by Paul E.B. Glad, William T. Barker, Michael Barnes
Chapter 16 provides an introduction to liability insurance issues generally (and Commercial General Liability ("CGL") insurance in particular). The chapter provides deeper coverage of issues that do not vary significantly among specific types of liability insurance, leaving topics that do vary by type of policy to more specific chapters. While the duty to defend is perhaps the most general liability insurance topic, it is both so important and so large a subject that it warrants a chapter of its own (Chapter 17).
Section 16.01 sketches the history of insurance - generally, and in the United States specifically - and provides an overview of the unusual federal/state division of authority in the regulation of insurance and the importance of ratemaking in liability insurance.
Section 16.02 distinguishes liability insurance and first-party insurance, and discusses the various types of liability insurance. First-party insurance covers risks to the insured's own property, business, or person, while liability insurance covers the risk that the insured will be subjected to a claim for a covered type of liability, protecting against both the expense of defending against such a claim and the cost of paying it, if liability is found. Covered claims typically must be made by third parties, not by other owners of the insured business or members of the household of an individual insured. Most insured businesses purchase CGL coverage, which covers a wide range of risks to businesses. Such policies commonly distinguish between injuries occurring during the operation of the business and those occurring after the business's operations are complete or its product has been sold. These policies sometimes are limited to one or the other form of coverage, and often providing different coveage limits for the two.
Most CGL policies are based on forms drafted by the Insurance Services Office, an industry association, though insurers are free to modify ISO forms. Under those policies, most litigation concerns Coverage A (for "bodily injury" or "property damage" - physical injuries) or Coverage B (for "personal injury" and "advertising injury" - economic or intangible injuries). Coverage A requires an accidental event, while Coverage B does not. Various types of risk are universally excluded from CGL coverage. Thus, things that move (autos, aircraft, and watercraft) are excluded, with any coverage to be provided by insurance specific to that risk. The risk insured is that the business will unexpectedly cause damage to third parties, while coverage is excluded for the risk that the business may simply do poorly at the tasks it undertakes to perform. Risks of injury to employees are excluded and left to policies of workers compensation and employer liability insurance. Risks arising from pollution and contamination are also excluded. Other risks, less important or less uniformly treated may also be excluded.
While CGL coverage addresses types of risks faced by most businesses, other types of insurance deal with risks specific to a particular business or profession. For example, Directors' and officers' insurance covers corporate officers and directors for liabilities arising from "wrongful acts" they may commit in their service to the corporation. Liabilities for professional malpractice are covered by Errors & Omissions policies. (Unlike a CGL policy, which does not insure the quality of the insured's goods or services per se, an E&O policy expressly does so.)
Umbrella insurance provides excess coverage over one or more primary liability policies, covering liability exceeding the limits of those policies. In addition, it provides primary coverage for certain types of liabilities not covered by primary insurance.
Homeowner's insurance covers not only liability risks associated with ownership of a home, but also provides substantial coverage for other non-commercial personal liability risks. Indeed, homeowner's insurance is the engine that drives most non-automotive, non-business civil litigation in the United States. (The policy also covers losses to the insured property, but the concern in this chapter is the liability coverage.) The principal limits on that coverage are noted in Section 16.02[e].
Motor vehicle accidents are the bread and butter of the American tort industry, and they are covered by auto insurance. Because most people agree on what a car accident is, the coverage issues under automobile policies tend to focus not on the insured risk itself, but on the specific vehicle involved in the accident, the "limits of liability," and the insurer's settlement practices.
Cyber insurance policies cover risks associated with transacting business on the Internet. While, many such risks may also be covered under the advertising injury coverage found in a CGL policy, a cyber insurance policy is specifically tailored to online business and will cover risks not typically covered by a CGL policy.
Section 16.03 covers issues associated with the initiation of a liability insurance claim. The first set of these issues, addressed in Section 16.03, concerns notifying the insurer of claims, suits and occurrences that are or may be covered. Where a primary policy is occurrence-based (as opposed to claims-made), it typically requires prompt notice of all claims and suits and often requires notice of occurrences that might result in claims. Excess policies may make notice requirement depend on likelihood that policy will be implicated. Most jurisdictions hold that late notice under an occurrence-based policy will not affect coverage if the delay does not prejudice the insurer. Requiring prejudice for late notice to impair coverage protects not only the interests of the insured, but also those of the claimant, who is a beneficiary of the insurance policy (especially where insurance is mandatory) and ought not to be deprived of the policy's protection unless the insured has breached in a way prejudicial to the insurer. A minority of jurisdictions disagree, at least where the contract specifies that timely notice is a condition precedent to coverage. Where prejudice is required, jurisdictions disagree on which party bears the burden of proof on prejudice. They also disagree on what constitutes prejudice. Some require only a probability of prejudice while others require various degrees of proof of actual prejudice.
Section 16.03 discusses issues relating to the insured's tender of the claim to the insurer. In the normal course of a liability insurance claim, the insured receives suit papers or other notice of a suit and forwards the papers or notice to its insurer, expressly or impliedly requesting that the insurer provide a defense. A request for the insurer to defend is referred to as a "tender" of the defense. Sometimes, an insurer may receive notice of a lawsuit (from the insured or someone else) without the insured requesting any defense. Finally, notice or tender (or both) may not occur until some time after defense of the suit has commenced. Accordingly, issues can arise as to what triggers an insurer's duty to defend and whether the insurer is obliged to reimburse or contribute to defense costs incurred before notice or tender. The first question is considered in Section 16.03[a] and the second in Section 16.03[b]. At a minimum, notice of some sort is essential. However, an insured is not obliged to cede defense of a suit to the insurer if it prefers not to do so, and any authority the insurer has to retain counsel for the insured rests on a request by the insured to do so. Some jurisdictions hold that an insurer's duty to defend is triggered only by a request from the insured, while others hold that an insurer that has learned of a claim against an insured must inquire whether the insured wants a defense. In many jurisdictions, insurers are not liable for pre-tender or pre-notice defense costs.
Section 16.03 addresses an insurer's options in responding to a tender. When an insured tenders a lawsuit for defense, an insurer that has a duty to defend will breach that duty if it does not provide a defense in a timely manner. On the other hand, if there is no duty to defend, the insurer still must notify the insured that no defense will be provided promptly enough that the insured can arrange for its own defense. If the insured is reasonably relying on the insurer to provide a defense and is not promptly notified to the contrary, the insurer may be liable for any resulting default judgment. Accordingly, a prompt decision must be made whether to provide a defense.
If the insurer provides a defense without indicating that it reserves the right to deny coverage, it will typically be deemed to have acknowledged coverage and may be estopped to later deny coverage. Accordingly, an insurer must attempt, before providing a defense, to identify any coverage issues that may provide grounds for refusing to indemnify for any judgment or settlement to assure that the insured is notified of those issues.
Section 16.03[c] examines the arguments for denying an insurer the ability to assert coverage defenses if it has defended without reserving rights. In such circumstances, the insurer may be said to have waived its coverage defense or to be estopped to assert that defense. Arguments based on waiver generally cannot extend the coverage provided by the insurance policy, although they may bar insurer reliance on policy defenses (e.g., late notice or lack of cooperation) that act as grounds for forfeiture of the coverage provided by the policy. A waiver occurs when a party intentionally relinquishes a known right or when that party's acts are so inconsistent with an intent to enforce that right as to induce a reasonable belief that the right has been relinquished. Defense without reserving rights (or without identifying all possible coverage defenses) may not be enough to establish a waiver.
If the insured has procured the insurance through misrepresentations, the law gives the insurer a right to rescind if the misrepresentations were both material and fraudulent (or, in many jurisdictions, if they were either). However, misrepresentations do not render a contract void, but only give the party deceived the option either to void it or to affirm it and sue for any damages resulting from the misrepresentation. The party having such an option must exercise it with reasonable promptness, and will not be permitted to delay making that election indefinitely while waiting to see which course would be more advantageous, casting all of the risk on the other party in the interim.
The reason why waiver generally cannot expand coverage is that expansion of coverage would require a new promise, supported by new consideration, rather than merely waiver of a defense. Some jurisdictions announce a broad rule against expansion of coverage by either waiver or estoppel. But estoppel can serve as a substitute for consideration. Thus, the modern rule allows expansion of coverage by estoppel. This occurs in two situations. One is based on representations at the time the policy is purchased, with the purchaser's reliance on those representations preventing reliance of policy language that differs from the representations. The other is based on the insured's relinquishment to the insurer of the right to control the defense of the underlying case.
An estoppel based on the insured's relinquishment of the control of the defense does not require any showing that the insured mishandled the defense (though such a showing would establish prejudice). This recognizes that innumerable strategic and tactical decisions shape the defense of a lawsuit. In many cases, these decisions involve no clear right or wrong answers, only choices among various mixes of advantages or disadvantages dependent on unknowable future developments. The right to control these choices is itself a valuable right. If the insurer's decisions made during its exercise of control are significant and irreversible, in the sense that they materially limit the insured's options in further conduct of the litigation, then prejudice may be found.
Still, showing that the insured's ability to make defense decisions has been denied or limited does not necessarily establish prejudice. If the insurer has a duty to defend, it usually has the right to control the defense. However, the insured is entitled to independent counsel if there is a conflict of interest affecting the defense, and some jurisdictions grant the insured the right to independent counsel whenever the insurer reserves its right to deny indemnification. If a reservation of rights based on a coverage defense not raised initially would have given the insured the right to independent counsel, then failure to raise that right would have deprived the insured of the right to control the defense. That would support an estoppel, if the loss of the right to control was prejudicial. But if the insured would not have had a right to control the defense, nothing may have been lost.
Sections 16.03[d]-[f] examine the requirements for a reservation of rights. The reservation must be prompt and identify all coverage issues of which the insurer has notice and wishes to rely upon. An insurer that learns of facts suggesting a coverage defense not previously known may promptly supplement its reservation of rights. Jurisdictions differ as to whether a unilateral reservation of rights is sufficient to preserve an insurer's coverage defenses or whether an insured's consent to the reservation is required. In practice, that difference has limited significance, because the insured's acquiescence, after receiving a reservation of rights, is generally treated as consent. Absent a statute or regulation, a reservation should not be necessary when the insurer neither controls the defense nor has any other obligation to act on the insured's behalf.
Section 16.03[g] examines rules governing declination of coverage. Any declination should be reasonably prompt and comply with any statutory or regulatory time limits. Failure to assert a potential coverage defense in a declination ordinarily ought not to prevent its assertion at a later date. An erroneous disclaimer of coverage typically constitutes a breach or anticipatory breach of contract, freeing the insured of all contractual conditions; some jurisdictions may bar assertion of any coverage defenses.
Section 16.03 provides an introduction to an insured's duty to cooperate in the insurer's defense of the suit against the insured. If an insurer wishes to obtain the insured's cooperation, it must exercise due diligence to obtain that cooperation. But, even if a breach of the duty of cooperation can be shown, most jurisdictions will permit avoidance of coverage only on a showing of material prejudice to the insurer from the breach.
Section 16.04 examines the tripartite relationship among the insured, the insurer and insurer-directed defense counsel. Under standard policies, and absent a conflict of interest regarding the defense, the insurer has the right to select defense counsel for the insured and to control the defense. There is a division of authority whether the insurer is a co-client of defense counsel. In the great majority of jurisdictions, the insurer retaining defense counsel for the insured may choose to be a co-client, and that generally is the case in insurance defense litigation. That conclusion follows from the usual test for formation of an attorney-client relationship. Generally, the insurer with the right to select counsel may, if it chooses, use its own employee counsel to defend the insured.
However, when there is a conflict of interest regarding the defense, the insured is entitled (under the Rules of Professional Conduct) to independent counsel, who represents the insured alone. A disabling conflict exists when insurer and insured have divergent interests in the way the case is defended. The primary example in insurance representations occurs when some factual issue bearing on the insured's liability also bears on existence of coverage. For example, if the insured is sued on alternative theories of negligence and battery, the former typically will be covered but the latter will not. Of course, the insurer and the insured share an interest in defeating the suit entirely and in minimizing any judgment. But if liability is found, the insured would prefer that it be based on (covered) negligence, while the insurer's interest would be served if it were based on (noncovered) battery. Because the way in which the case is defended has a real possibility of affecting the basis on which any liability would be found, this divergence of interest creates a conflict of interest for any defense counsel seeking to advance the insurer's interest as well as that of the insured. Most jurisdictions allow the insured to select and direct independent counsel, to be paid by the insurer, though a few allow the insurer to select, subject to an enhanced duty of good faith. A few jurisdictions grant the insured a right to independent counsel whenever the insurer reserves the right to deny indemnification, even if there is no conflict.
Section 16.04 examines insurer direction and use of guidelines for defense counsel. Absent a right to independent counsel, the insurer is entitled to require advance consultation and approval regarding significant defense activities it will be asked to pay for, but defense counsel counsel's acceptance of insurer direction may be limited by its duties to the insured. Consultation with the claim representative and acceptance of direction create no ethical issues unless the direction would subject the insured's interest to substantial and avoidable risks. If the course preferred by the insurer entails substantial and avoidable risks to the insured's interests, defense counsel must consult with the insured. Section 16.04[d] reviews and criticizes the Montana Supreme Court's controversial decision in In re Rules of Professional Conduct.
Section 16.04 examines issues of confidentiality and use of outside bill reviewers. Although the insurer is entitled to share most confidential information regarding the defense representation with affiliated organizations, disclosure of such information to outside bill reviewers may be limited where such disclosure might prejudice the confidentiality of that information as to third parties. Defense counsel must keep information regarding the representation confidential, except as disclosure is expressly or impliedly authorized. In general, disclosure of information to the insurer is impliedly authorized. But disclosure to outside bill reviewers may require informed consent of the insured.
Section 16.04 considers ways in which defense counsel must be especially cautious in partial coverage or excess exposure cases. Defense counsel must take care never to injure or endanger any interest of the insured without the insured's informed consent, and this limits counsel's handling of discretionary settlement authority. Defense counsel can and should advise both insurer and insured on the value of the case, but should not make recommendations on settlement strategy.
Section 16.05 discusses the various types of insureds: named insureds, automatic insureds (such as the members of a named insured's household), and additional insureds. In some cases, whether a given person is an insured may depend on whether that person was acting in a particular capacity (e.g., as a corporate director). While designation as an additional insured provides direct protection by the policy, indirect protection may be provided if the named insured has promised to indemnify a third person and that promise is an insured contract.
Insureds may be able to assign their rights, but assignments are typically restricted by the contract. Some transfers in organizational restructurings are not considered assignments and do not require the insurer's consent. Most jurisdictions allow post-loss assignments, though a few strictly enforce contractual restrictions. Some courts have held that insurance rights may be transferred by operation of law when the corresponding liabilities are transferred, treating the situation as if it were a form of post-loss assignment. But most courts reject such transfers without an assignment, and some consider that even a post-loss assignment would be prejudicial to the insurer if the insurer would potentially have the duty to defend both the original insured and the successor.
Section 16.06 provides an introduction to the duties to defend and indemnify under a liability insurance policy. Liability insurers are often said to have two principal contractual duties: the duty to defend and the duty to indemnify. (This chapter will not discuss indemnity policies, which promise only to reimburse the insured for the costs of defending and paying any judgment or settlement) The duty to defend refers to the insurer's obligation to pay the expense of defending its policyholder in a lawsuit. The duty to indemnify, by contrast, refers to the insurer's obligation to pay damages awarded against its insured. Most disputes involving liability policies concern the duty to defend, not the duty to indemnify, for two related reasons. First, the duty to defend is assessed at the outset of the case and so it is addressed in virtually every claim involving a lawsuit against the insured, whereas the duty to indemnify only arises when the insured has been adjudged liable to the third-party claimant. Second, because relatively few cases are tried to verdict, the insurer's actual duty to indemnify is much less frequently addressed.
Although the duty to defend is often said to be broader than the duty to indemnify, this universal principle is sometimes misunderstood to suggest there can be a duty to defend even when there is no possibility of coverage. To the contrary, however, the duty to defend is always tied to the duty to indemnify, and only arises when there is at least some possibility, however that possibility is determined, that the insurer could be obligated to pay for the relief awarded in the suit.
Section 16.06 provides an introduction to the duty to defend, which is more extensively treated in Chapter 17. In general, the defense obligation requires the insurer contemporaneously to pay the insured's litigation expenses in suits seeking covered damages, and many jurisdictions will hold the insurer liable for any errors or omissions by the defense counsel it assigns. Absent any right to independent counsel, the insurer usually controls defense and settlement of suits against the insured, even if the insured disagrees.
Existence of a defense obligation depends on the allegations of the complaint against the insured and, depending on the jurisdiction may include extrinsic information known to the insurer at the time of tender. By the terms of the insurance policy provision promising a defense, the duty to defend exists whenever a suit against the insured seeks damages that, if awarded, would be covered by the policy. States have differing views on the role of extrinsic facts (those not alleged in the complaint) in determining the potential for liability coverage. In what are commonly known as "four corners" states, neither party may look beyond the "four corners" of the complaint in determining whether the plaintiff seeks covered damages. Other states, however, allow use of extrinsic facts to show that the third-party plaintiff may (or may not) be seeking covered damages even if they are not expressly mentioned in the complaint. A limitation on this rule is that extrinsic evidence is only relevant if it sheds lights on the claims being made, not if it relates to other claims the plaintiff could make but is not actually pursuing. The defense obligation applies to groundless, false or fraudulent allegations, but only if they would result in covered damages if proven.
In general, an insurer obliged to defend any part of a suit is obliged to defend the entire suit. However, the insurer has no obligation to prosecute affirmative claims on the insured's behalf. The duty to defend can be terminated by exhaustion of the liability coverage or, in some jurisdictions, by resolution of all potentially covered claims.
Section 16.06 provides an introduction to the duty to indemnify. The duty to indemnify is analyzed differently from the duty to defend. The principal difference is that the duty to indemnify only arises after the insured has been held liable, and not merely where it is alleged to be liable. Moreover, the duty to indemnify requires imposition of liability for covered damages: an adjudication of liability on a noncovered claim does not obligate the insurer to pay.
Difficulty in determining the duty to indemnify arises where the two duties are not co-extensive. For example, the underlying complaint may seek a variety of damages, some covered and some not. Alternatively, the plaintiff may recover damages for the same act on multiple theories, such as negligence and assault. In such cases, it is necessary to analyze how to determine the insurer's obligation.
Principles of issue preclusion are relevant, but typically are not controlling on coverage issues. If the underlying case is truly contested, the findings are res judicata as to the existence and amount of the insured's liability. But the insurer is not a party to the underlying action and, if there is a conflict of interest regarding the defense, it will not be permitted to control that defense. So, its coverage interests on any subject where its interests conflict with those of the insured are not represented by either the claimant or the insured. The insured, of course, wants to avoid any finding that the claims against it are not covered. The third-party claimant will typically share that goal, because its interest will be best served by securing a judgment that is covered by insurance. Because the actual parties to the case share a common interest in making any judgment appear to be covered, the outcome of the case should have no binding effect on the insurer's coverage obligations because its interests may be directly contrary to those of both litigants, yet it has no opportunity to argue those issues in the underlying action. So the findings in the underlying action typically cannot bind the insurer on coverage.
Section 16.06 provides an introduction to the insurer's duty to settle, a topic treated more extensively in Chapter 23. Standard insurance policies give the insurer control of settlement decisions but impose no express duty to settle. But courts have implied a duty to settle to protect insureds from excessive risks of personal liability for judgments in excess of policy limits. Jurisdictions apply a variety of standards to determine the content of the duty to settle. The most widely used test is typically formulated as "whether a prudent insurer without policy limits would have accepted the settlement offer." The insurer need not settle noncovered claims or consider them when evaluating a settlement demand.
Section 16.07 provides an introduction to the nature of general liability coverage, a topic treated more extensively in Chapter 18. Section 16.07 covers certain basic principles. Liability insurance protects the insured against adverse judgments. Absent a breach by the insurer, no contractual duty is owed to the injured party unless and until there is a judgment or settlement agreed to by the insurer. While some state laws create duties to settle third-party claims, only a few of these are privately actionable. Litigants also must remember that liability insurance does not cover damage to the insured's own property, rights or interests, but instead covers injuries the insured causes to third parties. It must also be kept in mind that the policy covers the insured's liability, not the claimant's injury. As a result, if the insured is not liable for the claimant's injury, no matter how serious, then neither is its insurer. It is also important to bear in mind that a liability policy is a contract for protection against specific risks, and the statutory, regulatory and judicial principles that enhance insurers' obligations are there to protect the entitlement to covered damages, not to protect concerns beyond the policy's four corners. In the memorable words of one court, "[t]he insurer does not . . . insure the entire range of an insured's well-being, outside the scope of and unrelated to the insurance policy, with respect to paying third party claims," for "[i]t is an insurer, not a guardian angel."
Section 16.07 discusses common law principles that may supplement or override contractual terms. The notion of fortuity inherent in the very nature of insurance may be cited as an additional reason to dispute coverage. The "known loss" or "loss in progress" rule may preclude coverage irrespective of policy language, but different jurisdictions use different versions of that rule, especially for liability insurance. Public policy may limit coverage for particularly egregious or willful conduct irrespective of the policy language.
Section 16.07 provides an introduction to Coverage A of the CGL policy, for accidental bodily injury and property damage. The older approach to defining "accident," and one that is still recognized in a number of jurisdictions, is to question whether the effects of the insured's conduct were specifically intended. In essence, those jurisdictions conflate the "accident" requirement with the exclusion for "expected or intended" injuries, and hold an "accident" occurs whenever the insured did not intend to inflict the harm over which he or she is being sued. The more modern trend in the case law, starting in the 1980s, has been to recognize the "accident" limitation as a separate coverage requirement in itself, which refers to the type of act the policy covers as opposed to the subjective state of mind of the person committing it. This line of authority holds that a deliberate act is by definition not an "accident," irrespective of the insured's motivation, intent, or state of mind.
The two issues that most frequently arise involving the "bodily injury" definition are (1) whether emotional distress is bodily injury, and (2) whether bodily injury is covered if incidental to a noncovered loss. Emotional distress is usually not covered as "bodily injury," a term that contemplates a physical injury to a person's body, but the law differs from state to state. An equally vexing question is whether bodily injury is covered when it results from an event that would not otherwise be covered - most frequently, in a suit for injury to economic interests. Some courts simply conclude that the presence of the term "bodily injury" or "physical injury" is sufficient to implicate policy coverage. Others, however, hold that the policy was intended to cover an accident that directly caused an injury, and that claims of physical distress that are merely tacked onto noncovered claims do not change the gravamen of the suit for insurance purposes.
Negligent acts during the policy period are not covered unless there is a resulting bodily injury or property damage injury during that period. Continuing losses are covered over several consecutive policy periods, unless one or more policies states otherwise. When an injury occurs repeatedly, continuously or sporadically over several policy periods, numerous competing trigger theories have emerged and are discussed in Section 16.07[d].
Section 16.07 provides an introduction to Coverage B of the CGL policy, for personal and advertising injury. Coverage B of the CGL policy covers "personal and advertising injury" that is "caused by an offense arising out of [the insured's] business." "Personal and advertising injury" is defined in the policy, but is essentially a union of two coverages previously available as an endorsement to the Comprehensive General Liability policy: "personal injury" coverage and "advertising liability" coverage. The traditional "personal injury" coverage applied to roughly a dozen specified offenses that result in non-physical injuries. Typically, they fall into three groups: injuries to reputation (defamation, libel and slander), injuries to liberty (false arrest, imprisonment or detention), and injuries to intangible property rights (wrongful entry, wrongful eviction, and interference with private occupancy rights). "Personal injury" often expressly excludes "bodily injury." It is important to recognize that "personal injury" in this context means something highly specific, in contrast to the vernacular reference to "personal injury" as being an injury to a person's body, as in "personal injury lawyers."
"Advertising injury," by contrast, covers certain offenses such as copyright infringement and misappropriation of advertising ideas committed in the course of the insured's advertising activities. The coverage was largely overlooked until the late 1980s, when courts began finding coverage for business disputes such as patent infringement, false advertising and unfair competition that historically had been assumed to be uninsured.
As is apparent from the nature of the covered offenses, there is no "accident" requirement under Coverage B. Whereas Coverage A is typically triggered by an injury within the policy period, Coverage B is typically triggered by an offense within the policy period.
Section 16.07 discusses claims-made coverage, which is a fundamentally different approach to the timing of coverage than the injury-based or offense-based triggers previously discussed. "Claims-made" policies were developed in the 1970s in an effort to limit insurer exposure, and provide coverage if the damage-causing act is discovered and results in a claim during the policy term, regardless of when the insured's negligent act was committed. (Typically, the claim must also be reported during the policy period or during a short period thereafer.) Insurers generally insert a "retroactive date" into the policy, prior to which the insured's acts are not covered. Typically, the insurer will offer "retroactive" coverage back to the inception date of the insured's first claims-made policy with that insurer. For the insured to be covered for acts earlier than the retroactive date, the insured must look to either an occurrence policy in effect for injuries before that date or to "tail" coverage in a prior claims-made policy.
The term "claim" has generally been defined as a demand for money or services. A mere inquiry or assertion of wrongdoing is not a "claim." Likewise, the insured's realization during the policy period of an error it made is not a claim. However, both of these events indicate the possibility of a claim to be made in the future, and so the events will need to be disclosed on the next claims-made application, resulting in the claims being exluded under future policies. But the reporting of such a circumstance during the policy period when it occurs will create continuing coverage under the current policy for related claims.
Because of the specter of unknown, new claims arising after the policy expires, claims-made insurers typically offer "tail" coverage, also known as "extended reporting" or "extended discovery" coverage, which provides an additional period after policy expiration for claims to be made against the insured and reported to the insurer. Such provisions are necessary to provide continuing coverage after the insured switches insurers, with the new insurer barring coverage for events prior to the inception of its coverage. Extreme caution is required when changing from occurrence to claims-made coverage, since uninsured gaps can arise without proper coverages or endorsements.
Section 16.08 discusses the effect of an insured's representations and warranties. Material misrepresentation by the insured in obtaining coverage may provide grounds for rescission. At common law, no culpability is required for rescission based on a material misrepresentation. But this subject is heavily regulated by statutes, and many states require an intent to deceive before a policy may be rescinded. An insurer wishing to rescind must act promptly after learning of the misrepresentation. At common law, an insured was required to strictly comply with warranty provisions in an insurance policy. Noncompliance with a warranty was a complete defense for the insurer regardless of materiality of the breach. For the most part, modern statutory law has ameliorated the harsh impact of requiring strict compliance with common law warranties in insurance by removing almost all distinction between warranties and representations.
Section 16.09 discusses the physical form of a typical insurance policy, and how its various parts interact. The starting point for understanding a given liability insurance is the policy itself. This is important because litigants too often are guided by general legal principles and court opinions construing similar types of policies, and the litigants do not focus sufficiently on the contract actually before them, the terms of which bind the parties and govern any court's interpretation of the policy. Typically, there are three structural elements: (1) the declarations pages, which, by identifying the insured persons, applicable coverages and policy limits, dictate what is unique about that particular policy; (2) the policy form itself (sometimes called the "jacket"), and (3) the endorsements, which can modify the policy form in an infinite number of ways. All of these must be assembled and reviewed to determine the coverage provided by a particular policy.
Once all of the structural subparts have been assembled, they must be considered in terms of the policy's functional subparts: the insuring agreement, the exclusions, and the conditions. The insuring clause (or "grant of coverage") sets forth the basic scope of the insured risk and represents the requirements that must be satisfied for a covered loss to be present. The second section, the exclusions, takes back some of the risks that otherwise would have been afforded coverage by the insuring clause, either because they are covered by other types of insurance (for example, workers' compensation or automobile) or because insurers simply do not want to cover that risk (for example, intentional acts or pollution liability). Finally, the conditions section places certain conditions precedent to coverage (for example, the duty to give prompt notice and to cooperate) that the insured must satisfy to obtain coverage even if the terms of the insuring clause are met and no exclusion applies.
Section 16.09 discusses the amounts of coverage available, typically specified by the declarations pages. Modern general liability policies typically are subject to an aggregate and occurrence limit. An aggregate limit establishes the maximum amount the policy will pay for a specified type of damage. An occurrence policy provides coverage for "occurrences" or events that happen during the policy period and does not restrict the period during which claims may be made. The aggregate limit is designed to place a cap on the insurer's liability for all specified types of damage, regardless of the number of occurrences in the policy period. Some older policies may contain no aggregate limits or only contain aggregate limits of liability for specific claims, but do not cap the aggregate limits for all other claims. In addition, costs for defending liability coverage typically are not included in the policy limits.
Most states utilize a "causation" test for the number of occurrences. If a single cause results in multiple instances of damage, there still may be a single occurrence. Accordingly, when more than one person is injured as a result of the same harmful conduct, or from exposure to substantially the same general conditions, courts have found there is only one "occurrence," and thus held that only the one per-occurrence limit is available. Some cases have overlaid time or space considerations over a causation test for the number of occurrences. Accordingly, if related losses take place at significant distances from each other or after a significant amount of time has elapsed, a court: may be more likely to find two or more occurrences depending on the circumstances."
A "self-insured retention" (or "SIR") is an insurance arrangement whereby the insured takes all responsibility for dealing with claims up to a certain amount of loss. This includes adjusting the claim, either itself as the insurer or through a third-party claims administrator, defending itself against the claim, and, if necessary, paying it. Although some courts appear to view "deductible" as synonymous with "self-insured retention," there are important distinctions between the two. First, it is generally accepted that the insurer in a deductible arrangement is primarily responsible for the loss starting from its first dollar, though entitled to reimbursement from the insured, so that in case of insured insolvency, for example, the insurer must pay amounts covered under the policy within the deductible for which the insured is held liable. Where the policy imposes on the insurer a duty to defend, furthermore, this duty attaches even for claims within the deductible in the absence of specific policy language to the contrary.
Section 16.10 discusses obtaining coverage when the insurer refuses. An insured that wants or needs coverage under the policy may file suit against the insurer to compel payment, adding "bad faith" allegations if supported by the facts and the law, but suing an insurer carries both risk and reward. If the insured's position is correct, it will receive the desired policy benefits and perhaps a handsome tort recovery to boot. On the downside, actions against an insurer alleging the wrongful failure to defend tend to be expensive and time-consuming. While that action is pending, the insured may find itself fighting a "two-front" war and paying its own attorneys' fees in both cases. In light of these risks, an insured may wish to exhaust all other opportunities before filing suit, such a hiring counsel to persuade the insurer that coverage is owed, involving a sales agent or broker to convince the insurer it is wrong, complaining to the insurance regulator, or striking a deal with the third-party claimant and assigning its rights to the claimant.
Paul Glad is a partner in the San Francisco office of SNR Denton and has a broad insurance practice, with an emphasis on trials and appeals. Mr. Glad has participated in nearly 40 published insurance appellate decisions. He is the co-author of two books published annually: California Insurance Law Handbook and DiMugno's and Glad's California Insurance Laws Annotated. He has also authored more than 30 articles regarding a variety of insurance issues. Mr. Glad was named the No. 1 Insurance Attorney in Chambers USA (2003-2007). He was also selected as one of the top 500 lawyers in the United States by LawDragon, a legal publisher.
William T. Barker is a partner in the Chicago office of SNR Denton with a nationwide practice representing insurers in complex litigation, including matters relating to coverage, claims handling, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is a co-author (with Ronald D. Kent) of New Appleman Insurance Bad Faith Litigation, Second Edition and author or co-author of chapters of New Appleman on Liability Insurance, Second Edition; has published over 100 articles, and speaks frequently on insurance and litigation subjects. He has been described as the leading lawyer-commentator on the connections between procedure and insurance. See Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 n.4 (1995). He is a member of the Editorial Board of New Appleman on Insurance Law and New Appleman Insurance Law Practice Guide. Mr. Barker is a member of the American Law Institute.
Michael Barnes is a litigation partner in the San Francisco office of SNR Denton where he represents insurance companies in disputes involving first- and third-party coverage issues. He is a graduate of Duke Univeristy and the University of Michigan School of Law, and has participated in two dozen published decisions throughout the country. In addition to speaking and publishing articles on insurance law, Mr. Barnes serves on the Editorial Board of the Insurance Litigation Reporter and is a past chair of the Executive Committee of the Insurance Practice Section of the Bar Association of San Francisco.