Insurance Services Office, Inc. to release new standard Commercial General Liability forms and endorsements

Authors: Attorney Gregory D. Podolak Attorney David G. Jordan Insurance Services Office, Inc. to release new standard Commercial General Liability forms and endorsements Coverage changes, restrictions and new requirements Starting April 1, 2013, the Insurance Services Office, Inc. ( ISO ) will be rolling out a new line of standard Commercial General Liability ( CGL ) forms and endorsements. Some of these changes are expected to expand coverage, some will restrict coverage and others will introduce requirements never before seen. This article reviews the historical backdrop and motivation for some of the most significant changes and assesses the potential impact on coverage going forward. I. Additional Insured Endorsements Get a Makeover a. Eliminating uncertainty over additional insured/privity of contract requirements Additional Insured ( AI ) status is perhaps the most common risk transfer mechanism used across industries and is often required between entities who do not share a direct contractual relationship. In the construction setting, for instance, project owners and construction managers (so-called upstream parties who always require AI status outside of a wrap-up) customarily do not contract directly with subcontractors ( downstream parties). The expectation remains, however, that the subcontractor s AI endorsement will encompass those upstream interests. However, there has been an increasing trend by certain insurance companies and courts of interpreting the current ISO AI endorsement (CG 20 33 07 04) to require a direct contractual relationship between the party providing AI status and the party receiving AI status. That language confers AI rights when you [the named insured] and such person [the party seeking AI status] have agreed in writing in a contract or agreement. Although this language only requires a (that is, any) contract or agreement in writing that evinces AI status, and does not require a contract directly between the parties - Pro Con, Inc. v. Interstate Fire & Cas. Co., 2011 WL 2579825 (D.Me. 2011) (general contractor was an AI on a sub-subcontractor s policy despite not having a written contract with the sub-subcontractor due to absence of language such as with you in the AI endorsement) - some courts have misinterpreted this or similar language to require just the opposite. See, e.g., Brooklyn Hosp. Ctr. v. One Beacon Ins., 799 N.Y.S.2d 158 (2004); Venable v. Hilcorp Energy Co., Inc., 2010 WL 1817757 (E.D. La. 2010). ISO s newest AI endorsement (CG 20 38 04 13) seeks to remedy this issue by adding an entirely new paragraph in addition to the one referenced above, that broadly requires AI status for: Any other person or organization you are required to add as an 1

AI under the contract or agreement described in Paragraph 1. above. Although one court described a less refined version of this endorsement as grammatically ambiguous, QBE Ins. Corp. v. Adjo Contracting Corp., 934 N.Y.S.2d 36 (Sup. Ct. 2011) reargument denied, 601695/2009, 2011 WL 2110370 (Sup. Ct. May 16, 2011), this latest version of the AI endorsement should eliminate the issue on a going-forward basis. 1 ISO s decision to address the issue in this way by adding a separate paragraph rather than clarifying the language in the existing paragraph does have a downside, however, as it may cause certain insurers and courts to conclude that the existing language was always limited to direct contractual relationships (though it was not) and could fuel coverage disputes where the 04 endorsement is currently in use. That said, upstream parties (who will want to best position themselves to minimize the potential for a dispute over this issue) and downstream parties (who wish to honor the intent of their contract involving the upstream party), will want to insist on the new endorsement for their best chance of avoiding the issue altogether. Alternatively, if the insurer refuses to include this endorsement (or will only do so for a significantly higher premium), the parties can otherwise protect their interests by making sure there is a written contractual agreement between all relevant upstream and downstream parties. b. Limiting the reach of anti-indemnity statutes Another recent disquieting trend is the unintended application of anti-indemnity statutes to contractual AI requirements. This usually happens in one of two ways (not including those states whose anti-indemnity statute specifically references insurance). First, where the indemnity obligations and AI requirements are inextricably tied together in the contract, some courts feel compelled to void not only the offending indemnity requirements, but also the tied AI requirements. See Transcon. Ins. Co. v. Nat l Union Fire Ins. Co. of Pittsburgh, 278 Ill. App.3d 357 (1996). Second, a court incorrectly interprets an anti-indemnity statute to preclude any AI coverage requirements, even when such requirements are completely separate from any contractual requirements pertaining to indemnity. The latter scenario is more challenging to resolve, but the former can often be resolved by incorporating a savings clause (traditionally, the caveat to the extent permitted by law ) into the risk transfer provisions (SDV has often counseled clients to utilize this tactic). Indeed, many courts have sanctioned the use of this language in this way. See Thrash Commercial Contractors, Inc. v. Terracon Consultants, Inc., 3:11CV577TSL-MTP, 2012 WL 2407551 (S.D. Miss. June 25, 2012) (collecting authority from Massachusetts, New York, North Carolina, Illinois, Indiana). It is worth noting, however, that some states may not enforce such a clause. 1 It is worth noting that ISO s proposed alteration to the other insurance clause, discussed in more detail in Section II., b. below, may keep this issue alive because the amended other insurance clause has a written contract requirement. 2

Recognizing the increasing concern over this potential for the unintended application of anti-indemnity statutes, ISO will incorporate just such a savings clause into all of its standard form AI endorsements beginning on April 1, 2013. Although the import of this language has not been addressed in every state, the trend of authority strongly suggests it will preserve the AI requirement even where related indemnity provisions may otherwise fail. c. Limits: No more than the contract provides Once a party has been afforded AI status, that party is generally treated as an independent insured on the policy with all the rights and obligations of the named insured (save for a few exceptions as dictated by the policy) including equal access to the policy s full limits of liability (i.e., shared limits). Absent express policy language to the contrary, this would be the case even if the base contract from which the AI status stems requires the named insured to provide AI coverage in an amount less than the policy s limits. See Mobil Oil Corp. v. Maryland Cas. Co. 681 N.E.2d 553 (Ill App. 1998) (absent language limiting coverage, AIs are entitled to full limits). Some AI endorsements will, however, make such an explicit reference to the terms of the underlying contract, thereby limiting the AI to those limits proscribed in the contract. See Bovis Lend Lease LMB, Inc., et al. v. Great Am. Ins. Co., 53 A.D.3d 140, 155-60 (N.Y. App. Div. 1st Dept. 2008) (interpreting one such endorsement and upholding a policy provision limiting coverage for an AI to the minimum amount required by contract). ISO is now introducing language into all of its AI endorsements that would cap the limits of liability available to the AI to either: 1) those required by contract or 2) those proscribed on the Declarations page, whichever is less. Though not stated by ISO overtly, the obvious intent is to tailor the amount of coverage provided to the AI more closely to that which was contractually agreed to by the parties. The lesson for policyholder clients is simple: any contract language concerning the limits of insurance to be provided to an AI is likely to be enforced with much greater frequency and those words should be chosen with great care so as to accurately reflect the parties intent. d. CAUTION: AI Coverage May Now Follow Form to the Underlying Contract In a similar vein, ISO is also proposing to incorporate language into all of its AI endorsements that the insurance afforded to the AI will not be broader than that which [the named insured] is required by the contract or agreement to provide This language is substantially broader than the minimum limits language discussed above, as it not only impacts the amount of coverage provided to the AI, but also the scope of coverage afforded. Such language has not yet been tested by courts and may have far reaching implications. Unfortunately, ISO offers no reason for the change and very little insight into its anticipated impact. Standing alone, the language suggests that the precise parameters of the contract s AI requirements need to be scrutinized and established in order to determine the scope of available AI coverage (which could not be broader than the 3

contract requirements). In that scenario, the most extreme application of the language would see the contract s AI requirements completely incorporated into the policy, functioning as a separate set of terms and conditions and even, potentially, overriding the policy s terms (to the extent the contract requires something less than what the policy would otherwise provide). Such a result is not so surprising when one considers that this type of language is most commonly seen in another, similar setting in excess policies that provide follow form coverage. Radil v. Nat'l Union Fire Ins. Co. of Pittsburg, PA, 233 P.3d 688, 695 (Colo. 2010) ( The language of National Union's endorsement states that the UM/UIM insurance its policy provides will not be broader than the insurance coverage provided by [Great American s] policy. I would read that language to mean exactly and only what it says: National Union s insurance will not be broader than the insurance coverage provided by Great American. ). This new language places an unprecedented emphasis on the importance of the contract terms establishing AI coverage. Unless and until it is revised to more narrowly reflect its intended purpose whatever that may be or until such time as the courts offer an interpretation of this new language, we would caution policyholder clients to 1) avoid using this endorsement, if possible and 2) reexamine and/or modify their contractual AI requirements so as to avoid an inadvertent override of the broader terms of the AI policy. II. Adjustments to the Other Insurance Clause The Other Insurance clause is designed to minimize the insurer s risk by pushing off primary responsibility for a loss to another insurance carrier covering the same risk. Ironically, as most CGL policies contain similar other insurance provisions, the competing provisions are usually found to cancel each other out, 2 and each primary insurer is deemed responsible to pay a proportionate share of the risk. The exception typically involves coverage obligations between an insurer offering coverage to a party as a named insured and an insurer covering the same party as an AI. In this situation, the standard other insurance language indicates that the AI carrier pays first. However, due to certain loopholes in the existing other insurance language, the desired intent of requiring the AI carrier to be primary is not always realized. Recent adjustments to the other insurance provision address this issue. a. ISO removes the by attachment of an endorsement language The current provision states the CGL insurance is excess over: Any other primary insurance available to you covering liability for damages arising out of the premises or operations, or the products and completed operations, for which you have been added as an AI by attachment of an endorsement. 2 Some courts will perform an analysis of the competing other insurance provisions in order to determine which of the two contains the more limiting language. In the case of two policies containing the same ISO form language, however, the analysis would lead to the conclusion that the provisions are repugnant and therefore each insurer is responsible to pay a proportionate share of the risk. 4

To avoid any disputes of coverage priority in instances where AI status is extended through language contained in the general provisions of the policy, as opposed to being issued by way of an endorsement, ISO has removed the italicized language. b. ISO drafts primary and non-contributory other insurance clause Another potential alteration to the other insurance provision is the inclusion of language which states that coverage provided to AIs will be primary and noncontributory so long as 1) the AI is a named insured on another policy of insurance, and 2) there is a written contract between the named insured and AI indicating that the policy will be primary and will not seek contribution from any other insurance available to the AI. The added language clarifies the intent and understanding of the parties (on behalf of both insureds and carriers) that the AI carrier responds first to the claim. In addition, the added language also may support the argument that the AI excess carrier will also respond before the named insured s primary carrier (a method of coverage priority known as vertical exhaustion ). This might occur if the excess policy followed form to the primary policy (i.e., adopted by reference the other insurance clause of the primary policy) or otherwise utilized an other insurance provision or endorsement that also contained the added primary and non-contributory language. III. A More Stringent Professional Services Exclusion The function of a CGL policy is to apply to general acts of negligence and not professional negligence ; the latter is considered to involve conduct requiring a heightened degree of skill or expertise. Accordingly, the ISO form CGL policy excludes professional services because losses involving professional negligence are more appropriately covered under a professional liability policy. However, at times, policyholders and insurers disagree over whether the conduct which gives rise to the insurance claim is fairly considered professional or general. Such uncertainly is most often resolved in favor of the policyholder s interpretation and, in some cases, results in the loss being covered under both professional and general liability policies. See Medical Records Assocs. v. Am. Empire Surplus Lines Ins. Co., 142 F.3d 512, 515 (1st Cir. Mass. 1998) ( A court applying [these] maxim[s] might well be inclined to find certain conduct to be both covered by a professional E & O policy but not excluded by a CGL policy's professional liability exclusion. ). Responding to this issue, ISO has modified the exclusion by specifically including the following as professional services : hiring, employment, training, supervision, and monitoring decisions. This language, which makes it clear that hiring, training and supervising employees involves professional judgment, may be included in a variety of professional liability exclusion endorsements. Moreover, it is not hard to imagine that these revisions could lead to a substantial increase in coverage litigation, as bodily 5

injury claims especially in the construction context are routinely coupled with allegations of negligent supervision. IV. Decreasing the Scope of Personal & Advertising Injury Coverage The CGL policy is commonly thought of as providing coverage for the insured s liability for losses involving bodily injury or property damage. However, while perhaps less common, the CGL policy also affords coverage for liability stemming from personal and advertising injury, such as claims of damage to the reputation of another. An endorsement drafted by ISO removes the following from the definition of personal and advertising injury: oral or written publications, in any manner, of material that violates a person s right of privacy. The purpose of this deletion, as stated by ISO, is to restrict coverage. The impact of this removal may be hard to predict without court assessment, given that insurers may seek to apply an interpretation of this clause that is broader than the insured s interpretation. Arguably, many claims of damage to reputation can also be considered a violation of privacy rights. V. Revising the Insured Contract Definition The standard ISO CGL policy excludes coverage for contractual liability claims against the insured. This applies to instances where the insured has agreed to indemnify another party and is seeking insurance coverage for liability from such indemnity obligation (a minority of courts, stemming from Gilbert Texas Constr. L.P. v. Underwriters at Lloyd's London, 327 S.W.3d 118 (Tex. 2010), take a more expansive view of this contractual liability exclusion and apply it to all breach of contract claims against the insured). The ISO CGL policy contains an exception to the contractual liability exclusion for losses subject to an insured contract, which is an agreement whereby the promisor agrees to assume the tort liability of the promisee. By endorsement, the ISO definition of insured contract applies to circumstances where the tort liability assumed by the insured is for property damage or bodily injury that is caused in whole or in part by such insured. The current definition of insured contract found within the Amendment of Insured Contract Definition Endorsement and Limited Contractual Liability Railroads Endorsement thus states: Insured Contract means: That part of any other contract or agreement pertaining to your business under which you assume the tort liability of another party to pay for bodily injury or property damage to a third person or organization, provided the bodily injury or property damage is caused in whole or in part by you or by those acting on your behalf (emphasis added) 6

ISO has identified the in whole or in part language as potentially problematic, due to the fact that certain states do not allow a downstream party in a construction contract to indemnify an upstream party for any part of the upstream party s negligence. To address this issue, ISO is amending the insured contract definition to only apply to legally permitted indemnity obligations. The new definition of Insured Contract is as follows: 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 party to pay for "bodily injury" or "property damage" to a third person or organization, provided the "bodily injury" or "property damage" is caused, in whole or in part, by you or by those acting on your behalf. However, such part of a contract or agreement shall only be considered an "insured contract" to the extent your assumption of the tort liability is permitted by law. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement. Even prior to the addition of this new language, the in whole or in part language of the insured contract definition presented limitations upon Policyholders. Specifically, while the majority of states have enacted anti-indemnity statutes that apply to construction contracts, there are a few states that have not. Moreover, the CGL policy is not limited to construction industry related claims. Therefore, the in whole or in part condition can leave the insured exposed in certain instances, such as where the insured has agreed to assume the tort liability of another in a nonconstruction related matter (or in a construction matter where full indemnity of the upstream party is allowed), and the indemnity claim does not involve bodily injury or property damage that was caused in any way by the insured. The new ISO language has the potential of restricting coverage even further in those states where the downstream party to a construction agreement cannot indemnify the upstream party for any part of the upstream party s own negligence. In such cases, the insurance provided per the Insured Contract exception to the contractual liability exclusion is limited to the share (or percentage) of liability attributable to the negligence of the downstream party. This can possibly present an issue in certain circumstances, such as, perhaps, where the insured has joint and several liability exposure. VI. Conclusion For policyholders, these changes run the gamut from extremely helpful to very troublesome. Certainly, disagreement as to the scope and meaning of some of these changes is bound to arise, and much of the long term impact will remain unsettled until there has been sufficient testing in the marketplace and/or reviewed by the courts. For better or worse, however, these new forms will be here soon. Policyholders and their risk managers, brokers or coverage counsel need to start thinking strategically about these revisions in order to avoid potential pitfalls while taking advantage of new opportunities. 7

For questions or more information regarding the ISO form changes, please contact: Gregory D. Podolak, Esq. 203-287-2114 gdp@sdvlaw.com David G. Jordan, Esq. 203-287-2111 dgj@sdvlaw.com Jeffrey J. Vita, Esq. 203-287-2103 jjv@sdvlaw.com 8