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A Liability Insurance Primer for the Business and Real Property Lawyer

Attorneys seem to have a hard time drafting insurance requirements into license agreements, leases, mortgages, and contracts of sale. That’s likely because only a small fraction have paid any attention to the subject, relying instead on the “cut and paste” approach to drafting documents. Harsh accusation perhaps, but there’s a lot of evidence to support the charge.

How often have you seen an agreement call for “Comprehensive General Liability” coverage? That form of insurance policy hasn’t been issued since 1986. Its replacement, still the standard, is called “Commercial General Liability” insurance or “CGL” coverage. How about “All-Risks” casualty insurance? That one is long gone, primarily because of the confusion that such a name caused when it didn’t really cover all risks. Today, and for many years already (since 1983), what had been known as an “All-Risks” policy is known as “Causes of Loss—Special Form” property insurance (and sometimes as “Special Extended Coverage”). A final example—don’t try to get another party named as an “additional insured” under a property insurance policy unless that is the only way you can sue the insurance company for a bad faith refusal to pay when already named as a loss payee. That status is reserved for protecting other parties under a named insured’s liability insurance policy.

For the most part, this liability insurance primer uses real property examples, but every attorney, including business attorneys should benefit. It isn’t a substitute for relying on true insurance professionals and comprehensive treatises. Hence, what follows only touches on some basic concepts, beginning with some definitions, and delving into common issues. It also will point out some traps, and then, in Appendices A and B, there will be two sample insurance “provisions,” one for leases and the other for mortgages.

Standardization

Fortunately for the attorney, there is a great deal of standardization in the area of insurance policies. And, that standardization comes about because of the Insurance Services Office (ISO). That’s an industry organization whose role it is to promulgate insurance policy forms and then work on getting those forms approved by the insurance commissioners, or their equivalents, in each state. ISO has been remarkably effective. Consequently, it is unusual to find liability or property insurance policies on other than ISO forms. That’s not to say that an insurance company or an agent representing an insurance company can’t write its own coverage form. When they do, such a policy or policy endorsement is called a “manuscript” form, and is almost always broader than the ISO form it would replace. Don’t expect, however, that you’ll ever be able to call for a manuscript form in anything other than a very special transaction or where the premiums being paid are very large. Nonetheless, because such insurance policy forms exist, it is wise to require insurance coverage, “at least as broad” as the selected ISO form. Don’t shortchange the transaction by saying “equal to.”

There are two categories of insurance that dominate an attorney’s scope of interest: liability insurance and property insurance. They are mutually exclusive. The commercial property policy covers direct loss to covered real and personal property, with limited coverage for some indirect losses. Liability insurance covers some damages that the insured party causes to others. Those explanations are far too basic, as the following treatment will show.

The ISO commercial property program also includes workers compensation, fidelity, automobile, inland marine (transit), and crime coverage. Neither commercial property insurance nor these additional insurance policies will be treated here in any significant way. Each of these coverages, when separately issued, constitutes a “monopart.” Frequently, some or all of these coverages are issued under a single, commercial package policy. Regardless of how presented, the insurance concepts and coverages are the same.

ISO is not the only rating bureau to have promulgated “standard” coverage forms. Another major agency is the American Association of Insurance Services (AAIS), formerly known as the Transportation Insurance Rating Bureau (TIRB). Its programs are very much like the corresponding ISO programs, but given that ISO dominates the marketplace, no further reference will be made here to AAIS programs.

The CGL Form

The current form of general liability insurance policy, the CGL form, was born in 1986. Its current version was promulgated in 2007, and became effective in December of that year. Thus, its “date code” at the bottom left corner of each page of the form reads: “12 07.” It is made up of a coverage form supplemented (and amended by endorsements). The coverage form actually comes in two versions, one for insurance provided on an “occurrence basis” and the other on a “claims-made” basis. Form CG 00 01 has the occurrence trigger; Form CG 00 02 has the claims-made trigger. Otherwise, the forms are the same. Although an available form, the claims-made version is very rarely used. Nonetheless, market conditions change, and a party who requires another to obtain and maintain CGL coverage would be wise to require that it be written on an occurrence basis.

To avoid confusion, this treatment will use the 2007 CGL coverage form, the current form, for quoted provisions and discussion unless set forth otherwise. Assuming that the 2007 form is merely a more precisely written version of what preceded it would be a mistake. Since 1986, various changes, individually and in the aggregate, have changed the scope of coverage, sometimes to expand it—more often to narrow it. And, what is more, because liability insurance coverage is written on an occurrence basis, it is the policy year within which the damage or injury occurs that governs, not when the claim is made or the damage discovered. Consequently, when faced with a belated discovery of damaged happening long ago, the scope of coverage may come from a policy used before December, 2004, and perhaps from a policy written 30, 40 or more years earlier. That’s not uncommon in cases of pollution claims, and sometimes, to the chagrin of insurance companies, coverage can be found in policies written before the “pollution exclusion” was promulgated. This treatment need not concern itself with such issues because it is written with the transactional attorney in mind, and agreements must call for policy forms and coverage available at the time the agreement is written and contemplate only future coverage issues and forms. Thus, as to CGL coverage, what follows sticks to the 2007 form.

To put together a liability insurance policy, the selected CGL coverage form and the selected endorsements are combined with a declaration page and ISO’s Common Policy Condition form. Sometimes the resulting CGL insurance policy is combined with other insurance coverages, such as property insurance, and marketed as a commercial insurance policy or a business insurance policy. A copy of ISO’s CGL occurrence liability coverage form CG 00 01 12 07 can be found the Appendix D.

The CGL coverage form has four parts, as follows:

COVERAGE A—Bodily injury and property damage liability
COVERAGE B—Personal and advertising insurance liability
COVERAGE C—Medical Payments
SUPPLEMENTARY PAYMENTS—Coverage A and B

Attorneys will be most interested in Coverage A, and less so in the Supplementary Payments. So, that will be the focus of this treatment. There are other ISO commercial liability insurance forms, such as ones for liquor liability and for pollution liability, but those will not be discussed here except to point out that coverage for liquor related losses and pollution related losses is excluded from the CGL form.

Basically, the CGL coverage form begins by broadly expressing what it covers, and then listing exclusions from that coverage. So the key is to look at the primary promise of insurance in the form’s “Insuring Agreement.” It reads as follows:

We will 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. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. [The italics are ours, but the quotation marks appear in the policy and refer to defined terms in the policy.]

It is a common misunderstanding that a CGL based insurance policy is one of indemnification, i.e., one that reimburses an insured for what it pay to another for what the policy covers. In actuality, the insurer only requires that the insured have an obligation to pay. The way the CGL coverage expresses this concept is by paying for what the insured is legally obligated to pay. Even though this is broad language, obligations arising out of criminal acts are not covered because of public policy concerns. Many states do not have a public policy against insurers paying for punitive damages, and where that is the case, the policy will pay such damages. If this is important to a contracting party, then current legal research is required to determine whether the particular state or states in question permit such coverage. If they do, the CGL coverage form, as written, provides such coverage.

Search as you may, the term damages is not defined in the coverage form. It isn’t found in Section V of the form where the definitions are set out. That’s why the form doesn’t surround it with quotation marks. Basically, damages mean money that is paid as compensation or retribution. It includes the cost to repair property of others, medical expenses, pain and suffering, and those items usually thought of as being in the same nature as those examples. As pointed out above, it includes punitive awards where not barred by a state’s public policy. It does not cover the cost to perform or abstain from an act, typically the outcome of an action for injunctive relief, but courts have held that damages encompasses the cost of mitigation or for the abatement of nuisance. Only current legal research, on a state by state basis, will inform one as to how far a court will extend coverage beyond the usual meaning of damages.

Though not italicized, one should not overlook the coverage form’s use of the trigger term: “because of.” Purely economic damages are not within the scope of “bodily injury” or “property damage.” Therefore, standing alone, such damages (e.g., mental distress) would not be covered. But, if such otherwise uncovered damages are a consequence of a “bodily injury” or of covered “property damage,” coverage exists. Similarly, because the definition of “property” is limited to tangible property, loss of profits by an injured party would not be covered, but if such loss of profits flowed from damage to tangible property, it would be covered.

Bodily injury means:

Bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.

While drafted in a somewhat circular fashion, “Bodily injury means bodily injury ...,” this has not proven to be a problem. Case law seems to understand the common meaning of the term.

The definition of property damage is a bit more detailed. The 2007 form reads as follows:

“Property damage” means:

  1. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
  2. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

Electronic data, being information, facts or programs, whether on tangible media or not, is expressly excluded from the definition of tangible property.

The definition of “property damage” found within the 2007 form originally appeared in the 1990 form, and modifies that found in earlier forms by the addition of the explanation as to when the injury is deemed to have occurred. This change was intended to preclude claims under later policies for injury or damage from the time the damage or injury was first caused even if manifested later or if the cause is of a continuing nature.

Note the distinction between parts a. and b. Property of another that an insured loses is not covered because, in such a case, there is no physical injury to the property. But, loss of its use, even in the absence of it being physically injured, is covered. Watch, however for exclusions for loss of currency or certificates or tangible property of similar character.

Section V of the CGL coverage form defines occurrence in the following way:

“Occurrence” means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

Essentially, “[w]hat really matter is whether the bodily injury or property damages results without the insured’s foresight or anticipation.” American Law Reports 4th, P. 957.

The “Insuring Agreement” section within CGL Coverage A (Bodily Injury and Property Damage Liability) has some time and location limitations. For one, the otherwise covered injury or damage must be “caused by an ’occurrence’ that takes place in the ’coverage territory,’” by definition, the United States (including its territories and possessions), Puerto Rico, and Canada. It also includes international waters or airspace if traveling or transporting between places in those lands. It also includes the rest of the world for certain activities and products originating in the defined lands. By an Endorsement, the coverage territory can be made worldwide.

The “bodily injury” or “property damage” must occur during the policy period. For there to be coverage in a particular policy period, the CGL coverage form requires that, prior to that policy period, no person or entity listed in the policy’s Declaration and no party to whom the policy attributed coverage in Paragraph 1. of its Section II (Who Is An Insured) and no employee charged with receiving notices, knew that the injury or damage had occurred, in whole or in part, before that policy period began. Crucial to understanding how this works is understanding that the time of “discovery” is not relevant. What matters is when the injury or damage took place. This is complicated by situations of continuous exposure, such as to asbestos. In such cases, the damage is discovered years and years later and is presumed to have taken place throughout the periods of exposure. As such, this would implicate the liability coverage from many different policy years.

As noted above, the insurer’s primary promise to its insured includes the duty (and right) to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which the insurance coverage applies. This is an extremely important feature of CGL coverage for at least two reasons. First, it is broader than the substantive insurance coverage, because it covers even groundless “suits” and the duty is triggered upon an allegation of even a single covered “bodily injury” or instance of “property damage.” While some insurers, in some states, may seek to allocate defense costs among covered and non-covered claims (and the validity and success of such an allocation attempt is beyond the scope of this analysis), the defense must be mounted by the insurer even if only one claim of many would be covered by the policy, if true. A second important feature of the defense benefit in the CGL policy is that the cost of a direct defense on behalf of an insured is over and above the stated policy limit. Its cost doesn’t reduce the amount of coverage. Care must be taken however, to distinguish the concept of directly defending an insured, and paying for the insured’s defense of claims against a party who the insured has contractually agreed to indemnify. The cost to cover an insured’s obligation to indemnify another, both for damages and defense costs, is covered only to the stated policy limit.

Under the current CGL coverage form, a “suit” is no longer limited to a civil action in a court, but now includes arbitration to which the insured must submit (whether with the insurer’s consent or not) and any other alternate dispute resolution proceeding agreed-to by the insured if the insurer consents. A determination as to whether notices or letters, such as ones alleging that the insured is a potentially responsible party under environmental laws, constitutes a “suit” is determined on a jurisdiction by jurisdiction basis.

Exclusions

The 2004 CGL coverage form lists 15 express exclusions to coverage, basically saying that even if the Insuring Agreement would encompass damages caused by the excluded items, there is no insurance coverage for them. Although the full list follows, only those that commonly touch real property will be explored. The Exclusions to Coverage Part A (Bodily Injury and Property Damage Liability) are:

  1. Expected or Intended Injury
  2. Contractual Liability
  3. Liquor Liability
  4. Workers’ Compensation And Similar Laws
  5. Employer’s Liability
  6. Pollution
  7. Aircraft, Auto Or Watercraft
  8. Mobile Equipment
  9. War
  10. Damage To Property
  11. Damage To Your Product
  12. Damage To Your Work
  13. Damage To Impaired Property Or Property Not Physically Damaged
  14. Recall Of Products, Work Or Impaired Property
  15. Personal And Advertising Injury
  16. Electronic Data
  17. Distribution Of Material In Violation of Statutes

Of significant importance is a particular provision of the CGL Coverage Form that immediately follows the listing of these 15 exclusions from coverage. It reads:

Exclusions c. through n. do not apply to damage by fire to premises while rented to you or temporarily occupied by you with permission of the owner. A separate limit of insurance applies to this coverage as described in Section III—Limits Of Insurance.

This overriding exclusion will be treated below.

From their titles alone, it is clear that not all of the exclusions are of great interest to attorneys. On the other hand, some clearly are. Exclusion a. is a common and overriding one, but one that is somewhat confusing. It excludes “’bodily injury ’ or ’property damage ’ expected or intended from the standpoint of the insured.” That means that the CGL form does not provided insurance where the insured intends the injury. It does not deny coverage where the insured performed an intentional act, but didn ’t intend to cause the injury (other than where reasonable force has been used to protect persons or property).

Exclusion b. of the current form of CGL Part A coverage (Contractual Liability) cannot be intuitively understood from its name, because the actual provision contains two very special “carve outs.” Before applying the “carve outs,” the exclusion would deny coverage for obligations to pay damages by reason of assumption of liability under a contract. The first, and most general “carve out” says that there will be coverage if, absent the insured’s contractual obligation, the insured would have had the obligation to pay anyway. Of more technical interest is the second “carve out”—the one that says that, even in face of exclusion b., CGL coverage applies where the liability arises out of an “insured contract.” So, what is an “insured contract”? Under the exclusion, an “insured contract” includes:

  1. A contract for a lease of premises. However, that portion of the contract for a lease of premises that indemnifies any person or organization for damage by fire to premises while rented to you or temporarily occupied by you with permission of the owner is not an “insured contract”;
  2. A sidetrack agreement;
  3. Any easement or license agreement, except in connection with construction or demolition operations on or within 50 feet of a railroad;
  4. An elevator maintenance agreement;
  5. That part of any other contract or agreement pertaining to your business (including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another to pay damages because of “bodily injury” or “property damage” to a third person or organization. Tort liability means a liability that would be imposed by law in absence of any contract or agreement.

[All bold emphasis is ours.]

The coverage afforded for liability under “insured contracts” is interesting for a number of reasons. For one, the agreement need not be in writing. On the other hand, the current form requires that the contract have been executed before the injury or damage takes place; i.e., there is no retroactive coverage. To make it clear, the coverage afforded under subpart f. of the definition does not include liability resulting from a breach of the “insured contract,” only for indemnification obligations under the “insured contract.” A very common example cited is that there is no coverage afforded for damages that may arise from the insured’s failure to name the contract’s other party as an additional insured under the insured’s insurance policy, but if the insured would have been liable to the other party under a tort theory, there would still be coverage.

There are exclusions to the “carve out.” The most common one affects persons or entities working within 50 feet of a railroad on behalf of the railroad. That can be negated by the purchase of Endorsement CG 24 17 Contractual Liability—Railroads, a specimen of which is in Appendix E.

If the “insured contract” requires the insured to indemnify the other contracting party for attorneys fees and litigation expenses, then there is coverage; otherwise, there is none. Such defense expenses, when payable, are payable within the face amount of the policy.

The effect of the exclusions from coverage is that “damage to premises rented to” the insured is not fully covered by the CGL policy absent an added endorsement. This means that there is a separate, lower coverage limit when the insured causes fire damage to rented premises. That coverage limit can be found on the declaration page of the policy. Typically it is as low as $50,000 or $100,000. Consequently, “fire damage” or “fire legal liability” coverage for damage to rented is severely impaired under the basic coverage one typically finds with a standard CGL policy form. Thus, where relevant, a specific, and significantly higher coverage limit must be called for by landlords within leases. While Exclusion b., results in limited coverage for fire damage to real property items within leased premises, it isn’t only fire damage to items of real property that is limited. Exclusion j. does the same thing for damage to personal property in the care, custody or control of the insured.

Where an insured is in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages, Exclusion c. becomes of concern, Owners of premises where liquor is sold, etc. are covered under their own CGL policies if they, themselves, are not in the business of selling, etc. liquor. Consequently, it may no longer be necessary for such a property owner to rely on a tenant obtaining the available, separate coverage for liquor liability. Organizations, such as social organizations, can obtain a policy endorsement, CG 21 51, that would grant coverage on an event by event basis.

Exclusion f., the pollution exclusion, has been amended more than a dozen times since it first appeared and is now very broad. One can assume that the current form of CGL policy is intended to protect the insurer from any obligation to pay damages that arise out of pollution. Though there are various CGL policy endorsements that would extend coverage, either in general or for specific named sites, their availability is extremely limited and therefore beyond the scope of this treatment. Where needed or desired, parties should investigate the available of specific pollution liability insurance coverage.

Exclusion j., Damage To Property, eliminates liability insurance coverage to real and personal property owned, rented or occupied by the insured. There is a limited “carve-out” for property and contents rented to the insured for seven days or less (other than damage caused by fire). The exclusion also denies coverage to property of others in the care, custody or control of the insured as well as some other similar property. This exclusion is “softened” at the end of the list of the policy exclusions by a policy provision that provides limited “fire damage” or “fire legal liability” coverage under a much smaller limit of insurance. That smaller limited is shown on the policy’s declaration page. More importantly, the way in which property belonging to others can be insured is through the purchase of a property insurance policy. A frequently unnoticed consequence of Exclusion j. is that once a property is sold or otherwise alienated, liability insurance coverage for later damage caused by defects in the property at the time of sale no longer exists. A typical example is damage resulting from a fire caused, after sale, by a pre-existing defect in the property. Consequently, if one wishes to have liability insurance coverage to cover the exposure caused by a defect existing in a property at the time of sale, separate coverage must be arranged.

Exclusion m., Damage To Impaired Property Or Property Not Physically Injured, is an attempt, not entirely successful, by insurers to avoid paying for the repair or replacement of certain claims for “loss of use” damage caused by a defective product made or service provided by the insured. This is best explained by way of an example. If the insured installed an HVAC system and its pipes ruptured, the physical damage caused by the rupture to the building, but not to the HVAC system, would be covered and the loss of the building’s use during repair would also be covered. On the other hand, if the HVAC system fails to operate, but hasn’t exploded, ruptured or failed in a similar manner, loss of the building’s use while the system is repaired or replaced is not covered by the standard CGL policy.

As noted earlier, following the list of exclusions in the Bodily Injury and Property Damage Liability part of the CGL policy form is a “carve out” reading:

Exclusions c. through n. do not apply to fire to premises while rented to you or temporarily occupied by you with permission of the owner. A separate limit of insurance applies to this coverage as described in Section III—Limits Of Coverage.

This “add back in” provision, albeit at a lower coverage limit, does not impact Exclusion b., the one that excludes certain contractual indemnification obligations. Thus, the CGL coverage form provides liability insurance coverage where the liability is tort in nature, but not where it is solely contractual in nature. That risk of damage to leased or owned premises otherwise occupied by the insured should be covered by property insurance.

The CGL coverage forms all contain a section on Limits Of Insurance. One important concept is that of the General Aggregate Limit. This means that the Limit Of Insurance shown on the policy’s declaration page is the most that the insurer will pay in any given policy year for all insured events, related or unrelated. Products-completed operations claims are subject to a separate aggregate limit of their own. By the addition of an endorsement, the general aggregate limit can be made to apply on a location by location basis so that each location will have its own general aggregate limit. There is interplay between “umbrella” or “excess liability” insurance policies and the aggregate limit. If such an excess policies is written on a claims made basis, and in a given policy year the aggregate limit has been exhausted, excess policy premiums in subsequent years will be raised by reason of the greater exposure. Other than the making of this observation, this treatment will contain no further discussion of “umbrella” or “excess” coverage.

The CGL policy also includes a number of other coverage limits. The most relevant of these six other limits to the attorney is the one called: “Damages To Premises Rented To You Limit.” As previously discussed, this is the one that sets forth a separate, lower limit for damages occurring to rented or temporarily occupied property. For this reason, tenants wisely choose to carry commercial property coverage or to require that their landlords do so (with a waiver of subrogation).

Conditions

Another section of the CGL insurance policy sets forth nine Conditions to which each of the three coverage forms (Bodily Injury And Property Damage Liability; Personal And Advertising Injury Liability; and Medical Payments) is subject. They are “administrative in nature,” dealing with topics such as the coverage continuing even if the insured becomes insolvent or bankrupt; setting forth a duty of cooperation and prompt notice; explaining how the insured’s representations are treated; providing for premium audits; and the like. Some Conditions of particular interest to the attorney are those explaining how a particular CGL insurance policy coordinates with other available insurance coverages; how various named insureds are treated; the required notices of non-renewal and cancellation; and who is authorized to make changes to the policy.

One key concept within the Conditions is that where there is more than one named insured (each of whom is jointly and severally liable to pay the premium), notices need only go to the first named insured. Notices of non-renewal must be sent by the insurer at least thirty days before the policy expiration date. Notice of cancellation for non-payment will be given on at least ten days’ notice, and for other reasons, on at least thirty days’ notice. By the policy’s terms, the first named insured is authorized to make changes that affect all other insureds.

Another key Condition is the “Separation Of Interests” provision. This Condition does not affect the aggregate limit, which still applies regardless of how many named insureds are covered by the policy, but does treat each named insured as if it were the only insured under the policy. Consequently, a disqualifying misrepresentation made by one insured will not invalidate the coverage afforded to the other, non-misrepresenting insureds. Similarly, a claim need not be applicable to all insureds for the policy to cover fewer than all of the insureds. By its terms, the CGL coverage applies:

  1. As if each Named Insured were the only Named Insured; and
  2. Separately to each insured against whom claim is made or “suit” is brought.

The last Condition of great interest to attorneys is the one dealing with Other Insurance. The ISO set of insurance forms is coordinated to work with the CGL form’s statement that its coverage is “excess over” any other insurance. This means, among other things, that under the CGL form, if a tenant has purchased liability insurance covering rented property, the rental liability insurance will answer first for any claims. This Condition can make it confusing when an insured is also named as an additional insured under another applicable policy where the “second” policy has been written, as is often the case, to make the coverage afforded to an additional insured into “excess” coverage. For this reason, when a party to a contract requires the other to name it as an “additional insured” under that other party’s insurance coverage (such as where a landlord requires its tenant to name the landlord as an “additional insured”), the party insisting on being named as an “additional insured” should require that its status be primary and that the policy be written on a non-contributing basis. Ideally, the covered party’s “additional insured” coverage should be exhausted first; then, that party’s own CGL coverage would answer for the claim; and, then the insured’s umbrella policy would step in. Where a policy is primary, that insurer is the one that provides the defense.

Who Is An Insured?

Section II of the CGL coverage form covers “Who Is An Insured.” It reads as follows:

1. If you are designated in the Declarations as:

  1. An individual, you and your spouse are insured, but only with respect to the conduct of a business of which you are the sole owner.
  2. A partnership or joint venture, you are an insured. Your members, your partners, and their spouses are also insured, but only with respect to the conduct of your business.
  3. A limited liability company, you are an insured. Your members are also insureds, but only with respect to the conduct of your business. Your managers are insureds, but only with respect to their duties as your managers.
  4. An organization other than a partnership, joint venture or limited liability company, you are an insured. Your “executive officers” and directors are insureds, but only with respect to their duties as your officers or directors. Your stockholders are also insureds, but only with respect to their liability as stockholders.
  5. A trust, you are an insured. Your trustees are also insureds, but only with respect to their duties as trustees.

In addition to the foregoing, some volunteers, personal representatives, and newly formed or acquired businesses (for up to thirty days) are also within the ambit of a “named insured.” And, importantly, so are persons and organizations acting as an insured’s “real estate manager.”

Additional Insureds

An “additional named insured” and an “additional insured” have different statuses vis-à-vis the CGL policy’s coverage. Additional named insured are usually related to the first named insured and may be liable for the payment of premiums. In addition, some policy exclusions affect additional named insureds, but not persons or entities who are just “additional insureds.”

If not designated as a “named insured” on the insurance policy, a party can be added as an additional insured. In most jurisdictions, this cannot be accomplished by way of a Certificate of Insurance. Certificates, which will be discussed later, are normally issued by the insurance agent. The way to afford “additional insured” status to a desired person or entity or class of persons or entities is by way of an actual Endorsement to the named insured’s CGL coverage. By way of reminder, the concept of an “additional insured” is primarily applicable to liability coverage, and rarely applicable to property insurance (where one is an “interest holder” or holds the status as a “loss payee”). Yes, as stated earlier, don’t try to get another party named as an “additional insured” under a property insurance policy unless that is the only way you can sue the insurance company for a bad faith refusal to pay when already named as a loss payee.

There are more than thirty different ISO promulgated Endorsements that name a person or organization as an “additional insured.” Some, such as the following, are easily understood by their title. Examples are those named Additional Insured—“Club Members” or “Concessionaires Trading Under Your Name” or “Condominium Unit Owners.” There is a Endorsement that extends coverage to persons or organizations that have financial control over the named insured and that also covers premises controlled by that “parent” where those premises are used by the named insured.

The ones most often of interest to attorneys are the CG 20 11 Additional Insured—Managers Or Lessors Of Premises Endorsement [See Appendix F] and the CG 20 18 Additional Insured—Mortgagee, Assignee, Or Receiver Endorsement [See Appendix G]. The first covers property managers and landlords for liability arising out of the ownership, maintenance or use of the leased premises if scheduled on the named insured’s CGL insurance policy. Coverage ends when the named insured is no longer the tenant and it does not cover the manager or landlord for its own structural alterations or new construction or demolition. The second covers persons and entities of the character identified by its name, i.e., mortgagees and those having a similar interest in the property. There are other specialized forms, such as Endorsement CG 20 24 Additional Insured—Owners Or Other Interests From Whom Land Has Been Leased [See Appendix H]

The ISO CGL insurance policy scheme also envisions that the broad coverage afforded under a CGL coverage part can be “taken back” by the use of Exclusions added to the underlying coverage. There are many of these, some of which eliminate coverage for certain risks, such as the “Fungi Or Bacteria Exclusion” or the “Explosion, Collapse, And Underground Property Damage (specified Operations)” form. There are some directed toward behavior, such as the “Abuse Or Molestation Exclusion,” and many, many directed at particular businesses or business activities, such as the ones for “Funeral Services” or “Logging And Lumbering Operations.”

Lastly, a CGL policy may include Coverage Amendment Endorsements such as ones calling for arbitration, setting forth separate aggregate limits on a location by location basis, or deleting the liquor liability exclusion.

The key to navigating through the Endorsements, whether they be Exclusions, Extensions or Amendments, is to study the policy’s Declaration page. For an Endorsement or other coverage form to be applicable, it must be listed on the Declaration page. Look for the form number (e.g., CG 25 01) and the publication date of that form (e.g., CG 25 01 12 04, i.e., December 2004). Then, read the form. If it is not “stapled” into the policy, it still applies—ask for it. An insured can also bargain for a blanket additional insured provision to provide automatic coverage for any person or entity to whom the insured is contractually obligated to name as an “additional insured.”

Certificates of Insurance

Forget what you ever thought you knew about the value of a Certificate of Insurance. Even if you were correct at one time, the rules have changed dramatically.

Parties seeking status as an “additional insured” under another’s liability insurance policy very often ask for a “certificate of insurance.” In fact ACORD, a non-profit membership organization of carriers, agencies, and others, estimates that more than 8,000,000 copies of its forms of certificate of insurance are issued each year. Nonetheless, such a certificate is not the policy itself nor is it even a part of the policy. It isn’t a contract between the insurer and the holder of the certificate itself. Certainly, it provides evidence that a particular insurance policy or policies existed at the time the certificate was issued. Even though it may once have served to do so, now it almost never adds the certificate holder as a beneficiary of the listed insurance policy’s coverage. As to whether the certificate holder has recourse against the insurance company if a called-for notice of cancellation or non-renewal is not sent to the certificate holder is questionable at best.

Further, case law informs that a certificate holder may not be entitled to rely on any “facts” on the face of the certificate. The result differs whether the insurance company issued the certificate itself or whether it was an agent who issued the certificate. An additional factor is whether an agent who issued a certificate notified the carrier of the certificate’s issuance. Then, there are “general agents” who are empowered to bind their principal, the insurance company itself, and the “ordinary” agent who may have no such power. Accordingly, a disappointed certificate holder may only be able to look to the issuing agent’s own errors and omissions policy.

To add to the “uncertainty,” a substantial and rapidly increasing number of states do not permit a certificate of insurance to amend or become part of the insurance policy itself. The insurance industry has been successful in persuading many state insurance commissioners to effectively eliminate any liability insurers may have had for what is contained in a certificate of insurance. The National Association of Insurance Commissioners (NAIC) has a model fraud law and one of the named “Fraudulent Insurance Acts” in that model law is the presenting or preparation of a document that contains false information, including “[t]he issuance of written evidence of insurance.” In New Jersey, N.J.S.A. 17:22A-17a(7) “prohibits material misrepresentation of the terms and conditions of insurance contracts or policies to any person.” The New Jersey Department of Insurance interprets this, in its Bulletin 98-5, Certificates of Insurance, to include: “[p]roviding a certificate of insurance that materially misrepresents policy terms or conditions.” That Bulletin expressly states that: “[c]ertificates of insurance should only be used to provide evidence of insurance in lieu of a copy of the actual policy, and cannot be used to amend, expand or alter its terms.” Further, a number of states require the filing of certificate of insurance forms with their insurance department. In these states, the text of ACORD’s certificates cannot be modified, unless the modified form is filed for approval by the respective state Department of Insurance. Thus, if this is critical, a case-by-case review of state law and state insurance regulations must be made.

To illustrate how a Certificate of Insurance works or doesn’t work to effectuate a party’s status as an additional insured, the Second Circuit Court of Appeal case of 10 Ellicott Square Court Corp. v. Mountain Valley Indemnity Co., 2010 WL 5186041 (Unreported) is illustrative. Here, the policy afforded additional insured status to a contractor’s subcontractors once a contract between the contractor and its subcontractor was executed. The Certificate of Insurance flatly named a particular demolition subcontractor as an additional insured, however the accident giving rise to the court’s involvement happened after the demolition work had begun, but before the contract was executed. The result was a holding of “no coverage as an additional insured.” Granted that the court reserved its decision as to whether an “estoppel” argument could reverse that result, but that isn’t the kind of assurance that the demolition subcontractor had sought when it asked for the Certificate of Insurance in the first place.

That leaves the question of the text of any particular certificate of insurance. While there is no need to utilize or accept one of the available certificates promulgated by ACORD, almost certainly that is the form that will be furnished. Even where permitted in a rapidly declining number of states, agents are unprepared to review and “vet” customized forms. Parties rarely have the bargaining power to make any significant changes to the ACORD forms, of which there currently are two: ACORD 28 (2009/12)—“Evidence of Commercial Property Insurance” and ACORD 25 (2010/05)—“Certificate of Liability Insurance.” There is no significance to one being called “Evidence” and the other “Certificate.” In the vernacular, they are both certificates of insurance. Specimens of the ACORD 25 and the ACORD 28 can be found in Appendix I and Appendix J, respectively.

The current ACORD 25 and ACORD 28 forms should not be confused with their prior, now very obsolete forms of the same number. They are very different, and the differences highlight the problem with the current forms. Each of the current forms are “issued as a matter of information only and confers no rights upon the” certificate holder (in the case of the liability certificate) or the additional interest holder (in the case of the property certificate). Neither amends, extends or alters the policy’s coverage. The current versions of the two forms, unlike prior versions, kick the question about notices of cancellation to the policies themselves without any indication as to what the policies provide in that respect. So, if a certificate holder wants a particular number of days of notice before a policy can be cancelled, the policy must be endorsed with that notice period in order to satisfy that requirement.

So, what should the concerned certificate holder do? Get a policy endorsement. In the case of a CGL insurance policy, get the appropriate one naming the additional insured as such. For a landlord or property manager, that means CG 20 11 Additional Insured—Managers Or Lessors Of Premises. For a lender, that means CG 20 18 Additional Insured—Mortgagee, Assignee, Or Receiver. The wisest step to take is for the certificate holder to obtain and maintain its own CGL insurance policy.

In contrast to the CGL policy form, mortgage holders have a special provision or “Additional Condition” within the ISO Building and Personal Property Coverage policy form, Section F.2. It informs that the term mortgageholder includes “trustee” (such as under a deed of trust). It allows a mortgage holder to file a proof of loss in the named insured fails to do so. It allows the mortgage holder to pay the premium. And, importantly, it promises ten days ’ notice of cancellation for nonpayment of premiums and thirty days for other reasons. It also promises ten days ’ notice of non-renewal. The insurance company reserves a right of subrogation when it pays any loss to the mortgage holder and reserves the right to buy the mortgage and step in the shoes of the mortgage holder.

In past years, before the current ACORD certificates of insurance forms were promulgated, agents were permitted to alter them by, for example, deleting the “will endeavor” limitation. Although denied by or unknown to many insurance agents, ACORD expressly sanctioned such changes. That is no longer the case.

To summarize, let’s use the words of ACORD itself: “A Certificate of Insurance is NOT an insurance policy, and does not serve to provide, endorse, amend, extend or alter in any way the terms of an insurance policy. Only an endorsement, rider or amendment to the policy can effect changes in coverage. Reference to a contract between the client and a third party on a certificate does not provide coverage.”

Deductibles and Self-Insured Retention Amounts

The terms “deductible” and “self-insured retention” are frequently misunderstood and mistakenly thought to be the same. This is because in the context of property insurance, the “deductible” is the amount of loss absorbed by the insured. The insurance company just “deducts” that amount from the insured loss before paying its insured. In the liability insurance context, the insurance company will pay the entire claim to the injured party (because a CGL insurance policy is not “indemnification”) and its insured must reimburse the carrier for the amount of the liability “deductible.”

Where an insured has a “self-insured retention,” the insured covers the loss up to the retained amount, and then the carrier steps in. Frequently, the insured will manage claims when the claims fall below the retained amount. Thus, a policy with a “self-insured retention” looks like two different policies. To a claimant, there are no funds available from the carrier other than for the amount of the claim above the retained amount—essentially, the “insured” is uninsured for the “self-retained limit.” Therefore, unless an “additional insured” party wants to rely on the insured (and not the insurance company) paying the first part of a claim, i.e., the “self-retained limit” amount, it should insist on a policy endorsement that will provide for that result. If such an endorsement is obtained, it is very common for an insured with a “self-insured retainage” (SIR) to be required to enter into an indemnity agreement with the insurance company that writes its CGL coverage. An additional insured can not expect that insurers who issue policies with an SIR will still have a full defense obligation unless the SIR amount has been paid out by the insured. Even though that is the general understanding, even in California, it should be noted that in Vulcan Corp. v. Superior Court, 185 Cal.App.4th 677 (2010), the California Court of Appeals held that primary insurers on policies with a SIR must still provide an “immediate, ’first dollar’ defense” (subject, of course, to their right to later recover the SIR amount from the insured) unless the policy expressly imposes exhaustion of the SIR as a precondition to the duty to defend. Lastly, lest one think that an additional insured, itself, could pay out the amount of the SIR to “trigger” the defense obligation, that is probably not the case, especially the way the ISO CGL policy is written. As interpreted by at least one court [in Forecast Homes, Inc. v. Steadfast Insurance Company, 181 Cal.App.4th 1466 (2010)], because the CGL policy said: “You shall be responsible for payment of all damages...” [italics mine] and also because some of the policies in question said “payments by others, including but not limited to additional insureds, do not serve to satisfy the self-insured retention,” the additional insured party could not satisfy the SIR threshold on behalf of the policy’s named insured.

Quality of the Insurance Carrier

Not all insurance companies are of equal (or even good) financial strength. For that reason, it is common for additional insureds or interest holders (e.g., mortgagees) to require that the insured’s policies be written by companies of a certain minimum quality. While there are a number of rating agencies who opine as to the financial character of insurance companies, one dominates the field—A.M. Best with its Best’s rating system. A full description of the A.M. Best ratings is at www.ambest.com/ratings/guide.html. A.M. Best issues two types of ratings: a Best’s Rating (A++ to F) for large companies and a Financial Performance Rating (9 to 1) for companies that do not meets the minimum size or operating experience requirements for a Best’s Rating. A.M. Best also identifies insurance companies by their Financial Size Category (FSC) ranging from an FSC class of I (less than one million dollars of capital, surplus, and conditional reserve funds) to FSC class XV (greater than two billion dollars).

A.M. Best classifies Best’s Ratings of A++ through B+ as “secure” and lower ratings as vulnerable. Consequently, it is common to see minimum ratings requirements within contracts, leases, and mortgages of A:X or stronger. An “A” rating is described by A.M. Best as “Excellent” and an FSC of X calls for capitalization, etc. of over five hundred million dollars.

In Conclusion

Attorneys practice law. Rarely are they experts in non-law substantive fields. Nonetheless, just as “ignorance of the law is no excuse,” ignorance of key substantive concepts, such as those concerning insurance, is no excuse. The answers are easy once you can figure out the questions. The purpose of this exposition or basic outline covering liability insurance issues for attorneys is only to help the practitioner identify issues and thereby frame questions. If that goal has been achieved, then it was worth the effort. Make the insurance expert your friend. Keep her or his name on your Rolodex®. But, don’t waste his or her time. That’s where this treatment may be most useful to the real property practitioner—getting the reader grounded in the basic concepts, so that the questions make sense.



IRA MEISLIK, ESQ.

Ira Meislik is a principal at the Montclair law firm of Meislik & Meislik. His practice is concentrated in two areas ( Business Law and Commercial Real Estate Law.

Mr. Meislik’s business law practice covers general business, commercial, and transactional matters. In this area, he handles business formations, acquisitions, mergers, contracts, negotiation, and business counseling. Mr. Meislik’s commercial real estate practice focuses on the needs of landlords and tenants primarily within shopping centers and office properties. In addition to crafting space and ground leases, he has extensive experience in the acquisition, disposition, and financing of real property.

He a one of seven members of the Uniform Law Commission’s Joint Editorial Board (JEB) for Real Property Acts. The JEB is responsible for monitoring new real property developments which may have an impact on Uniform State Laws and for making recommendations to the National Conference of Commissioners on Uniform State Laws (NCCUSL) for drafting new, proposed state laws.

Mr. Meislik holds the highest “AV” rating in the Martindale-Hubbell Law Directory and has been selected as a New Jersey Superlawyer every year since 2005, and is selected for inclusion in The Best Lawyers of America®. He was named to the 2009 BTI Client Service All-Stars list as one of only 176 attorneys cited by Fortune 1000 companies as providing excellence in client service. He is one of a small number of attorneys in New Jersey who have achieved the status of a LEED® Accredited Professional.

He is a frequent speaker and writer in the areas of real estate, business entity selection, attorney ethics, limited liability entities, and unincorporated business associations. He is co-editor of, and contributor to, the just released second edition of the American Bar Association’s The Commercial Lease Formbook and is a contributor to its The Sublease and Assignment Deskbook and to other real property related books. He participated in the drafting of the Revised Uniform Partnership Act, the Revised Uniform Limited Partnership Act, and the Revised Uniform Limited Liability Company Act, each then promulgated by NCCUSL.

A Fellow of the American College of Real Estate Lawyers, Mr. Meislik is also a member of the American, New York, and Essex County Bar Associations, as well as of the International Conference of Shopping Centers. He currently serves as chair of the American Bar Association’s Ground Leasing Committee and is vice-chair of its Real Property, Trust and Estate Section’s Diversity Committee. He is past chair of its Joint Committee on Limited Liability Entities. In addition, Mr. Meislik is an immediate past member of the New Jersey State Bar Association’s Real Property, Trust and Estate Law Section’s Board of Consultors and has served as a vice-chair of the Business Law Section’s Board of Directors.

Mr. Meislik holds a B.S. degree in Mechanical Engineering and an M.S. degree in Industrial Management from Polytechnic University and a J.D. degree, cum laude, from Seton Hall University School of Law. He can be reached as follows: (973) 783-3000 (voice); (973) 744-5757 (telecopier); and at .(JavaScript must be enabled to view this e-mail address) (email). His firm reviews and summarizes recent New Jersey business and real estate cases. They are available at: http://www.meislik.com.

APPENDICES
For your convenience, the following associated documents are contained in one PDF file
Click to download (571 KB)

  1. Sample Insurance Provisions for a Lease
  2. Sample Insurance Provisions for a Mortgage
  3. Sample Insurance Provisions for a Service Contract
  4. Specimen Commercial General Liability Coverage Form CG 00 01 12 07 (Occurrence)—2004
  5. Specimen CGL Coverage Endorsement CG 24 17 01 96 Contractual Liability—Railroads
  6. Specimen Endorsement CG 20 11 01 96 Additional Insured—Managers Or Lessors Of Premises
  7. Specimen Endorsement CG 20 18 11 85 Additional Insured—Mortgagee, Assignee Or Receiver
  8. Specimen Endorsement CG 20 24 11 85 Additional Insured—Owners Or Other Interests From Whom Land Has Been Leased
  9. Certificate of Liability Insurance—ACORD 25 (2010/05)
  10. Evidence of Commercial Property Insurance—ACORD 28 (2009/12)

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