Land Of Exclusions

Insurance Bureau of Canada (IBC) published a wide-ranging series of advisory wordings for exclusions to commercial general liability (CGL) policies in 2005. For the first time since 1986, 23 changes were made to clarify coverage intent, standardize individual endorsement wordings and address legal changes in the Canadian environment.

Historically, the CGL policy has been designed to indemnify a business (insured) facing claims by a third party that allege damage to tangible property or bodily injury resulting from an occurrence such as an accident or mishap, including negligence by the insured. In some legal cases prior to 2005, particularly in certain industries like construction, court interpretations were potentially stretching the coverage net of the CGL policy.

There are no specific statistics or surveys on the level of adoption by commercial insurers, but IBC senior counsel Mario Fiorino says the association “is generally content with the take-up” of the advisory wordings. “We feel that they have clarified underwriting intent in several important areas,” he says. “The changes, we think, are accomplishing the underwriting objectives.”

Specifically, the advisory wordings addressed several developments and legal interpretations by Canadian courts, such as the “continuous” or “triple” trigger theory and the scope of contractual liability. But they also codified certain exclusions that had come to be prevalent in the CGL policy via individual endorsements, such as sexual abuse, asbestos, data, mould/fungi, nuclear, terrorism and war. In addition, the wordings imposed a new “general aggregate” limit designed to reduce the potential amount payable by the CGL insurer in situations in which there is a frequency of claims within one policy period.

Some observers, such as Christopher Dunn, a partner with Dutton Brock and an expert on CGL policies in Canada, agree the wordings have, so far at least, withstood legal tests. He notes that prior exclusions made by endorsement, such as mould and the specification that electronic data is not tangible property, have already been tested in favour of insurer wordings, or not challenged at all.

However, Dunn cautions that even four years is not long enough to gauge whether recommended exclusionary wordings are bulletproof. “If you look at an occurrence that happened in 2005 or 2006, it can easily take four to five years for a case to wind its way through the courts,” he says. “This is in many ways like trying to turn an ocean freighter on a dime. And then once it finally starts to turn, you realize there are all these other rocks in your path.”

In particular, Dunn argues two “big areas” addressed by the IBC wordings may yet yield future litigation — the continuous trigger theory and the scope of contractual liability. On the first issue, courts in Canada have tried to define “trigger theories” to demonstrate when losses actually occur in a CGL policy. In all, there are four trigger theories: exposure, manifestation, continuous (or triple) and injury-in-fact.

TRIPLE TRIGGER THEORY

Of these, the continuous or triple trigger theory has caused insurers the most concern. From a legal perspective, it holds that from the time the damage occurred — and continued to occur — to the time the damage became manifest, any and all policies in effect during that range of time would apply to the loss. The clear result of this legal interpretation is that many CGL policies, and insurers, could potentially be on the hook for one claim.

In one major case, Alie et al v. Bertrand & Frre, Lafarge Canada (2002). the Ontario Court of Appeal held that, depending on the policy wording, coverage under a CGL policy could still be triggered even though the damage was sustained to some extent before the policy period began. One of the longest and most costly trials in Canada, the case lasted more than 15 months and included arguments from lawyers representing 23 affected insurers. It involved the long-term deterioration of concrete foundations due to improper concrete mix, requiring the replacement of the foundations at considerable cost.

In its revisions, IBC inserted wordings to preclude coverage for known losses that occurred prior to the policy period. Wordings were also added to explain when bodily injury or physical damage is deemed to have been known to have occurred. The goal was to overcome the trend of the courts to expand the time period covered by a continuous trigger theory, according to IBC documents.

Dunn says although this revised language could withstand a court test, “it will not likely have the effect insurers desire of negating coverage as soon as the damage becomes known to the insured.” He argues the so-called “Montrose provision” will apply only if there is property damage or bodily injury known to the insured of a sufficient magnitude to trigger a reporting obligation under any current or prior liability policy. In other words, any knowledge of such a loss would have to be clear, significant and obvious.

“The insured would not likely be denied coverage for losses that it was aware of, unless a court finds that such damage was sufficient to have met the policy requirement that it should have been reported under the CGL policy to the insurer,” Dunn says.

CONTRACTUAL LIABILITY

The second notable area of the amended CGL exclusion wordings, according to Dunn, is the revision regarding contractual liability. In recent years, insurers have witnessed a trend of smaller clients assuming the liability of bigger firms through legal contracts and hold harmless agreements. Insurers may believe they are insuring only the business inter-ests of a small contractor for example, but a legal contract with its suppliers may result in much broader liability and scope of coverage.

Dunn cites the example of a cable installer doing work on behalf of a large cable company. A contract may place liability on the installer for any damages, even if the cable company itself was negligent.

To respond, IBC changed the contractual liability coverage language to exclude coverage for the “sole negligence” of the indemnified party (or additional insured). It also modified the definition of “insured contract.” The goal was to exclude what Dunn calls the “gratuitous assumption of liability by the insured.”

For Dunn, this revised wording would likely be upheld in court, although it has yet to be tested. “Where the insured is in whole or in part liable for the loss, an underwriter can accept and properly price the risk,” he says. “Where the assumption of liability by the insured is gratuitous (without fault), this is not capable of being priced, as the underwriter is effectively insuring the operations of the third party.”

CGL AND CONSTRUCTION

The construction industry has tended to be a lightning rod for litigation. Several recent cases involving the role of subcontractors — which is not directly related to the IBC exclusion wordings — have created some concern for insurers. At issue is how far courts are willing to expand the definition of “subcontractor” to provide coverage for work done that may otherwise have been excluded under a CGL policy.

In AXA Insurance (Canada) v. Ani-Wall Concrete Forming Inc. (2008), builders sued Ani-Wall because defective concrete resulted in the need for removal and replacement of footings and foundations. Dominion Concrete supplied the concrete to Ani-Wall. AXA acknowledged the damage to the houses constituted property damage within the meaning of the CGL policy, but it held that the loss was excluded under the common “Your Work” exclusion. Ani-Wall argued that Dominion Concrete was not a supplier, but a subcontractor and thus was covered under the subcontractor exception to the “Your Work” exclusion. The Ontario Court of Appeal found in favour of Ani-Wall.

“The definition of ‘supplier’ versus ‘subcontractor’ is a critical difference,” Dunn says. “In AXA v. Ani-Wall, the court stretched the definition of subcontractor as far as it can reasonably be stretched… The concern is that they may go further in the future. If mere suppliers are found to fall within the exception as subcontractors, this would dramatically expand the scope of the insurer’s exposure.”

Interestingly, in a similar case in Western Canada, the British Columbia Court of Appeal came to the exact opposite conclusion. In Progressive Homes Limited v. Lombard General Insurance Company of Canada (2009), the issue at hand involved determining whether a general contractor should be afforded coverage for damage to a leaky building.

In addition to its CGL policy, the insured, Progressive Homes, had purchased a Broad Form Property damage endorsement to expand coverage after completion of the project. The endorsement indicated only that the policy would not cover work performed by the named insured. It did not mention subcontractors, whose work would presumably be covered under the endorsement. In a 2-1 ruling, the B.C. Court of Appeal held that there was no defence coverage to a general contactor for a subcontractor’s work.

OTHER ENDORSEMENTS

Of course, the construction industry is just one of many that rely on coverage and interpretation of the CGL policy. From retailers to transportation firms to manufacturers, the CGL is the most commonly purchased form of commercial insurance protection.

Given the widespread scope of the policy, one potential exclusion conspicuous by its absence in the 2005 IBC advisory wordings relates to flu pandemic. Even with the experience of SARS in Toronto in 2003 (which resulted in insignificant claims activity), the IBC did not create an advisory pandemic exclusionary wording. Now with the threat of H1N1 and a potentially busy flu season, there is still no reason to jump the gun on any pandemic exclusion wording, according to the IBC’s Fiorino.

“The CGL policy will respond to bodily injury or property damage, but the general feeling is that there will not be widespread claims (due to flu pandemic),” says Fiorino. “That does not mean there will not be creative pleadings to try to trigger the duty to defend or indemnify.”

While it is unlikely that a virus or flu would result in “damage to tangible property,” a pandemic could lead to coverage claims under the bodily injury wording of the CGL policy, according to Dunn.

“The CGL responds to bodily injury caused by an ‘occurrence,’ which is defined as an ‘accident,'” Dunn says. “Anything unexpected or unintended from the standpoint of the insured qualifies as an accident. Even courting a risk may still qualify as fortuitous. It is hard to imagine how an insured could allow a flu to spread almost intentionally or with such a degree of certainty that it would not be seen as ‘unexpected or unintended.’ As such, there are few scenarios where one could see the CGL not responding to an allegation of negligence or breach of duty resulting in the spread of or exposure to a pandemic unless specific exclusionary language is developed and instituted.”

According to the Marsh 2009 Risk Alert report, H1N1 Influenza: Preparing for and Responding to a Pandemic, “the standard (CGL) policy typically responds to bodily injury, sickness, or death allegedly caused by the insured. Insurers are, therefore, likely to closely scrutinize the alleged causal connection between a claimed infection or exposure and the actions of the insured. Because insurers take the position that the policy extends only to actual injuries, they are also likely to look closely at the nature of injuries alleged by third parties and may reject claims based on fear of exposure, exposure without actual symptoms, or other mental or emotional injuries.”

A proposed new advisory wording for a pandemic endorsement is, in fact, waiting in the wings as of press time. A pandemic endorsement proposed by the Toronto Insurance Conference (TIC) and backed by the Insurance Brokers Association of Canada (IBAC) is now before the board of the Insurance Bureau of Canada (IBC).

As proposed, the pandemic endorsement would take effect during a declared emergency and extend the term of an expiring policy or suspend the cancellation notice period for a policy pending cancellation. The proposed extension of an expiring policy may be of varying length, depending on the length of the emergency, but can be up to a maximum of 120 days (90 days, plus up to 30 days’ time allowed for the resumption of business).

The endorsement includes advisory wording, meaning that even if IBC’s board adopts the endorsement, it would be left up to individual insurance companies to decide whether or not they would adopt the same wording. The proposed endorsement would not apply automatically to any property and casualty insurance policies.

Apart from potential pandemic triggers, time will tell how the IBC CGL policy advisory wordings will be interpreted to clarify underwriting intent and scope of coverage. Ultimately, it is the courts that will provide insurers — and clients — with guidelines on what is and what is not included in the CGL policy.”

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Two big areas addressed by IBC wordings may yet field future litigation — the continuous trigger theory and the scope of contractual liability.

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Insurers are likely to closely scrutinize the alleged causal connection between a claimed infection or exposure and the actions of the insured.