 My first post on the CGL’s “Recall of Product” exclusion discussed the exclusion’s triggering event or when it happens. This post will explain what costs are excluded.
Here is the complete text of this part of the exclusion: This insurance 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 your product, your work, or impaired property. The verb “incur” -- which means, “become subject to as a result of one’s actions,”[1] -- is central to this exclusion. The verb implies an event caused the claimant to perform a single or multiple actions. As a result, the claimant now seeks reimbursement for a “deprivation as by negligence or accident,”[2] “[a]n amount paid or incurred in payment,”[3] or, “[t]he cost … required for something incurred in the performance of a job or task.”[4] The claimant can reduce all three nouns to a dollar amount. The following events cause the damage. In these examples, the insured’s work or product has cause some type of quantitative damage, which forces the “claimant” to seek indemnification from the insurer. Withdrawal and recall are discussed in the first installment on this exclusion “Loss of use:” “of” is a function word[5] that implies the word that follows is “the object or an action demonstrated or implied by the preceding noun.” “Use” is the verbal of “use” which means to, “take hold or deploy as a means of achieving something.”[6] “Loss of use” means the claimed is deprived of the ability to deploy an item towards a particular end. “Inspection” is a verbal noun of the transitive verb “inspect,” which means, “to look at closely, typically to address quality.” Here, the insured’s defective product or work has been incorporated into the claimant’s goods or work, forcing the claimant to look for the damage. “Repair” is the verbal noun of “repair,” a transitive verb that means to, “restore to a good condition.”[7] Here, the claimant has already fixed the problem and is looking for indemnification. “Replacement” is a verbal noun of “replace,” which means, “provide a substitute for.”[8] Here the claimant has swapped a new component for the insured’s defective part. “Adjustment” is the verbal noun for “adjust,” which means to “alter slightly in order to achieve a desired result.”[9] Here, the insured’s defective part or work as forced the claimant to change his equipment or operations. “Removal” is the verbal noun of, “remove” which means, “take away from the position occupied.”[10] Here, the claimant has simply shed the insured’s product or work. “Disposal” is the verbal for “dispose,” which means, “get rid of.”[11] Here the claimant has thrown the defective good away. Like most exclusions, the above drafting is broad and should apply to almost all potential situations. [1] The Concise Oxford English Dictionary (“Oxford”), © 2004 p. 722 [2] The American Heritage Dictionary, Second College Edition (“American Heritage”), © 1985, p. 743 (the word “loss” is a noun derived from the verb “lose”) [3] American Heritage, p. 320 (“cost”); see also Oxford at 323 (“legal expenses”) [4] Oxford at 501(“expense”) [5] https://www.merriam-webster.com/dictionary/of [6] Oxford at 1592 [7] Oxford at 1218 [8] Oxford at 1219 [9] Oxford at 16 [10] Oxford at 1217 [11] Oxford at 414
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 Another “your product” exclusion contained in the CGL deals with the potential liability caused by product recall. The exclusion’s purpose is to prevent the CGL insurer from becoming liable for this risk. I’ll explain this exclusion in two parts, starting with the when this exclusion applies. Here is the specific policy language: This insurance does not apply to (title of subsection) recall of products, work or 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 of suspected defect, deficiency, inadequacy, or dangerous condition to it. Withdraw means “to take back or away,”[1] while recall is “an official order to return.”[2] The former is a voluntary action while the second is an official order. Both verbs are past tense, meaning each action is completed.[3] “Market” is the most commonly used noun to describe the place or location where goods are bought and sold[4] while “use” is the “application or employment of something for some purpose.”[5] The former implies that the good is still on the shelves while the latter connotes that the good has already been employed for some purpose. “Because of” is a conjunction, which means, “By reason of.”[6] The words following the phrase justify why the good was withdrawn or recalled. Here, there are three reasons:
The purpose of listing a group of nouns which describe the problem is to case as wide a net as possible with the intention of incorporating all known possibilities – which this description does well. [1] American Heritage Dictionary, Second College Edition, © 1985, p.1387 [2] American Heritage, p. 1032 [3] The Chicago Manual of Style, 16th edition, © 2010 p. 233 [4] The Concise Oxford English Dictionary 11th Edition, © 2005 p. 874 (“an arena in which commercial dealings are conducted.”) [5] American Heritage, p. 1331 [6] Oxford p. 119 [7] Oxford, p. 375 [8] American Heritage p.375 [9] American Heritage, p. 1399 [10] Oxford, p. 16 [11] Oxford 717 [12] American Heritage, p. 365 [13] American Heritage, p. 861  Risks related to "your product" (which, for the purposes of this quick post, is a product made by the insured or work performed by the insured) are excluded from the standard ISO CGL policy (please see here, here, and here).
As of this writing, Boeing is experiencing problems related to their product. Several countries have banned one of their airplanes from service due to several recent crashes. This situation highlights several risks that are typically financed by a risk financing facility or "captive insurer." These include: 1.) The liability related to the product 2.) The cost of public relations damage to the company 3.) Some of the lost income caused by the problem 4.) The cost of recalling the product from the market 5.) Legal expenses related to the incident. For companies that make a product and place it into the "stream of commerce," a captive might make sense.  The previous post discussing the “your work” exclusion explained the CGL’s coverage exception for the physical work performed by or on behalf of the insured. That exclusion also applies to the insured’s communications meant to assure a third party regarding the specific attributes or qualities of the insured’s work. Here is the exact wording of the exclusion. This insurance does not apply to property damage to your work arising out of it or any part of it. “Your work” includes warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of “your work.” A “Warranty” is “an assurance by the seller of property that goods or property are as represented or will be as promised.”[1] The verb “represent” means, “to describe as an embodiment of a specific quality.”[2] Representation is a noun derived from the verb.[3] Both nouns are categories of the broader statements made by a seller to a buyer that represent certain aspects of the goods sold. This exclusion applies to five specific types of statements regarding goods:
The combined impact of these five adjectives is very broad and should cover all statements that the insured could potentially make about his “work.” For a further discussion of the concepts involved, please see the Uniform Commercial Code's discussion on warranty. [1] The American Heritage Dictionary, Second College Edition, © 1985, p. 1364 [2] Id at 1049 [3] The Concise Oxford English Dictionary, Second Edition, © 2004, p. 1511. The suffice -tion is used to make a noun from a verb. [4] Oxford, p. 537 [5] The American Heritage Dictionary observes that fitness means the good is “right or correct in view of the circumstances.” p. 508 [6] Oxford, p. 1174 [7] Online Merriam-Webster Dictionary, https://www.merriam-webster.com/dictionary/quality, last visited on March 3, 2019 [8] American Heritage, p. 430 [9] Oxford. p. 1064 [10] Oxford, p. 47 [11] American Heritage, p. 1331  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  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. |
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