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In December 2001, the Insurance Service Office (ISO) implemented major changes to its general liability forms and endorsements. Although driven by concern about electronic and Internet-related perils, these revisions also address diverse issues such as the 1995 Montrose Chemical case, construction defects, negligent supervision litigation, additional insureds, worldwide coverage, employee benefits liability, limited products withdrawal and project management protective liability. Failure to pay close attention to these revisions and their impact on your insurance program could leave you without important coverages you may have had previously or new coverages that may be beneficial to your company.
The growth of the Internet and its use as a tool to market and deliver products and services continues to impact legal liability. A number of coverage changes have been made to liability exclusions and definitions that address these liabilities. Although the ISO commercial general liability form provides no coverage for trademark or patent infringement, a specific exclusion has been added to clarify this point since use of the Internet increases the likelihood of intellectual property claims and litigation. Coverage will continue to be provided for infringement of copyright, trade dress or slogan in the named insured’s advertisement.
Those in the business of creating Web sites and providing Internet access join advertisers, broadcasters, publishers and telecasters in the personal and advertising injury exclusion since they present similar hazards. A new exclusion has been added for those hosting chat rooms and bulletin boards since some courts have determined that these businesses are publishers.
A personal and advertising injury exclusion has also been added to protect against companies that use Internet tactics designed to mislead and divert customers by the unauthorized use of another company’s name or product in an e-mail address, domain name or metatag. (For a glossary of Internet liability terms, see “Technology Trends,” RM, December 2000.) Coverage for these risks is now available only through personal and advertising injury coverage for specialty markets or endorsements.
Lastly, two new optional Internet professional liability exclusions are available. One applies to Internet service providers and Internet access providers and the other to Web designers and consultants. In the near future, these professional exclusions will become mandatory, removing all general liability coverage for these risks.
The personal and advertising injury definition has been updated to clarify that it includes defamation, disparagement or violation of privacy “in any form” to embrace all electronic media. The advertisement definition has been revised to state that notices include those that are published or posted via the Internet and similar forms of electronic communication. Coverage territory has been redefined to include offenses that take place through the Internet or other means of electronic communication.
Probably most important, property damage has been redefined to specifically state that electronically stored data or software is not tangible property “for the purposes of this insurance,” thereby removing potential coverage for damage to data or software and loss of use resulting from that damage. If you are using a standard CGL form and are legally liable for a customer’s lost electronic data in its computer system, you have no property damage coverage.
Two new coverages relating to this change in the property damage definition affecting electronic data and software will be available soon. The first is an electronic data liability endorsement that has been filed for availability in the first half of 2002 and will provide coverage for loss of data resulting from physical injury to tangible property. ISO is also preparing an electronic data liability coverage form to be filed later in 2002 that will provide even broader coverage for damage to electronic data.
Known Injury or Damage
A basic principle of liability insurance is that it should only respond to unknown losses. In the case of Montrose Chemical Corporation v. Admiral Insurance Company (July 1995), Admiral Insurance argued that no coverage should apply since Montrose knew of a loss prior to inception of Admiral’s coverage. But the Supreme Court of California disagreed, ruling that until an insured’s legal obligation to pay third party claims had been established, there remained a potentially insurable risk.
Responding to the Montrose Chemical case, ISO introduced mandatory endorsements in 1999 revising several of its liability insuring agreements so they would only apply to loss or damage unknown prior to the policy period. That language has now been incorporated into the coverage forms and the mandatory endorsements are being withdrawn.
Damage to Your Work
Construction defect claims relating to condominium and other construction projects have become an increasingly difficult problem over the past twenty years. Part of the problem lies in defining a construction defect. According to the California state courts:
“A construction defect is the failure of a building or a building component to be erected in a reasonably workmanlike manner, or to perform in the manner intended by the manufacturer or reasonably expected by the buyer, which proximately causes damage to the structure.”
The CGL form excludes property damage to the named insureds work if it arises out of the workmanship and is included within the products-completed operations hazard. There is an exception to the exclusion for subcontractors. Since the construction defect hazard can increase dramatically if the named insured uses subcontractors extensively, ISO has implemented two new optional endorsements that restrict coverage by deleting this exception for subcontracted work. One removes the exception for all exposures and the other for designated operations only. Contractors depending on this exception for coverage will need to make sure their policies are not renewed with these endorsements.
Who Is an Insured
At the request of a number of agents’ groups, volunteers have been added as automatic additional insureds in the Who Is an Insured section of the CGL policy. Coverage has been broadened by deleting the medical payments exclusion for injury to volunteers. Organizations that use volunteers regularly will have significantly broader coverage.
Insureds often sign contracts requiring that additional insureds receive completed operations coverage. Covering this exposure has been an ongoing problem, in part because no standard endorsement existed and in part because many underwriters are unwilling to provide the coverage. Now, a new standard ISO endorsement has been developed to provide that coverage. The existing additional insured endorsements applying to owners, lessees and contractors have also been revised to specifically exclude completed operations since these endorsements are intended to apply to operations coverage only. So, if you need this coverage you must negotiate its attachment with your insurer and you must still obtain the second additional insured endorsement that provides ongoing operations coverage only.
ISO has also introduced two new endorsements to provide automatic additional insured status for grantors of licenses. One applies to all written contracts requiring the grantor to be named as an additional insured for as long as the licensing agreement between the parties exists. The second endorsement for grantors applies to scheduled additional insureds only. The Who Is an Insured section of the CGL is being revised to include trusts as named insureds and trustees as insureds.
Personal Injury for Lawyers
The lawyers’ offices classification in the commercial lines manual requires attachment of a total personal and advertising injury exclusion. An optional endorsement is being introduced to provide personal and advertising injury coverage for lawyers when acting in a business capacity outside of the legal profession. Adding this new endorsement will avoid claim disputes that may arise regarding whether or not the mandatory personal and advertising injury exclusion was intended to apply to business pursuits outside of the legal profession. Some underwriters may be reluctant to use the new endorsement, however, since there is concern about whether a clear delineation can be made between a lawyer’s professional and nonprofessional personal injury offenses.
Recent court cases have found coverage under CGL for injuries arising from an automobile accident, despite arguments from insurers that these injuries are excluded by the aircraft, auto or watercraft exclusion. In Thomas Milfred Pablo v. Scott Allen Moore (February 2000), the Supreme Court of Montana ruled that the CGL policy covering Moore’s employer must respond to injuries caused by Moore while he was operating a vehicle in the course of his employment. Although the injuries arose from an auto accident, the plaintiff argued that the injuries arose from negligent supervision and not from the ownership, maintenance or use of an auto, as required in the CGL exclusion. The court ruled that negligent supervision was not clearly and unambiguously excluded from CGL coverage.
Other state courts have dealt with similar decisions in the past few years. Given the uncertainty surrounding this issue, the auto exclusion has been revised to clarify that it applies even if there is an allegation of negligence or other wrongdoing in the supervision, hiring, employment, training or monitoring of others by the insured.
Worldwide Coverage Endorsements
The ISO CGL form previously provided limited worldwide coverage through the definition of coverage territory. The major downside to this coverage from the buyer’s perspective is that damages must be determined in a suit brought in the United States, Puerto Rico or Canada. ISO has now introduced three new worldwide endorsements that will provide coverage even if a suit is brought outside this coverage territory.
The first provides coverage anywhere in the world except countries under trade or other economic sanctions or embargos with the United States. The second amends the coverage territory to include the United States, Puerto Rico or Canada and any other country specified in the schedule of the endorsement. The third endorsement covers anywhere in the world except countries scheduled on the endorsement and those countries under trade or other economic sanctions or embargos with the United States.
Employee Benefits Liability (EBL) Coverage Endorsement
Although many carriers have independent EBL forms, ISO had not previously provided a form for this coverage. ISO’s new claims-made endorsement attaches to the CGL and covers obligations to pay damages and defense expenses because of negligent acts, errors or omissions committed in the administration of an employee benefits program. An aggregate limit and a per employee limit apply, and an optional deductible is available. A five-year extended reporting period endorsement is available on an excess basis-for a premium not to exceed 100 percent of the EBL endorsement’s premium-and includes a separate aggregate limit of insurance.
The employee benefits liability endorsement includes a number of exclusions for exposures such as dishonesty, failure to perform a contract, insufficient funds, investment advice, The Employment Retirement Income and Security Act (ERISA), available benefits, taxes, fines, penalties and employment-related practices. If your business provides employee benefits and you have no insurance for damage due to the negligent administration of those benefits, consider this new form.
Limited Product Withdrawal Expense
ISO has also introduced a first party, limited products withdrawal expense coverage endorsement. It applies to reasonable and necessary product recall expenses if a known or suspected defect has caused or is reasonably expected to cause bodily injury or physical injury to tangible property. This endorsement includes a separate aggregate limit and provides no liability or defense expense coverage.
Expenses must be incurred within one year after initiation of the recall, and must include the costs of recall notification; stationery, envelopes, production of announcements and postage or facsimiles; overtime, including transportation and accommodations; computer time; hiring independent contractors and other temporary employees; transportation, shipping or packaging; warehouse or storage space; and disposal. No coverage is provided for product replacement, repair or redesign or the costs to regain market share, goodwill, revenue or profit.
Exclusions apply to withdrawals resulting from the failure of a product to accomplish its intended purpose, infringement of intellectual property rights, chemical transformation, expiration of designated shelf life, known defects and banned products. A broader form of products withdrawal coverage is under development for delivery in 2002 or 2003. It will provide the first party coverage described above and third party liability, defense expense and an optional coverage for restoring goodwill.
Project Management Protective Liability
In 1997 the American Institute of Architects revised the general conditions of its contract for construction to add a provision allowing the use of project management protective liability insurance. At the request of agents and insurers, ISO has introduced a project management protective liability endorsement to meet this need. It can be attached to the OCP coverage form and may be used in place of a stand-alone OCP or additional insured endorsements. Current OCP phraseology, “operations performed for you by the contractor,” is replaced by the phrase “operations by or for the contractor,” thereby significantly expanding the scope of coverage. The Who Is an Insured provision has also been broadened by providing vicarious liability coverage for the owner, contractor, architect, engineer or surveyor, or construction manager for claims arising out of work performed by or on behalf of the contractor or its general supervision of that work. An important modification to the subrogation condition waives any rights of recovery the insurer may have had against any named insured because of payments the insurer makes. Exclusions apply to completed operations; professional liability; damage to property the named insured owns, rents, occupies or has borrowed; care custody or control; damage to work performed by or for the contractor; and impaired property or property not physically injured. Damage to Property the Insured
Owns, Rents or Occupies
The damage to property exclusion has been revised in several coverage forms to provide more detail regarding its intent. A 1996 coverage case found an insurer was obligated to defend and indemnify the insured in a suit against him by his condominium association. The association was seeking to recover costs it had incurred to replace a glass enclosure in the insured’s condominium to prevent further damage to a third party. Since it is not the intent that general liability cover repairs made to the insured’s own property for any reason, ISO has revised the damage to property exclusion to clarify this point.
The language used in insurance contracts is notoriously difficult to decipher; subtle nuances can make for substantial differences in a court of law. For this reason, these changes to the 2001 general liability program demand your attention, especially if you are a developer, contractor, manufacturer, lawyer or have international liability loss exposures. Understanding and reviewing these changes with your insurance service providers could help you avoid costly coverage gaps, and ensure that you take advantage of all of the broadened coverages available.
How will these changes affect your company? Reader Forum at rmmag.com
Paul Joudrey (“The New ISO General Liability Forms,” p. 42) is owner and principal of Hebron, Connecticut-based Joudrey Consulting, LLC, a commercial general liability consulting firm specializing in coverage, underwriting, product development, education and training. He has served as a member of ISO’s Commercial General Liability Committee and General Liability Panels and as a faculty member for the Society of Certified Insurance Counselors. (firstname.lastname@example.org. net)
Paul Joudrey served as a member of the Insurance Services Office’s Commercial General Liability Committee.
Copyright Risk Management Society Publishing, Inc. Jan 2002
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