Commercial General Liability Policies

It’s a Bird! It’s a Plane! But Is It Insured? California Case Reinforces Importance of Liability Coverage for Drone OperationsAs the popularity and diverse nature of drones increase, the liability risks associated with drone operations increase as well. A California federal judge recently held that a standard CGL aircraft exclusion barred liability coverage for injuries related to drone operations. The case arose out of a wedding reception gone wrong when a wedding photography company operated a drone to capture the big day. While the drone was hovering at eye level, a guest collided with the drone and sustained serious injuries, including loss of sight in one eye. The court found that the drone fell under the ordinary meaning of the word “aircraft” as defined in the Merriam-Webster’s Collegiate Dictionary, even though the policy did not define the term “aircraft.” The court ruled that the insurance company could recover the costs it spent defending the wedding photographer because the exclusion meant that the insurer did not have an obligation to defend the photographer against the suit filed by the injured wedding guest.

In a previous post, we advised against relying on the ambiguity of the term “aircraft” to avoid application of the aircraft exclusion in the standard CGL policy. The ambiguity argument has become all the more dangerous as courts like this one decide that a drone is an “aircraft.”

Reliance on a CGL policy becomes more problematic because many CGL policies explicitly exclude coverage for drones. For example, Commercial General Liability Form CG 21 09 06 15 excludes coverage for an “unmanned aircraft,” which is defined as an aircraft that is not designed, built, or modified to be directly controlled by person on or in the aircraft.

CGL policies can provide liability coverage for drone operations by endorsement. Commercial General Liability Form 24 50 06 15 provides coverage for an unmanned aircraft. Coverage A provides coverage for bodily injury and property damage, while Coverage B provides coverage for personal and advertising injury. You may purchase either coverage or both.

A CGL policy does not provide property coverage for the drone or its cargo; it provides liability coverage only. Commercial Property Form 04 14 12 16 protects drones that you own, rent or lease if you have a contractual obligation to provide insurance. This endorsement is appropriate for a drone if you are not transporting cargo. If you choose to endorse your standard policy with this form, carefully describe your operation in its entirety in the schedule to procure complete coverage. Commercial Inland Marine Form IH 00 61 01 16 is a separate form that covers cargo, but its coverage is limited because it lacks business interruption coverage.

A specialty drone policy generally provides liability coverage for drone operations, as well as property coverage for the drone itself. Because specialty policies are customizable, you can select what coverage you want. Both annual policies and on-demand policies are available. On-demand policies provide time-limited coverage for specific operations, while annual policies provide coverage throughout the policy period. Insurance companies offering specialized drone policies tout their comprehensive coverage for those companies that regularly utilize drones. Both new entrants into the insurance market as well as traditional aviation insurance companies are rushing to provide this coverage, thus expanding coverage options for drone operators.

For more information on drone coverage, please view our webinar.

Policyholder Diligence Ensures You’re InsuredPolicyholders take notice – a recent New York case highlights the importance of thoroughly analyzing and understanding all policy language to minimize project risk and ensure proper coverage. As an illustration, the Court of Appeals of New York recently held that a named additional insured was not covered under an insurance policy because the plain meaning of the language in the policy endorsement required a written contract between the policyholder and the additional insured.

In Gilbane Bldg. Co./TDX Construction Corp. v. St. Paul Fire & Mar. Ins. Co., the Dormitory Authority of the State of New York (DASNY) contracted with Samson Construction Company as general contractor for the construction of a new building. DASNY also contracted with a joint venture, formed by Gilbane Building Company and TDX Construction Corporation (the “JV”), to serve as construction manager on the project. The contract between DASNY and Samson required Samson to procure general liability insurance for the project and name the JV as an additional insured. Samson obtained this coverage from Liberty Insurance Underwriters.

Thereafter, DASNY sued Samson and the project architect. In turn, the architect filed a third-party complaint against the JV, which then provided notice to Liberty seeking defense and indemnification. Liberty denied coverage, and the JV initiated suit against Liberty, arguing that it qualified for coverage as a named additional insured. The New York Supreme Court denied Liberty’s motion for summary judgment and held that the JV was an additional insured under the applicable insurance policy. The Appellate Division reversed and the Court of Appeals affirmed.

The court reviewed the language of the additional insured provision which read, in relevant part, “an insured [is] any person or organization with whom you have agreed to add as an additional insured by written contract…” Here, the JV and Samson did not have a written contract with one another. Nonetheless, the JV argued that the written contract requirement conflicted with the plain meaning of the language in Liberty’s endorsement, “well-settled rules of policy interpretation,” and the parties’ reasonable expectations. The court disagreed, and found that the language was facially clear. It concluded that Liberty’s endorsement would only provide coverage to the JV if Samson and the JV entered into a written contract because “unambiguous provisions of an insurance contract must be given their plain and ordinary meaning.”

The court then explained how the outcome would differ if the provision did not include the word “with.” In that case, the endorsement would have provided coverage to “any person or organization whom [Samson had] agreed by [any] written contract to add…” Since Samson already contracted with DASNY to add the JV as an additional insured, coverage would have been effective as to the JV.

Regardless of the type of insurance policy at issue, it is critically important to thoroughly analyze the policy documents to ensure an accurate understanding of the language used. Individual policyholders often take policy language at face value, if they read the terms of the policy at all, and never question what coverage they have actually purchased. Similarly, when the policy at issue is part of a larger set of contract documents, companies often become complacent during the contract review process—especially when certain documents appear boilerplate or seem like only a minor formality to finalize a contract. Oftentimes, the perceived need for reviewing policy language is further dampened by the fact that the insurance policy comes into existence after the project contract is signed, such as the policy in this case.

As a result of complete oversight, the hurried nature of review, or the overwhelming volume of contract documents requiring review, policyholders can easily adopt a reading of policy language that might reflect reasonable expectations but does not necessarily adhere to the plain meaning of the language. Diligence must extend to the review of insurance policies because ignoring the actual language of the policy can result in significant risk exposure.  If you have any questions or concerns about your current insurance coverage or upcoming project needs, please contact Alex Thrasher and the team at Bradley to learn more about ways to ensure that you’re covered.

Federal Court Enters Powerful Duty to Defend Order in MaineIn addition to being a great place to find lobster, Maine may also be one of the country’s best jurisdictions for a policyholder seeking defense from its commercial general liability carrier.

In Zurich American Ins. Co. v. Electricity Maine LLC, the U.S. District Court for the District of Maine found against Zurich and in favor of Electricity Maine LLC, one of several defendants in an underlying class action lawsuit alleging pricing violations against the power company. Most notably, the court confirmed that Maine has a particularly low threshold for triggering an insurer’s duty to defend. The court found an “occurrence” despite Zurich’s argument that all the underlying allegations involved intentional conduct. And perhaps most shockingly, the court found the possibility of “bodily injury” based solely on the underlying complaint’s request for “actual damages in an amount to be proven at trial.” There is no mention in the complaint of emotional distress or mental anguish, but the court found an allegation of “bodily injury” anyway, relying on Maine’s broad duty to defend rules.

Based on this decision, a CGL policy can be triggered in Maine by virtually any general allegation of damage caused by negligence. Maine follows what it calls the “comparison test” and seems to allow for a duty to defend unless there is absolutely no chance of an eventual judgment that would fall within the scope of coverage provided by the policy.

Once again, we have an important reminder on two fronts. First, the duty to defend should be broadly construed, and some courts are willing to give the policyholder every benefit of the doubt, particularly in the face of ambiguous underlying allegations. Second, never forget choice of law. If you can go to Maine to resolve a duty to defend dispute (or to eat lobster), do it.

Insurance Purchasers Beware: Florida Court Finds No Duty to Defend Data Breach Claim Under CGL Personal & Advertising Injury CoverageOn November 17, 2017, a U.S. district court in Florida narrowly construed personal and advertising injury coverage for data-breach claims under a commercial general liability policy. In Innovak International, Inc., v. The Hanover Insurance Company, the court held that The Hanover Insurance Company (the insurer) has no duty to defend Innovak International, Inc. (the insured), against a putative class action arising from a data breach that compromised users’ personal private information (“PPI”).

The court narrowly construed the policy’s definition of “personal and advertising injury” that included “[o]ral or written publication in any manner of material that violates a person’s right of privacy.” Despite the absence of a requirement that the insured publish that material, the court held that the policy only extended coverage to publication by the insured.

The court held that “[t]he act that violates the claimants’ right of privacy is the publication of their PPI, and the Underlying Claimants have not alleged that Innovak directly or indirectly committed that act.” The court rejected Innovak’s arguments that the phrase “in any manner” includes both “direct publication of PPI and negligent failure to prevent third parties from obtaining the PPI.” Following a New York state court decision (Zurich American Insurance v. Sony Corporation of America), the Florida court construed the phrase “in any manner” to refer to the medium rather that the sender of the information.

The court also rejected Innovak’s argument that the putative class action complaint alleged that Innovak indirectly published the PPI. The court held that the complaint clearly alleged that Innovak failed to protect the users’ PPI by failing to implement sufficient data security measures – which is not an allegation of publication at all. The court distinguished a California case, Hartford Casualty Insurance Co. v. Corcino & Associates, et al., because that complaint alleged that the insured posted private information on a public website, and the court did not address the same legal issues.

Finally, the court made short shrift of Innovak’s argument that Hanover waived its defense by omitting it from its denial letter, because the particular defense was included within the letter.

This case serves as a reminder that organizations should not assume that their commercial general liability policies will cover losses from data breaches – even if the organization purchases a data breach enhancement, as Innovak did. The policy’s Data Breach Form provided only data breach services and paid only data breach expenses and expressly excluded “fees, costs, settlements, judgments or liability of any kind” arising out of a data breach. The lack of coverage under the Data Breach Form left Innovak with only the personal and advertising injury coverage, which, in this instance, did not extend to the putative class action against Innovak.

As often mentioned on this blog, prudent insureds should purchase dedicated cyber insurance coverage if at all possible. Smaller organizations may rely on coverage enhancements to their existing insurance programs but should recognize the risk of this strategy. Under either a traditional or specialized cyber insurance program, all insureds should scrutinize policy language to understand the scope of coverage and –more importantly – the limitations of that coverage for data breach and other cyber-related exposures.

The Professional Services Exclusion: You May Not Have the Coverage You ThinkCould you be providing “professional services” that might lead to liability excluded by your commercial general liability policy? The answer may be different than you think.

A recent unpublished Eleventh Circuit opinion provides a reminder that it is important to review your CGL policy and understand whether you are covered. The facts upon which the court relied in Witkin Design Group, Inc. v. Travelers Property Casualty Co. of America appear simple enough. An intersection traffic accident resulted in the death of a young boy. The resulting lawsuit included a negligence claim against the landscape architect who designed and constructed the intersection. The landscape company called on its CGL insurer to defend and indemnify it from the claim. You can imagine the company doing so with the thought that a liability claim had been brought and its general liability policy would provide coverage for that claim.

Like most CGL policies, however, this CGL policy contained a professional services exclusion that excluded coverage for claims “arising out of the rendering of or failure to render any ‘professional service’.” Professional services were defined by the policy as “any service requiring specialized skill or training.” The CGL policy said that professional services included:

a. Preparation, approval, provision of or failure to prepare, approve, or provide any map, shop drawing, opinion, report, survey, field order, change order, design, drawing, specification, recommendation, warning, permit application, payment request, manual or inspection;

b. Supervision, inspection, quality control, architectural, engineering or surveying activity or service, job site safety, construction contracting, construction administration, construction management, computer consulting or design, software development or programming service, or a selection of a contractor or subcontractor; or

c. Monitoring, testing, or sampling service necessary to perform any of the services included in a. or b. above.

But, these are merely non-exhaustive examples. The Eleventh Circuit was clear: “the professional service exclusion applies to any service requiring specialized skill or training.” Because the claim for which the landscape company sought coverage arose out of its design and construction of the intersection, which required specialized skill or training, the court found the professional liability exclusion applied, resulting in no coverage under the CGL policy.

The Eleventh Circuit’s opinion is not ground-breaking. Whether an insured’s conduct constitutes excluded “professional services” is a frequently litigated coverage question, which turns on policy language, the insured’s specific conduct, and applicable state law’s definition of professional services. Other recent examples of cases in which courts have found no coverage because of professional services exclusions include a claim against a home inspector alleging failure to discover insect and water damage; a claim against a real estate broker who failed to disclose an adverse property condition; a claim against a property manager for failing to properly supervise construction; and a claim against an insurance company for misrepresenting insurance policies.

Simply because a professional services claim is excluded by the CGL policy, however, does not always mean that the insured is left holding the bag without insurance coverage. Many companies purchase professional liability policies, which are errors and omissions policies intended to provide coverage for claims arising from the specific professional services in which the insured is engaged. It is critical to understand, however, that these policies may define “professional services” differently than the insured’s CGL policy, and care should be taken to ensure that your professional liability policy covers what your CGL policy may exclude.

So, while the Eleventh Circuit’s recent decision is not ground-breaking, it does provide a useful reminder to think about whether you have the liability coverage that you think you have.  We suggest that you consider the following questions, and discuss them with your broker or attorney if necessary:

  • Does my CGL policy have a “professional services” exclusion?
  • Am I engaged in conduct that could expose me to liability claims and that could be construed as a “professional service” as defined and excluded by the policy?
  • Do I need to purchase a professional liability policy to protect from those claims, and does that professional liability policy cover what the CGL policy excludes?

It is better to know the answers to these questions now, rather than find out after a claim has been filed that you don’t have the coverage you thought. After all, It Pays to be Covered.™