Commercial liability insurance coverage

An often-seen version of the insurance agreement in commercial general liability (CGL) policies provides that the insurance company will pay “all sums” that the policyholder is “legally obligated to pay” for liabilities “imposed by law” or “assumed”. under contract.” In an effort to exclude coverage for liabilities arising out of or in connection with the contract, insurers have argued that the “statutory” liability strand refers only to liabilities based on tort, thereby seeking to avoid contract-related liability. This argument, however, challenges the clear insurance language defining how CGL policies are triggered. This article explains why, on a correct reading of insurance language, contractual liabilities should be eligible for the “statutory” part of a CGL insurance agreement.

Proper analysis begins with well-established principles of policy interpretation. Generally accepted principles of policy interpretation require courts to first consider the wording of the insurance policy and interpret it broadly in favor of coverage. The black letter principles direct the courts to refrain from rewriting the insurance policy or disregarding the wording of the policy or making it “mere excess”. Often the courts must also read the language taking into account the reasonable expectations of the policyholder. Finally, insurers, who are masters of the language of policies written by insurers such as that used in CGL policies, must state any limitation of coverage in clear and explicit language and bear the burden of demonstrating that an exclusion applies. to exclude coverage for all insureds of the insured. loss.

Applying these principles, it follows that an insurance contract covering liabilities “imposed by law” does not limit coverage to tort liabilities. If that was the intention, insurers could have made that meaning clear; they do not have. For example, insurers could have written the language to limit covered liabilities to those “imposed by law.” [in tort law]or any other type of specific law (for example, statutory, regulatory, administrative or common law). Further, on a reasonable interpretation, obligations under a contract are “imposed by law”. All contractual liability is based on the existence of obligations created by the force of law which are ultimately “imposed by law”. Moreover, if insurers wish to define coverage as applying only to claims unrelated to the contract, it is their duty to do so. Insurers cannot retroactively read restrictive language into a policy in an attempt, at the time of claims, to reduce the extent of coverage for liability “imposed by law”.

An illustrative case applying the above reasoning is the historical case, Vandenberg v. Superior Court, 21 Cal. 4th 815 (California 1999). In Vandenberg, the California Supreme Court held that the “legally obligated to pay as damages” provision suggested “no special or legalistic meaning to the phrase”. (ID. at 840.) According to the court, “a reasonable layman, aware that he or she is purchasing a ‘general liability’ insurance policy, would not conclude that this duration of coverage refers only to the liability asserted in tort, and therefore entirely excludes liability based on a theory of breach of contract.ID.) Vandenberg provides a roadmap for policyholders seeking coverage for contractual claims under “statutory” insurance language.

In this regard, the coverage of tort versus contractual liability has also been challenged in the context of the words “legally obliged to pay” in a CGL insurance agreement. Courts in New York, for example, have held that these terms encompass both contractual and tort liabilities. See, for example, Charles F. Evans Co. v. Zürich Ins. Co.731 NE2d 1109 (NY 2000); Hotel des Artistes, Inc. c. General Accident Ins. Co. of Am.775 NYS2d 262 (App. Div. 2004); Touchette Corp. vs. Merchant Mut. Ins. Co.429 NYS2d 952, 954 (App. Div. 1980).

In denying coverage, the insurance companies asserted that the contractual liabilities are not “imposed by law” because the insured voluntarily assumed the contract. The insurers then argue, despite having no policy wording to support the argument and ignoring the ambiguities, that the “statutory imposed” wording limits indemnification to tort liability only. While this reasoning conflicts with the plain language of the policy (and the case law described above) and ignores ambiguity, at least some federal courts have accepted the position of insurers. See, for example, in general, Busch Properties, Inc. c. National Union Fire Ins. Co. of Pittsburgh, Pennsylvania.815 F.3d 1123 (8th Cir. 2016) (allegedly applying Missouri law); VBF, Inc. vs. Chubb Grp. of ins. cos.263 F.3d 1226 (10th Cir. 2001) (allegedly applying Oklahoma law).

Insurers have also argued that an insurance agreement covering liabilities “imposed by law” or “assumed by contract” should be read disjunctively. In other words, the “statutory” part cannot cover contractual liabilities, because any contract-related liability falls exclusively under the “contract-based” part. This position, however, ignores the well-established principle of contractual interpretation that expressions or clauses joined by the disjunctive “or” suggest that what immediately follows is the first of two or more alternatives. A contractual liability can therefore be covered if it is “imposed by law”, whether or not it is “assumed by contract”.

With a thorough analysis of applicable law and policy language, applied to the facts, policyholders faced with contractual liabilities and “statutory imposed” insurance language can make a strong case for coverage.