Will Changes to the Commercial General Liability Insurance Policy Leave You Exposed? Considerations for Contractual Risk Transfer April 2013 Lockton Companies Significant changes have been made to the endorsement language on a widely used Commercial General Liability insurance policy form. Left unaddressed, ISO s 2013 edition of this CGL policy, filed for use in most states, may lead to an increase in litigation for your organization. The following pages provide details on what we consider to be the most significant changes. ERIC SILVERSTEIN Senior Vice President National Accounts Team Leader (404) 460-0707 esilverstein@lockton.com PAUL PRIMAVERA Senior Vice President Claims Advisory Practice Leader (202) 414-2620 pprimavera@lockton.com Most of these changes involve contractual liability, so our focus will be the impact on parties to a contract. In addition, we share insights on how it may impact your excess insurance coverage. To help clarify the issues and offer practical answers on this complex topic, we provide the specific adjustments you need to make to your policy, so you have the necessary coverage. The key to avoiding litigation is to review your contract language and ensure it is in coordination with the new policy wording. L O C K T O N C O M P A N I E S
ADDITIONAL INSURED ENDORSEMENT REVISIONS There are three major changes: 1 Only to the extent permitted by law Frequently referred to as a savings clause, the idea being that instead of discarding the entire agreement and additional insured status with it, the cover would apply to the extent permissible by law. However, the law is not clear on the issue. It varies by state. Legal interpretations have a history of conflating language applying to contractual liability with coverage provided as an additional insured. Additional insured coverage was designed for simplicity. The new clause furthers state-specific exceptions. 2 Not broader than the coverage required by contract or agreement The most difficult to manage of the three clauses. It is an attempt to limit the additional insured coverage to any potential restrictions outlined in a contract or agreement. 3 For no more than the limit required by contract or agreement or the policy limit, whichever is less Adds additional complexity to the drafting of contracts to specifically match intent. For example, many contracts use the term a minimum of. What exactly was the intent of the parties? Is it unlimited to the extent purchased or the minimum amount stated? 2
April 2013 Lockton Companies ADDITIONAL INSURED ENDORSEMENT REVISIONS Example: A. Section II - Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for bodily injury, property damage or personal and advertising injury caused, in whole or in part, by your acts or omissions or the acts or omissions of those acting on your behalf: 1. In the performance of your ongoing operations; or 2. In connection with your premises owned by or rented to you. However: 1. The insurance afforded to such additional insured only applies to the extent permitted by law; and 2. If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide for such additional insured. B. With respect to the insurance afforded to these additional insureds, the following is added to Section III - Limits Of Insurance: If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance: 1. Required by the contract or agreement; or 2. Available under the applicable Limits of Insurance shown in the Declarations; whichever is less. This endorsement shall not increase the applicable Limits of Insurance shown in the Declarations. Upstream companies will need to review their base contract wording to avoid disputes. The likely result is increased litigation over the scope of contracts. Where possible, upstream parties should require manuscript additional insured endorsements with follow form wording in excess policies. However, this may not always be commercially feasible. Upstream parties may find additional avenues of recovery within the umbrella policies of downstream companies. Particularly, where Coverage B wording has not been modified in concert with ISO revisions. If you have to accept an ISO additional insured endorsement for a construction contract, we suggest CG 20 38 04 13 Owners, Lesses or Contractors -automatic Status for other parties when required in a written construction agreement. It eliminates the privity of contract issue properly providing additional insured status through the tiers of contractors. However, for the endorsement to apply the named insured must be performing operations for the additional insured. 3
OTHER INSURANCE EXCESS LIABILITY In order to clarify the intent of the additional insured carrier to be primary, ISO revised wording within the other insurance provision. The 2007 ISO Version had primary coverage to additional insured coverage but included the requirement by attachment of an endorsement. This requirement created an inadvertent loophole for other insurance recovery where the additional insured status was provided by the policy form rather than by the endorsement. The new form deletes this condition in an attempt to clarify with respect to the order of coverage. In conjunction with the new ISO language, parties can also outline intent by contractually agreeing that the additional insured coverage will be primary and non-contributory regardless of the other insurance of the named insured on a primary, contributory, or excess basis. The prior form included the underlined section in Conditions, 4.b.1: (b) 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 additional insured by attachment of endorsement. In the new form, the underlined section has been removed. No additional action is needed. 4
April 2013 Lockton Companies NEW ENDORSEMENT PRIMARY AND NON-CONTRIBUTORY CG2001 The revised endorsement is a further clarification to the priority of payments issue under additional insured coverage. It is hoped that the changed coverage wording eliminates many of the disputes to determine whose policies will pay first. One critical issue is whether the excess policy of the party adding another entity as an additional insured follows form of the primary other insurance clause. If the primary policy is endorsed with CG2001 and the excess policy follows form of the primary insurance wording, the probability that the excess coverage of the party naming another as additional insured would respond next is greater than it would be without use of the endorsement or proper contract wording. Taken from the most recent endorsement: The following is added to the Other Insurance Condition and supersedes any provision to the contrary: Primary And Non-contributory Insurance This insurance is primary to and will not seek contribution from any other insurance available to an additional insured under your policy provided that: 1. The additional insured is a Named Insured under such other insurance; and 2. You have agreed in writing in a contract or agreement that this insurance would be primary and would not seek contribution from any other insurance available to the additional insured. Upstream parties should require CG2001. Upstream parties should require follow form other insurance provisions where multiple layers of policies would be required to fulfill additional insured requirements. A written contract should specifically provide for additional insured status and clearly state that the policy shall not seek contribution from any other available insurance. If a downstream party is required to be primary and non-contributory, the endorsement should be requested. 5
LIQUOR LIABILITY The liquor liability coverage has been broadened for those not in the business of serving liquor and tightened for those who are in the business of serving liquor. The BYO establishments are now clearly not excluded from coverage under a standard liability policy. However, the exclusions have been tightened to clearly exclude liability related to negligent hiring, improper supervision and failure to transport patrons. Revised Exclusion C, Liquor Liability (underline added for emphasis) Bodily injury or property damage for which any insured may be held liable by reason of: 1. Causing or contributing to the intoxication of any person; 2. The furnishing of alcoholic beverages to a person under the legal drinking age or under the influence of alcohol; or 3. Any statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages. This exclusion applies even if the claims against any insured allege negligence or other wrongdoing in: a. The supervision, hiring, employment, training or monitoring of others by that insured; or b. Providing or failing to provide transportation with respect to any person that may be under the influence of alcohol; if the occurrence which caused the bodily injury or property damage, involved that which is described in Paragraph (1), (2) or (3) above. However, this exclusion applies only if you are in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages. For the purposes of this exclusion, permitting a person to bring alcoholic beverages on your premises, for consumption on your premises, whether or not a fee is charged or a license is required for such activity, is not by itself considered the business of selling, serving or furnishing alcoholic beverages. If you are in the business of serving liquor or contracting with a party in the business of serving liquor, you should have increased awareness as to the need for liquor liability coverage. Beware of the Amendment of Liquor Liability Exclusion. The endorsement broadens the exclusion. 6
April 2013 Lockton Companies PERSONAL AND ADVERTISING INJURY VIOLATION OF PRIVACY The addition of the term "in any manner" as to how the exclusion applies to publication with knowledge of its falsity broadens the exclusion to apply to all forms of social media. For example, an unauthorized photo could conceivably fall under the scope of the exclusion. Taken from the most recent ISO form Personal and Advertising Injury exclusions (underline for emphasis): b. Material Published with Knowledge of Falsity Personal and advertising injury arising out of oral or written publication, in any manner, of material, if done by or at the direction of the insured with knowledge of its falsity. c. Material Published Prior to Policy Period Personal and advertising injury arising out of oral or written publication, in any manner, of material whose first publication took place before the beginning of the policy period. RECORDING AND DISTRIBUTION OF MATERIAL IN VIOLATION OF LAW The exclusion relates to bodily injury and property damage (exclusion p). It has been broadened to include Fair Credit Reporting and state and local ordinances and regulations. This 4th part of the exclusion is exceptionally broad. Taken from the most recent ISO form Personal and Advertising Injury exclusions (underline for emphasis): p. Recording and Distribution of Material or Information in Violation of Law Personal and advertising injury arising directly or indirectly out of any action or omission that violates or is alleged to violate: 1. The Telephone Consumer Protection Act (TCPA), including any amendment of or addition to such law; 2. The CAN-SPAM Act of 2003, including any amendment of or addition to such law; 3. The Fair Credit Reporting Act (FCRA), and any amendment of or addition to such law, including the Fair and Accurate Credit Transactions Act (FACTA); or 4. Any federal, state or local statute, ordinance or regulation, other than the TCPA, CAN-SPAM Act of 2003 or FCRA and their amendments and additions, that addresses, prohibits, or limits the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information When contracting with marketing firms or creating marketing campaigns on a broad variety of social media additional consideration should be given to purchase of a cyber policy or endorsement expanding coverage. Changes to coverage for social media related events aside, we are concerned about the increase in litigation that is likely to occur as a result of changes in additional language. We suggest that our clients review their standard contracts to accommodate changes in additional insured wording. 7
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