 The CGL covers risk to “your property” which the policy defines broadly. To prevent the application of this definition to the insured’s actual work (either physical or intellectual), the policy specifically excludes “Damage to Your Work.”[1] In this post, I’ll cover sections (a)(1) and (2) of the exclusion.
Here is the language covered in this post: Your work, means
Let’s begin with sentence 1. “Or” is a coordinating conjunction, which connects words of equal rank. “Work” is an, “activity involving mental or physical effort done in order to achieve a result.”[2] [3] “Operations” are “a process or series of acts performed to effect a certain purpose or result.”[4] This word implies a specific process. For example, workmen must remove an old air conditioner before installing a new one. These two nouns cover the gamut of production methods for an economic output. “Performed” is the past tense of the transitive verb “perform,” which means to, “carry out, accomplish, or fulfill.”[5] Two prepositional phrases are verbal objects. The first phrase begins with “by,” which means, “through the agency or act of.”[6] “You” refers to the insured.[7] This phrase applies when the insured performs the activity. The second prepositional phrase begins with “on,” which means, “the agent or agency of a specified action”[8] while “behalf” means, “as the agent of.”[9] This phrase means a third party acts as an agent of the insured. We can rewrite the first sentence as, “the insured or his agent performs the work or operation.” The second sentence contains a list of three items (“Materials, parts, or equipment”), which references the contractual interpretive maxim of, “expressio unius exclusio alterius: “If one or more specific items are listed without any more general or inclusive terms, other items although similar in kind are excluded.”[10] This is the exclusive list of items an insured can “furnish.” “Materials” are the “tools or apparatus for the performance of a given task.”[11] “Parts” are, “a component that can be separated from a system,”[12] while “equipment” is, “the item needed for a particular purpose.”[13] The insured “furnishes” these items, which means they are provided “to equip with what is needed.”[14] The definition casts a wide net to incorporate all physical items the insured incorporates into the final product. Returning to the air conditioning example above, this definition would cover all the individual parts used as part of the assembly from the smallest screw to the outside condenser and attack unit. To conclude, “your work” means all the physical or mental labor performed and includes all the items included as part of the work. [1] 2(k) of the CGL [2] Concise Oxford English Dictionary, 11th Edition, © 2004, p. 1661 [3] The definition also covers intellectual activity (it includes “mental … effort”), preventing a knowledge-based service provider (such as an accountant, lawyer, doctor or engineer) from attempting to argue a CGL applies to his professional activity. [4] The American Heritage Dictionary, Second College Edition, © 1985, p. 871 [5] Oxford at p. 1064 [6] American Heritage at 222 [7] From the opening paragraphs of the policy. [8] American Heritage at 867 [9] American Heritage at 168 [10] Kastely, Post, and Hom, Contracting Law, second Edition, © 2000 Carolina Academic Press, p. 724 [11] American Heritage at 772 [12] Id at 905 [13] Oxford at 402 [14] American Heritage at 540
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 Because the CGL is designed to be the workhorse business policy, its language has to be open to liberal interpretation – a drafting concession that potentially exposes the insurer to unintended coverages. For example, the policy provides indemnification for “property damage.” A skilled lawyer could potentially apply this definition to the insured’s product, exposing the insurer to product liability coverage. This explains why this coverage is specifically excluded. The complete "'your product" exclusion is contained in several sections. For the sake of clarity, I've assembled them into one sentence, which follows. The exclusion’s complete text is emboldened; bracketed, italicized comments provide context: [Beginning of Section 2 titled “Exclusions] This insurance does not apply to [title of section (k)] Damage to Your Product [which is] “property damage to your product arising out of it or any part of it.” The CGLs’ complete definition of “your[1] product,” is, “any goods[2] or products,[3] other than real property, manufactured, sold, handled, distributed, or disposed of by, you, others trading under your name, or, a person or organization whose business or assets you have acquired.”[4] The definition has five verbs (“manufactured, sold, handled, distributed, or disposed”) that link to the insured to the product so as to create an insurable interest. Manufacture means, “to make or process into a finished good.”[5] Clearly, this verb applies to a company that converts inputs into a sellable output. “Sold” is the past tense of “sell” which means “to exchange or deliver for money.”[6] This verb applies to retailers. Handle means “to deal with”[7] while “distribute” means “To supply goods to retailers.”[8] Both these verbs apply to middle-men – companies that are part of the supply chain, but only hold the item for a limited amount of time. “Dispose” means “to get rid of.”[9] Now that we’ve defined “your product”, let’s return to the definition: [Beginning of Section 2 titled “Exclusions] This insurance does not apply to [title of section (k)] Damage to Your Product [which is] “property damage to your product arising out of it or any part of it.” The combination of the §2’s opening phrase (“this insurance does not apply to”), and section k’s title, (“Damage to Your Product”) is clear and concise. Here is the text (emboldened) without the parenthetical references: This insurance does not apply to damage to your product. Unfortunately, that’s where the clarity ends thanks to the next two phrases, “arising out of it” and “or any part of it.” The first phrase is supposed to apply to a situation where the insured’s item is a component of a larger product and then causes damage to the larger whole. For example, a cell phone battery overheats, damaging the rest of the phone. The verb “arise” is problematic. While one of its meanings is, “to result”[10] – clearly the drafter’s intention -- it’s more common use is “to get up”[11] or “to move upward,”[12] as in, “Arise, my son” – which is often used in a Biblical context. Why the drafters didn’t use a more accurate verb – such as “causes” or “results from” – is a mystery. The second prepositional phrase, “or any part of it,” is also troublesome. It’s meant to apply when part of the insured’s “product” causes the damage previously mentioned. Again, the word choice is awkward. A single, 14-word sentence should be clear and unambiguous. This one is anything but. We ultimately know what the drafters are trying to define. The wording really needs work. [1] The very beginning of the policy observes that “you” and “your” refer to the insured. Please see discussion here. [2] The American Heritage Dictionary, 2nd College Edition, © 1985, p. 568 (a good is a “commodity or ware”). [3] The Concise Oxford English Dictionary, © 2004, p. 1145 (“an article or substance manufactured or refined for sale”). Once again, the term being defined is included in the definition. [4] CGL Section V, §21 [5] Id at 764 (however, most dictionaries also state the word implies large-scale production, which could potentially lead to a challenge for non-mass-produced goods). [6] Id at 1114 [7] Id at 592; see also Oxford at 647 (“to control or manage commercially”) [8] American Heritage at 410 [9] Oxford at 414 [10] p. 127 [11] Id [12] Id  The CGL is the “workhorse” United States policy, providing the vast majority of business insurance coverage in the U.S. But the policy’s definitions contains a potential pitfall: because the policy indemnifies the insured for “property damage” and “bodily injury” arising from “general” liability, a skilled attorney could successfully argue the policy applies to risks not intended by the policy drafters. The standard policy contains a number of standard exclusions to prevent this outcome. Because a CGL’s covers “bodily injury” it could potentially cover worker’s compensation claims. To prevent this outcome, the policy specifically excludes not only worker’s comp claims (Section 2(d) excludes claims for “worker’s compensation and similar laws”) but also “bodily injury related to an “employer’s liability.” (Section (2)(e)). The latter provision is probably overkill, but certainly doesn’t hurt. The CGL’s coverage of “property damage” and “bodily injury” could potentially open the door to liability for damages caused by pollution (in fact, careless drafting in the late 1960s and early 1970s allowed insureds to successfully file such claims, leading to huge losses for insurers). Exclusion (2)(f) specifically precludes that possibility by excluding claims for property damage or bodily injury caused by pollution (some policies go so far as to have a rider called the “Total Pollution Exclusion). The CGL’s coverage of “property damage” and “bodily injury” could lead to coverage caused by an auto accident. Exclusion 2(g) – for damage arising out of “the ownership, maintenance, use, or entrustment to others of any aircraft, “auto” or watercraft owned or operated by or rented or loaned to any insured” – prevents this possibility. Finally, the CGLs’ coverage of property damage could potentially force the CGL insurer to cover losses to physical property such as buildings and houses. Exclusion (2)(j), which excludes “property damage to property you won, rent, or occupy” prevents this outcome. Ultimately, the insured should create an “insurance tapestry,” which would look like this:  Ideally, each insurance box only covers claims unique to the specifically named coverage.
Each policy applies to a specific risk. The language of each policy also specifically excludes its application to the other fact patterns (pollution excludes worker’s comp etc…). Weaved together, the policies protect the insured against specific catastrophic risks.  The CGL also covers property damage, or, more specifically, ”physical injury to tangible property.” Simple, right? Not exactly. Let’s look at this phrase with a bit more grammatical detail:  These five words are a phrase, or, “… a group of words not containing a verb and its subject. A phrase is used as a single part of speech.”[1] Central to this phrase is a preposition, which shows “the relation of a noun or pronoun to some other word in the sentence.”[2] The first two words (physical damage) are a noun phrase which is then related to “tangible property” via the preposition “to.” The online Merriam-Webster dictionary contains two potential definitions for "to:" 1.) “a function word to indicate contact or proximity,” 2.) or “a function word to indicate the result of an action or a process.” Using each definition, we get
Number 2 is clearly the mostly likely and commonly accepted definition. I’ve included number 1 mostly out of a sense of completeness. However, it’s also a possibility once we dig deeper into the definitions of the phrase’s words. Let’s further break down this phrase by defining each of the key words:[3]
We can combine the first three words into the following: “harm to (a) body that is perceptible (by touch).” Although it seems painfully obvious, a third party must be able to perceive the harm. Most definitions of the word property use the word, “thing” -- a broad and indefinite word, meant to connote, well, anything. Definitions of the word property also refer to the concept of ownership, which means the person alleging damage should have possession of the item. In legal terms, this usually means title, even if the concept is demonstrated informally. That's it for this post. Next time, I'll look at some of the different types of property seen in the case law. [1]That’s from my VERY old Warriner’s English Grammar and Composition, © 1973. [2] Id [3] I use three dictionaries: a 1982 American Heritage Dictionary, a 2004 Oxford English Dictionary, and the online Merriam-Webster Dictions.  If you're considering forming a captive insurance company as part of your overall risk management strategy, you probably have a lot of questions. In this webinar we look at: 1.) Risk -- what it is; what it isn't; how we can pay for it 2.) Insurance -- what it is; what it isn't 3.) Forming and running the captive It's on Friday, January 25 at noon. You can sign up here. The CGL allows an individual to sue for two types of damages: bodily injury and property damage. The policy defines the former as, “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.” According to the dictionary, “bodily” means “of or pertaining to the body,” which, in turn, means, “the entire material structure and existence of an organism.” Injury means, “to undergo physical harm.” Combining these two definitions yields the following definition: “physical harm to the material structure of an organism” -- an unsurprising conclusion. The policy also covers damages from sickness or disease. These are somewhat similar terms to the layman, although using the conjunction “or” to separate them implies a meaningful difference. “Disease” is, “an abnormal condition of an organism or part, especially as a consequence of infection, inherent weakness, or environmental stress.” On the other hand, “sick” means “suffering from or affected with a physical illness.” The difference between the two seems very nuanced. The former is perhaps more severe and more likely to be resulting from external events under the control of the insured (asbestos would be a potential example), while the latter appears to be something such as an extended cold. Let’s apply these definitions to a “slip and fall” in which the plaintiff breaks a bone and also contracts pneumonia while in the hospital. The broken bone is clearly a “bodily injury” while the pneumonia is either a “sickness” or “disease.” We can more or less apply these definitions to any situation where the plaintiff’s body sustains physical damage as well as some type of infection and arrive at the same result: coverage for the damage. Finally, let’s discuss the “including death resulting from any of these at any time” clause. The purpose of this clause is to address one of the most potentially expensive results of a case from a wrongful act: wrongful death: “Any fatality caused by the wrongful acts of another may result in a wrongful death claim. Many wrongful death claims are based upon death resulting from negligence, for example following a motor vehicle accident caused by another driver, a dangerous roadway or defective vehicle, or medical malpractice.[2]” This is an incredibly complicated are of law, far beyond the scope of a blog post. Suffice it to say it’s probably covered. Next, I’ll take a look at property damage. Dictionary definitions are from The American Heritage Dictionary, (c) 1985  A discussion of the CGL’s insuring clause (where the insurer specifically states it will pay a claim in specific situations) requires a reference to §224 of the Restatement of Contracts, which defines a condition as, “… an event, not certain to occur, which must occur … before performance under a contract becomes due.” Two events must occur before an insurer will pay a claim. The first is an “occurrence,” which the policy defines as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” This is the event that harms the plaintiff, who then initiates the second event by filing a “suit,” which is a “… proceeding in which damages … are alleged.” Once a suit is filed, the insured informs the insurer, who will then perform the following acts: We will pay 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. This paragraph contains several key insurer obligations rights. First, the insurer will pay sums “the insured becomes legally obligated to pay.” While a jury verdict is the obvious example, out-of-court settlements are far more common. At minimum, there must be a formal agreement. Second, the insurer has a duty to defend. This is a great advantage for the insured who will not have to pay for an attorney. Third, the insurer may investigate the claim itself, which is reserved to prevent insurance fraud. Finally, the insurer can settle the suit, essentially acting as an agent for the insured. And this leads us to a discussion of several key GGL concepts: occurrence, bodily injury, and property damage. Let’s begin with "occurrence," which is defined in Texas as … … a fortuitous, unexpected, and unintended event. ... We have further said that an intentional tort is not an accident and thus not an occurrence regardless of whether the effect was unintended or unexpected. ... But a deliberate act, performed negligently, is an accident if the effect is not the intended or expected result; that is, the result would have been different had the deliberate act been performed correctly (Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex., 2007)). The three adjectives of fortuitous, unexpected and unintended have one thing in common: a level of randomness so high that an insured cannot plan for the event. For example, a business in Houston, Texas knows that a hurricane will eventually hit the city. But it doesn’t know when; it could be next year or in five years. The high level of unpredictability makes planning impossible and thereby triggers the need for insurance. In addition, an act performed negligently is also a trigger. The legal concept of negligence also contains a random element similar to fortuitousness. In addition, negligence is one of the most common causes of action a third-party will bring against an insured, more or less guaranteeing that the CGL has to cover this cause of action. And that's it for this post. Next up, I'll look at bodily injury and property damage.  If you're considering forming a captive insurance company as part of your overall risk management strategy, you probably have a lot of questions. In this webinar we look at: 1.) Risk -- what it is; what it isn't; how we can pay for it 2.) Insurance -- what it is; what it isn't 3.) Forming and running the captive We'll be hosting this on January 11 at noon. You can sign up at this link. The commercial general liability policy is “the” workhorse business insurance policy, providing coverage for millions of businesses around the country. Over the next few posts, I’ll be taking a look at it from a lawyer’s perspective, looking at key policy language to see what exactly what's covered. Here is an upload of the front page of the latest CGL. Please use it for reference. 
First, a few general observations. An insurance policy is a contract between two parties – the insurance company and the insured. Courts use standard interpretation maxims to determine the contact’s meaning. There are two key rules to keep in mind about this process. First, an insurance policy is an adhesion contract – a contract written entirely by one party. To overcome the inherent advantage this gives the insurer, courts interpret the contract’s terms and conditions against the drafter (the insurance company). From a practical perspective, this means judges will try to find coverage, under the assumption that the insured wouldn’t have purchased the policy to remain uninsured. Second, courts will use a word’s plain meaning to determine what a term means. On that matter, I’ll be using the dictionary (actually several dictionaries) – a lot. Specifically, I’ll reference the American Heritage Dictionary © 1985 (a gift from my Dad a long time ago), the Concise Oxford English Dictionary ©2004, and the online Merriam-Webster Dictionary.
Let’s begin with the policy name (number (1) on the CGL above), which actually contains a fair amount of important data. “Commercial” means, “of or pertaining to commerce,” which, in turn, is “the buying and selling of goods.” -- a remarkably limiting definition. Several dictionaries add that “commercial” also means, “the intent to make a profit.” The word “general” might seem odd at first. I would argue the key definition for this word is “not specialized or limited” and then use this phrase as a way to compare the CGL to far more specific policies like Pollution, Employment Practices, and Cyber-Liability. Each of the latter three policies covers specific risks and none others. Compare those to the CGL which covers “non-specific” risks. “Liability” means, “the quality of being liable” a legal term meaning, “Obligated according to law.” In other words, a court says you’re responsible, which implies a lawsuit. Let’s wrap this up by translating the policy name into “plain English.” The policy covers the costs of court-imposed general liability arising from business operations. Using the above form as a guide, let’s move onto number (2), which states; “”you” and “you’re” refer to the Named Insured shown in the Declarations. Here’s a tip: when you get your policy, make sure the named insured is the correct insured. Be very specific: for example, if your company’s name is Acme, LLC, but the declarations say “Acme, Inc.,” ask the insured to change the name. Number (3): “we” and “us” refer to the insurer providing coverage. This usually isn’t an issued. But, as with the named insured observation, make sure it’s the right company. Number (4): The word “insured” actually covers a much wider number of people than you’d think. There is an entire page and a quarter of potential insureds later in the policy. So, that’s it for this blog post. Think of this as the “intro” piece. Next time, I’ll start in on the far more complex issues of “occurrence,” “bodily injury,” and “property damage.”  Insurance is a grudge purchase; you know you need it, so you buy it. But chances are you've never read your policy.
This webinar will help to cure that problem. We'll explain four basic insurance coverages: commercial general liability, property, employment claims, and cyber liability. At the end, you'll have a high-level understanding of what each policy covers. You can sign up at this link. Traditional insurers have their place as part of a risk financing plan. They have the financial size to absorb massive catastrophic losses (like hurricanes) and extensive claims services, while providing insureds with predictable expenses. All in all, these are clear benefits. But that doesn't mean that your claim will be paid. From the Tampa Bay Times: Nearly one out of every three people who have put in a damage claim from the two hurricanes that hit Florida this year won't receive a nickel to cover the cost, state data shows. The Florida Office of Insurance Regulation released new statistics Tuesday that show hurricanes Hermine and Matthew caused a combined $824 million in insured losses. More than 120,000 claims have been submitted for the two storms combined, but about 42,000 have been resolved with no payments to the property owners. Another 33,000 claims have yet to be resolved. State regulators say the payment rate, so far, isn't unusual. Florida's new insurance commissioner, David Altmaier, told Gov. Rick Scott and the Florida Cabinet on Tuesday that officials are closely watching insurers for trends showing companies are slow to respond to claims or engage in conduct that would prompt a reaction from his agency. This is one of the drawbacks of dealing with large insurance companies. It's also a prime reason why companies often look at establishing and maintaining a risk financing facility.  Insurance is a grudge purchase; you know you need it, so you buy it. But chances are you've never read your policy. This webinar will help to cure that problem. We'll explain four basic insurance coverages: commercial general liability, property, employment claims, and cyber liability. At the end, you'll have a high-level understanding of what each policy covers. You can sign up at this link. It's easy to fall into the trap of thinking that executives won't embezzle from the company. After all, they're highly compensated individuals whose concern about their reputation should keep them in check, right?
No. According to the Association of American Fraud Examiners: Angela Morelock, CPA, CFE, CFF, ABV brings issues of fraud and embezzlement to the forefront. With over twenty years’ experience, she brings a wealth of knowledge and insight to identify and mitigate risk as well as remediation after an incident has occurred. The Association of Certified Fraud Examiners recently put out the 2018 Report to the Nations. In it they identified over 2,600 real cases of occupational fraud across industries, amounting to a median loss of $130,000 per case. In over 20% of those cases, there was a loss of $1 million or more. Because these individuals know intimate details about the company's inner-financial workings, they are able to not only steal money but make it difficult for the company to detect their activities. This explains why it usually takes at least 18 months to uncover complex theft. It also explains why the amount of the loss can be so high -- the length of detection time allows the embezzler to steal a lot. And if you think this can't happen to a fortune 500 company, think again. From the NY Times: Mr. Saikawa, speaking at a 90-minute news conference at Nissan headquarters in Yokohama, described Mr. Ghosn and Greg Kelly, a director who was also arrested Monday, as “masterminds” of a long-running scheme to mislead financial authorities. He offered few details, citing the prosecutors’ continuing investigation. “I feel a big disappointment,” said Mr. Saikawa, who did not bow in deep apology before television cameras, as is customary in Japan. “And I feel frustration and despair, and indignation or resentment.” Mr. Kelly was Nissan’s first American director, appointed in 2012, but had a much lower profile than Mr. Ghosn. Neither of the men could be reached for comment. So -- you're thinking about adding a risk financing facility to your corporate operations. Great! What does that mean? Glad you asked! Please join us on Friday, November 16th at noon for, "What Every Captive Owner Should Know." You can sign up at this link. The following is from the closing remarks by Mr François Villeroy de Galhau, Governor of the Bank of France and Chairman of the Autorité de contrôle prudentiel et de resolution (ACPR), at the 10th international conference on insurance, Paris, 26 October 2018.
In the short term, Brexit is, alas, the issue that will keep us busiest. The ACPR is working actively to ensure a smooth transition, but the time has come for insurers to set their contingency plans in motion. That means talking with supervisors in the UK and Europe. It will also mean getting new authorisations, transferring portfolios, relocating European companies and setting up third-country branches. Even if we hope to avoid it, we must be ready for a no-deal scenario. In this respect, it would be preferable to have European legislation in place to ensure that every relevant issue is dealt with in a harmonised manner; however, if need be, and as a backstop, the enabling legislation presented to the Council of Ministers on 3 October will allow us to take legal steps in France to manage - for those individuals insured in France - situations where UK firms have not already transferred their contract portfolios. I would like to mention that joint work by the European Central Bank and the Bank of England to assess financial risks looked specifically at insurance contracts, and we believe the risks in this area to be manageable, provided we can properly guarantee the protection of policyholders. In the medium term, against the backdrop of the digital revolution, cyber-security is a growing concern for all businesses. Insurers are of course among the main ones affected because they hold sensitive data. Your industry would certainly be well advised to draw on your experience with cyber-risk to build up your own cyber-insurance offering. I come last to climate risk, which occupies the longest time horizon of all, but which nevertheless requires tangible action to be taken right now. As today's discussions have shown, the natural disaster insurance regime needs an overhaul and I know that reforms are coming in 2019. But this is also a very important area of investigation for supervisors because, over the long run, climate stability is a determining factor in financial stability. In June of this year, the ACPR published a study revealing that an estimated 10-20% of all securities held by French insurers are exposed to risk in relation to the transition to a low-carbon economy. The Banque de France and the ACPR have set up and are actively coordinating the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). Launched in Paris last December, the NGFS started out with eight trailblazing supervisors but has since grown to include 19 members and five observers, including the Sustainable Insurance Forum (SIF). We are working hard on two subjects where insurers are in the vanguard: disclosure of current climate risks and the projection of dynamic stress tests based on future risks. A report detailing the network's first year of work and making recommendations will be presented at a conference in Paris on 17 April next year. |
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