Part 1: When Coverage Might Not Exist

In this series on insurance policies, we will discuss what businesses and organizations should consider for the scope and mechanics of their commercial general liability (CGL) insurance policies. In this first installment, we will look specifically at some common scenarios where an organization might have an expectation of coverage but where coverage might not exist. These scenarios can be described in two different categories: Coverage exclusions and circumstances voiding coverage. Exclusions to coverage are exceptions to an otherwise broad promise of coverage, explicitly exempting specific classes of occurrences from a carrier’s obligation to indemnify or defend. On the other hand, coverage for occurrences that are indeed included in the policy might be voided under certain circumstances, such as where an insured makes a material misrepresentation on an application for insurance or fails to promptly notify the carrier of an occurrence.

Exclusions to Coverage

1. Expected or Intended Injury

The standard CGL Coverage Form¹ issued by the Insurance Services Office (ISO), the organization that drafts standardized provisions for insurance policies, includes a list of several exclusions to its general coverage for bodily injury and property damages. The very first exclusion listed in the Coverage Form is that of “bodily injury or property damage expected or intended from the standpoint of the insured.” This exclusion is consistent with the laws of most states, which prohibit as against public policy the insuring of acts undertaken intentionally with the intent to cause harm.

Per this exclusion, the personnel or agents of an organization will not be insured if they take any action with an intent to cause bodily injury or property damage and such injury or damage results. However, this exclusion will not apply to bar coverage for claims against an employer for negligent hiring, retention, or training of an employee who intentionally harms another’s person or property. For example, if a delivery driver texts while driving and causes a collision resulting in the injury of another motorist, there will be coverage for negligence claims against both the driver and her employer. But if the delivery driver, in a fit of road rage, intentionally strikes and injures another motorist, then the exclusion applies and there will be coverage neither for the driver’s individual liability nor for any vicarious liability that might attach to her employer. However, coverage will exist for negligent hiring or retention claims against the employer.

Insurers will sometimes try to invoke this exclusion for various scenarios in order to avoid coverage, including at times unexpected harms such as sexual abuse. If your organization is engaged in activities that run a unique risk for provoking claims for intentional torts, it would be wise to confirm that you have insurance in place that will provide coverage in any contingency.

2. Abuse or Molestation

In addition to the standard exclusions set forth in the CGL Coverage Form, the ISO also uses exclusionary endorsements. Endorsements (sometimes called riders) are amendments or modifications to the general coverage form policies.  Carriers include them to limit, modify, or expand the coverage set forth in the general policy.  An exclusionary endorsement that the ISO first introduced in 1987, and which has become common in many CGL policies, is entitled “Abuse or Molestation Exclusion.”² This endorsement excludes coverage for injuries and damages arising out of “the actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured.” The endorsement also excludes coverage for claims of negligent employment, investigation, or retention of any abuser or molester for whom the insured was legally responsible, as well as the negligent reporting or failure to report such person to proper authorities.

If your organization or its employees work with children or incapacitated persons and also has a CGL policy with this exclusionary endorsement, sexual abuse litigation could mean bankruptcy or dissolution. Churches, schools, childcare facilities, nursing homes, and other such organizations want to ensure that they have coverage in place for this kind of occurrence. The standard exclusion leaves your organization wide open to exposure if any employee or agent of the organization is accused of abusing children or infirmed persons. So you have to negotiate for an additional endorsement that includes this coverage—for a price.

3. Employment-Related Practices

Another common exclusionary endorsement found in many CGL policies is an exclusion of coverage for “employment-related practices.”³ This exclusion provides that coverage does not extend to injuries to a person arising out of any:

1. Refusal to employ that person;
2. Termination of that person’s employment; or
3. Employment-related practices, policies, acts or omissions, such as coercion, demotion, evaluation, reassignment, discipline, defamation, harassment, humiliation, or discrimination directed at that person.

If your business or organization has employees and also has a CGL policy that includes this exclusionary endorsement, there is a tremendous risk of exposing the organization’s assets to judgments or settlements from employment discrimination, harassment, or retaliation claims. It is crucial to confirm that your organization either has a CGL policy that does not exclude coverage for employment claims or else has a supplemental policy that provides such coverage with adequate policy limits.

Circumstances Voiding Coverage

1. Material Misrepresentations

In addition to exclusions of coverage, there are mistakes that insured parties can make that will result in voiding coverage, even when damage at issue is a covered occurrence. When an insured makes a material misrepresentation on its application for insurance, the misrepresentation might be grounds for rescission of (taking back) the insurance contract, thus voiding coverage. For example, if an insurance application asks if the applicant’s facilities have functioning fire alarms and sprinklers, a false response might void coverage for persons injured in a building fire. Material misrepresentations in the context of a claims process might also lead to voiding coverage, such as where an insured reports a claim but misrepresents the facts of its own role in causing the occurrence. Think of it as the insurer being allowed to cancel coverage without paying up.

The law regarding whether a misrepresentation is sufficiently “material” to void coverage varies from state to state. Under Colorado law, a misrepresentation is considered material if it “affected either the risk accepted or the hazard insured against such that the insurer would not have included the coverage provision had it been truthfully informed.”⁴ Jurisdictions also differ as to whether coverage is voided when the misrepresentation was an insured’s honest mistake. Some jurisdictions take a hardline approach under which any misrepresentation, whether intentional or unintentional, can be grounds for avoidance,⁵ while others require proof of an insured’s intent to deceive the insurer.

2. Failure to give prompt notice

Many CGL policies, including all policies based on the ISO’s CGL Coverage Form, require the insured to report claims or occurrences to the insurer “as soon as possible” or “as soon as practicable” as a condition for coverage of such claim or occurrence. Businesses and organizations often naively let issues go unreported to their insurers and thereby deprive their insurer of the opportunity of taking timely steps to mitigate the risk of liability. Some examples: an employer receives a demand letter from the attorney of an aggrieved former employee and discounts the threat of litigation, only to have litigation or a public relations crisis on its hands months later; a business knows that a patron was injured on its premises, but dismisses the extent of the patron’s injuries, only to face a personal injury lawsuit down the road; the overworked director of a non-profit organization is served with a summons and complaint for a legal action and assumes it’s simply a gesture of intimidation, only to be slapped with a default judgment after failing to respond. In each of these cases, the insured failed to notify its insurer of a potential claim or occurrence within a reasonable time.

Under most insurance policies, the insured’s prompt notice of the claim or occurrence is a condition precedent to the insurer’s obligation to indemnify or defend the insured. This means that if the insured fails to notify its insurer of a possible claim, it may be grounds for the insurer to deny coverage. While some jurisdictions require an insurer to show that it was materially prejudiced by an insured’s delay in giving notice in order to deny coverage,⁶ other jurisdictions will allow insurers to deny coverage when notice is not given as soon as practicable.⁷

The points discussed above demonstrate the importance of understanding the scope of your insurance coverage. In the next installment of this series, we will discuss ways to gauge whether your organization has sufficient policy limits for each area of potential risk.

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¹ Accessible at: https://www.northstarmutual.com/UserFiles/Documents/forms/policyforms/Current/CG%2000%2001%2004%2013.pdf

² Accessible at: https://public2.capspecialty.com/capfiles/826725.pdf

³ Accessible at: https://www.uuinsurance.com/ShowPDF.php?number=BP+04+17+07+02

⁴ Nationwide Mut. Ins. Co. v. Mrs. Condies Salad Co., Inc., 141 P.3d 923, 925 (Colo. App. 2009).

⁵ See, e.g., Nationwide Mut. Fire Ins. Co. v. Nelson, 912 F. Supp. 2d 452, 454 (E.D. Ky. 2012), (“[A]n insurance company may void a policy based on a material misrepresentation regardless of the applicant's intent”).

⁶ See, e.g., Prodigy Commc'ns Corp. v. Agric. Excess & Surplus Ins. Co., 288 S.W.3d 374, 382 (Tex. 2009)

⁷ See, e.g., Templo Fuente De Vida Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 129 A.3d 1069, 1071 (N.J. 2016).

Featured Image by Rebecca Sidebotham.