Understanding The Current CGL Policy In California

Bridgeport Continuing EducationSan Francisco, California

November 14, 2008

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Introductions

• John D. Greenjgreen@fbm.com 415-954-4492

• Tyler C. Gerkingtgerking@fbm.com415-954-4968

• Erica Villanuevaevillanueva@fbm.com415-954-4437

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Policy Types

• First Party / Third Party• Comprehensive General Liability / Umbrella

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Components of a CGL Policy

• Declarations page• Insuring Agreements

– Coverage A– Coverage B

• Exclusions• Supplementary Payments• Who is Insured• Limits of Insurance• Conditions• Definitions• Endorsements

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Primary, Excess & Umbrella Coverage

• Primary

• Excess

• Umbrella

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Primary, Umbrella, and Excess Coverage

CGL

Umbrella

Limits

EventsCovered

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Rules of Construction

1. “Plain Meaning Rule;”

2. If a term in a policy is ambiguous, the term must be interpreted consistent with the insured’s “objectively reasonable expectations;”

3. If an interpretation in accord with the insured’s objectively reasonable expectations does not resolve the ambiguity, the ambiguity must be resolved against the insurer;

4.Exclusions in a policy must be “conspicuous, plain and clear.”

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The Plain Meaning Rule

• The normal rules of contract interpretation apply• Fundamental goal: give effect to the mutual

intention of both the insurer and the insured• If possible, mutual intent is to be inferred from the

written provisions of the policy itself• Terms are to be interpreted in their “ordinary and

popular sense”

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Objectively Reasonable Expectations

• Ambiguous = capable of two or more constructions, both of which are reasonable

• Extrinsic evidence: admissible to show ambiguities and custom and practice

• If a term in a policy is ambiguous, the ambiguity is resolved by interpreting the provisions in the sense the insured understood them at the time of formation

• Clauses providing coverage are interpreted broadly, exclusions narrowly

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Ambiguous TermsInterpreted Against Insurer• If the objectively reasonable expectations of the

insured do not resolve an ambiguity, the provision is construed in favor of coverage

• Rationale: contract of adhesion

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Exclusions Must BeConspicuous, Plain And Clear• Applies to any provision that limits or excludes

coverage that an insured would otherwise reasonably expect to be covered by a policy

• An exclusion may not be buried in a sea of ink

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CGL Coverages

• Bodily Injury• Property Damage• Advertising Injury• Personal Injury

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Bodily Injury

Standard ISO Definition:

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

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Bodily Injury

• Physical Injury – Even cellular level

• Emotional distress if physical manifestations– If not?

• Umbrella coverage: may expressly include emotional distress

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Property Damage

ISO Definition:

“Property damage” means:

(a) 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

(b) 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.

For the purposes of this insurance, electronic data is not tangible property.

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Property Damage

• Physical Injury to tangible property– Physical– Tangible

• Resultant loss of use• Loss of use of tangible property that has not been

physically injured

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The Insuring Agreement

We will pay all sums [or 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. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result.

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All Sums

• Continuous and progressive damage• Not limited to that portion of damage occurring

during a particular policy period

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Legally Obligated To Pay

• Applies to both tort damages and contract damages. Vandenberg v. Superior Court, 21 Cal.4th 815 (1999)

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Damages

• Has been held to mean money ordered by a court of law

• The language of the CGL policy is broader: covers settlements made and reimbursement of money paid to the government

• Ameron Int’l Corp. v. Ins. Co. of Pennsylvania, 150 Cal. App. 4th 1050 (2007) (review granted)

• Insuring agreement (or excess/umbrella policy) may contain broader “damages” language

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Personal Injury & Advertising Injury

Standard Insuring Agreement:

“We will pay those sums that insured becomeslegally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies . . . .”

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Advertising Injury Coverage: 3-Part Test

• Enumerated Offense

• Advertising Activities

• Advertising Injury

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Advertising Injury Offenses – 1986 Form

a) Oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services;

b) Oral or written publication of material that violates a person’s right of privacy;

c) Misappropriation of advertising ideas or style of doing business; or

d) Infringement of copyright, title or slogan.

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Differences in 1986 and pre-1986 Forms

• Unfair competition

• Piracy

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What Is “Advertising?”

• One-on-one solicitations?• Hameid v. National Union (2003) – “widespread

promotional activities usually directed at the public at large.”

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1986 Personal Injury

a) False arrest, detention or imprisonment;b) Malicious prosecution;c) Wrongful eviction from, wrongful entry into, or

invasion of the right of private occupancy of a room, dwelling or premises that a person occupies by or on behalf of its owner, landlord or lessor;

d) Oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services; or

e) Oral or written publication of material that violates a person’s right of privacy.

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1998 Personal Injury and Advertising Injury – Key Changes• Combined definition• Changes to address intellectual property claims:

– Use of another’s advertising idea in your “advertisement;” or

– Infringing upon another’s copyright, trade dress or slogan in your “advertisement.”

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Occurrence

Standard ISO Definition:

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

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“Accident”

• Refers to whether the insured intended the conduct, not the resulting damage

• Must be unexpected and unintentional• Negligent acts are included within accidental

conduct covered as an “occurrence” under the CGL policy.

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Number of Occurrences

• Important for allocation, deductibles, exhaustion of limits of liability

• “Causation view:” look to the number of underlying causes of injury, not the number of injuries or claims

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Personal and advertising injury offenses

•Personal and advertising injury coverage is offense-based, not occurrence-based.•Offense must be committed during the policy period:

“This insurance applies to ‘personal and advertising injury’ caused by an offense arising out of your business but only if the offense was committed in the ‘coverage territory’ during the policy period.”

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Trigger of Coverage

• Advertising injury / personal injury: insured must show proof of a wrongful act during the policy period (not triggered by resulting damage)

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Trigger of Coverage - Theories

• Discrete loss• Manifestation• Injury-in-fact• Exposure• Continuous and progressive damage

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• Discrete Accident

Trigger—BI/PD

Act Damage

Year 1 Year 2

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• Continuing Progressive Damage

Trigger-BI/PD

Damage Damage

Year 1 Year 2

Discovery

Year 3

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Trigger of Coverage

• Once triggered, the insurer remains on the risk for all subsequent harm

• Coverage for property acquired by the insured after the end of the policy term

• Third party claimants need not have owned the property at the time damage occurs to trigger policies in effect when the damage occurred

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Exclusions

• Intentional conduct• Own Property, Product or Work Performed• Sistership and Withdrawal from the Market• Pollution• Professional Services• Intellectual Property• Liability Assumed Under Contract

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Intentional Conduct

• CGL policy excludes bodily injury and property damage that is “expected or intended from the standpoint of the insured.”

• California Insurance Code § 533:

“An insurer is not liable for a loss caused by the willful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agent or others.”

• Both require a showing that the insured believed its conduct was substantially certain or highly likely to cause damage.

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Property You Own, Rent or Occupy

(1) Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another's property;

(2) Premises you sell, give away or abandon, if the “property damage” arises out of any part of those premises;

(3) Property loaned to you;

(4) Personal property in the care, custody or control of the insured.

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Your Product

• “property damage to ‘your product’ arising out of it or any part of it.”

• “goods or products (other than real property) manufactured sold, handled, distributed or disposed of by: (a) You; (b) Others trading under your name; or (c) A person or organization whose business or assets you have acquired.”

• “Products” include containers (other than vehicles), materials, parts or equipment furnished in connection with such goods or products.

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Work Performed

• ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’”

• “your work” includes “work performed on your behalf,” such as by subcontractors, and materials furnished in connection with the work.

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Sistership and Withdrawal from the Market

CGL policy does not apply to:

“Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:

(1) ‘Your product’;

(2) ‘Your work; or

(3) ‘Impaired property’;

if such product, work or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.”

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Pollution

• Pre-1973: No Exclusion• 1973 to 1985: Exclusion with Sudden and

Accidental Exception• 1985 to present: “Absolute” Exclusion

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Professional Services

• Typical professional services exclusion:

“This insurance does not apply to bodily injury, property damage, advertising injury or personal injury arising out of the rendering or failure to render professional services.”

• Some professionals obtain such coverage through malpractice insurance (e.g., attorneys, physicians) or errors and omissions policies (e.g., engineers, accountants).

• Exclusion is interpreted very broadly under California law, barring coverage for liability arising out of the performance of any service that requires a minimum degree of skill, is offered by the insured in the course of its business, and is performed in exchange for remuneration.

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Intellectual Property Exclusion

• New forms specifically exclude liability arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights.

• Except – infringement of copyright, trade dress or slogan in the insured’s “advertisement.”

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Liability Assumed Under Contract

• Bars coverage for liability arising out of “bodily injury” or “property damage” “for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.”

• 2 exceptions:1) Liability for damages “that the insured would have in the absence of the contract or agreement”2) Liability for damages “assumed in a contract or agreement that is an ‘insured contract,’ provided the ‘bodily injury’ or ‘property damage’ occurs subsequent to the execution of the contract or agreement.”

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Conditions

• Notice• Deductibles / Self-Insured Retentions• Cooperation• Voluntary Payments / No Action

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Conditions - Notice

• Notice triggers the insurer’s obligation to provide coverage under a liability policy

• Policies typically require notice of an “occurrence”, even if it has not ripened into a “suit” – late notice excusable

• Notice of a claim or lawsuit• Notice-prejudice rule• Pre-tender defense costs

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Conditions – Deductibles / SIRs

• Deductible: portion of the loss that the insured must reimburse to the insurer in the event of a covered loss

• Self Insured Retention: a specific amount of loss that is not covered by the policy but must be borne by the insured

• Insured is responsible for a single deductible where a single “occurrence” results in losses over several policy periods

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Conditions - Cooperation

• Applies to defense, investigation, and settlement of claims or lawsuits

• Forward notices and lawsuits to the insurer• Participate in the defense• Help the insurer to locate witnesses• Disclose information to the insurer necessary for

the defense• Avoid collusion with the claimant• Breach requires a showing of prejudice

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Conditions – Voluntary Payments

Standard ISO provision: “No insured will, except at that insured’s own expense, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”

• Exceptions:– Economic necessity– Insurer breach– Extraordinary circumstances

• Can be enforced without a showing of prejudice

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Conditions – No ActionStandard ISO provision: No person or organization has right under this Coverage Part: (a) To join us as a party or otherwise bring us into a “suit” asking

fordamages from an insured; or

(b) To sue us on this Coverage Part unless all of its terms have been

fully complied with. A person or organization may sue us to recover on an agreed

settlement or on a final judgment against an insured . . . An agreed settlement means a settlement and release of liability signed by us,the insured and the claimant or the claimant’s legal representative.

• Bars claims for money damages against the insurer by third parties before final judgment or settlement

• Precludes the insured from settlement directly with a third party claimant without the insurer’s consent

• Does not preclude a suit by the insured for a determination of coverage

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Duty to Defend

Standard ISO provision:

We will have the right and duty to defend any “suit” seeking damages for bodily injury or property damage to which this insurance applies. We may at our discretion investigate any “occurrence” and settle any claim or “suit” that may result. But our right and duty to defend ends when we have used up the applicable limit of insurance in the payment or judgments or settlements . . . .

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.

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Duty to Defend

• Duty arises as long as a mere “potential” for coverage exists

• Turns upon facts known by the insurer at the inception of a third party lawsuit

• Duty to defend ends only when the lawsuit has concluded, or the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage

• The insurer must defend immediately and entirely

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Factual allegations are what counts

Gray v. Zurich Ins. Co.: • “[T]he carrier must defend a suit which potentially seeks

damages within the coverage of the policy.”• The insurer “cannot construct a formal fortress of the third

party's pleadings and retreat behind its walls. The pleadings are malleable, changeable and amendable.”

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Duty to Defend

Based on:• Facts of Complaint• Additional Facts Known From

– Client– Discovery– Other sources

• Additional Legal Theories Facts of Complaint (or Additional Facts) Would Support

Counterclaims may also trigger duty to defend

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Section 533

• Potential for finding of wilfullness does not bar duty to defend.

• Horace Mann v. Barbara B.: “It is important to remember that no public policy forbids the defense of claims alleging intentional acts.”

• Gray v. Zurich Ins. Co.: Plaintiffs “may very well stretch the action which lies in only nonintentional conduct to the dramatic complaint that alleges intentional misconduct.” They should not become “the arbiter of the policy’s coverage.”

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Duty to Defend

Other considerations:• Duty to investigate• No limit on defense costs• Complete defense / Buss reimbursement• Reservation of rights

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Ending The Defense Obligation

• Exhaustion of limits• Withdrawal of defense• Declaratory relief action: insurer must establish

there is no potential for coverage based on undisputed facts

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Insured’s Right to Stayof Carrier’s Declaratory Relief Action

"To eliminate the risk of inconsistent factual determinations that could prejudice the insured, a stay of the declaratory relief action pending resolution of the third party suit is appropriate when the coverage question turns on facts to be litigated in the underlying action." – Montrose Chem. Corp v. Superior Court

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Breach of the Duty to Defend

• Insured may seek damages in contract and tort• Contractual damages for breach of duty to defend

– Insured bears the burden of proving its damages (defense costs)

– No right to recovery if another insurer provided a complete defense to the insured

• Extracontractual damages recoverable if the insurer acted in bad faith

• Alternative for insureds with fewer resources: Uncontested trial, entry of stipulated judgment

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Duty to Indemnify

• Depends on an ultimate adjudication of coverage• Duty to settle: implied by the covenant of good faith

and fair dealing• Unreasonable denials of coverage: bad faith

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Allocation Issues

• Time on the risk• Vertical exhaustion / pick a year• Horizontal exhaustion: Padilla Construction v.

Transportation Ins. Co. (2007)• “Gap” issues• Contribution

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Subrogation

Transfer Of Rights Of Recovery To Us

If the insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after loss to impair them. At our request, the insured will bring “suit” or transfer those rights to us and help us enforce them.

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Additional Insured Endorsements

• Certificates of Insurance– Representation by Broker– Backed by endorsement?– Agency/Authority– Apparent Authority

• Additional Insured Endorsements• Scope of Coverage

– “Ongoing operations” (1993)– Sole negligence (2004)

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Ethical Considerations

• Conflicts of interest (Cumis)• Choice of counsel• Fees• Control of defense

– Eliminating covered claims– Settlement decisions

• “Litigation guidelines”• Privilege Issues

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Defense With a Reservation of Rights

• San Diego Navy Federal Credit Union v. Cumis Ins. Society: conflict of interest between insured and insurer entitles insured to independent counsel

• Civil Code section 2860– "[W]hen an insurer reserves its rights on a given issue

and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist."

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Insurer’s Obligations With Respect To Appointed Defense CounselThe insurer must:• Employ competent counsel to represent the insured• Provide that counsel with adequate funds to conduct the defense• Avoid restricting the counsel from acting in the insured’s interest

The primary obligation of insurer-appointed defense counsel is to defend the insured against the claims asserts. Defense counsel’s obligations to the insurer are secondary.

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Rule of Professional Conduct 3-310

California Rule of Professional Conduct 3-310 requires, in the event of a conflict, that the attorney obtain a written waiver or withdraw from the representation:

“A member shall not, without the informed written consent of each client,” accept or continue representation where the client’s interest actually or potentially conflict, and “at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.”

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Conflicts of Interest

Conflicts of interest arise where:• The outcome of a reserved coverage issue can be

controlled by counsel first retained by the insurer for the defense of the claim in the underlying action

• Multiple parties are insured by the same insurer• The insurer has commenced litigation against the insured

(whether or not related to the same lawsuit the insurer is obligated to defend)

• The attorney hired to represent the insured is representing the insurance company in a separate coverage action

• The insurer would expose the insured to liability in excess of policy limits by attempting to settle a third party claim for an amount exceeding its limits

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Cumis – The Right to Independent CounselThe right to independent counsel of the insured’s own

choosing (“Cumis counsel”) arises where:• The insurer agrees to defend subject to a

reservation of rights, and• A potential conflict of interest exists between the

insured and the insurer

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Minimum Qualifications ofCumis CounselCalifornia Civil Code Section 2860(c) requires the

following minimum qualifications for Cumis counsel:• At least five years of civil litigation practice including

substantial defense experience in the subject at issue in the litigation

• Errors and omissions coverage

However, the insurer may not unreasonably withhold consent of the counsel selected by the insured.

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Fees Paid To Cumis Counsel

• Insurer must pay the independent counsel’s fees and costs, but not the attorney’s full rates.

• California Civil Code Section 2860(c) permits the insurer to limit fees to what “are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.”

• The insured is required to make up the difference• The fee limitation does not apply where coverage

exists under a policy issued before January 1, 1988

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Obligations of Cumis Counsel

• Represents the insured only. There is no attorney-client relationship between Cumis counsel and the insurer.

• Cumis counsel may later represent the insured in coverage litigation against the insurer.

• Cumis counsel’s duties to the insurer (California Civil Code Section 2860(d)):– Timely “inform and consult with the insurer on all matters

relating to the action.”– Disclose to the insurer “all information concerning the

action except privileged materials relevant to coverage disputes . . . .”

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Can The Carrier Insist On “Litigation Guidelines”?• Guideline examples

– Prior Approval and Consultation– Legal Research, Bates Stamping, Travel– Number of Attorneys (meetings, depositions)– Expert Retention, Motion Practice– Reimbursement Rates

• Dynamic Concepts v. Truck Ins. Exch.: “Under no circumstances can such guidelines be permitted to impede the attorney’s own professional judgment about how to competently represent the insureds.”

• Rule of Professional Conduct 1-600(A)

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Privilege Issues

Business & Professions Code Section 6068(e):

The attorney’s obligation is “to maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.”

• Imposes an obligation on counsel to not disclose confidential information shared between counsel and the insurer to the insured

• Similarly, counsel may not disclose information gained from confidential discussions with the insured to the insurer