provided through an exception to the exclusion for employer’s liability. The exception states that where the primary named insured agrees to defend and indemnify others through an “insured contract”, coverage will be provided by the insurer notwithstanding the employer’s liability exclusion. To invoke such coverage, it is necessary to secure a written agreement by the primary named insured to indemnify other covered parties or to procure an additional named insured endorsement adding them explicitly.
Insurance Coverage Disputes
Given the intricacy of the above policy language, insurers routinely deny claims to the surprise of their insureds. Where an insurer disclaims coverage, the insured must retain counsel to challenge the disclaimer of coverage if an argument exists that the disclaimer was improper. Unlike most jurisdictions, New York does not impose statutory damages on an insurer that improperly disclaims coverage, so it is common for insurers to disclaim coverage if they have even a questionable basis for doing so.
Following an insurer’s disclaimer of coverage, the insured or the insurer can request that the court decide whether coverage exists by way of a declaratory judgment. A declaratory judgment has the effect of determining the rights and obligations of the parties. CPLR 3001.
If an insurer disclaims coverage based on an exclusion in the policy, the burden is on the insurer to establish that the exclusion applies to the facts of the case and that there are no other reasonable interpretations of the policy language. If the court finds that an ambiguity exists, it will construe the ambiguous language in favor of the insured. White v. Continental Cas. Co., 9 N.Y.3d 264 (2007).
The insured may also contest an insurer’s denial pursuant to New York Insurance Law 3420, which imposes obligations on insurers concerning the handling of claims and the disclaimer of coverage. The insurer is required to promptly investigate claims and provide a written disclaimer of coverage specifying the grounds upon which the denial is based. An insurer may not disclaim coverage based on the insured’s failure to provide timely notice of the claim unless the insurer can demonstrate that it was prejudiced by the untimely notice. Prejudice is established if the untimely notice materially impaired the ability of the insurer to investigate or defend the claim.
In addition to a declaratory judgment, the insured may assert a breach of contract cause of action to recover monetary damages if the insurer improperly denied a claim. In limited circumstances, an insurer’s improper denial of coverage could also provide for consequential damages beyond the limits of the policy.
Although policy exclusions are to be narrowly construed in favor of the insured if they are at all ambiguous, the courts in New York will not extend coverage based on equitable considerations if the exclusionary language is reasonably susceptible of only one meaning. Fornino v. New York Cent. Mut. Fire. Ins. Co., 218 A.D.3d 1192 (4th Dep’t 2023).
Furthermore, an insurer defending a claim of the insured may seek to rescind the underlying insurance policy based on fraudulent inducement. This claim requires the insurer to demonstrate that the policyholder made a material misrepresentation of fact when securing the policy, and that it would not have issued the same policy had the correct information been disclosed. Curanovic v. NY Cent. Mut. Fire Ins. Co., 307 A.D.2d 435, 437 (3d Dep’t 2003); Insurance Law 3105. The court may consider factors such as the nature of the information withheld or misrepresented, whether the misrepresentations were made knowingly or negligently, and the extent to which the insurer relied on the misrepresentations.
Conclusion
Insurance coverage disputes are complex. While insurance brokers can generally be relied upon when securing coverage, legal representation is needed once a dispute arises. With a deep understanding of the complexities inherent in CGL policies and insurance coverage disputes, our experienced team at Muchmore & Associates PLLC provides proactive solutions and steadfast representation to contractors and property owners in New York.
About Author
Melanie Wasserman graduated from Washington University School of Law in 2022, where she served as Associate Editor of the Journal of Law and Policy. She joined the firm in 2021 as a summer associate and returned upon graduation. Read more.
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