16.3 Types and Structure of Policies

• Library: Insurance Law in Virginia (Virginia CLE) (2020 Ed.)

16.3 TYPES AND STRUCTURE OF POLICIES

16.301 In General. There are two types of CGL policies, standard and manuscript. The standard policy is a form ⁴ issued with endorsements that attempt, usually in a heavy-handed way, to modify the standard product to fit the coverage the insurer has agreed to extend. A manuscript policy is a one-of-a-kind policy specifically drafted for a particular insured either by the insurer or the broker. The insured or the insured's counsel may sometimes participate in the drafting of a manuscript policy, although this is not the usual case. Today the standard policy is widely used, while the manuscript policy has become increasingly rare.

A typical standard policy is divided into eight parts, consisting of

		1.	A declarations page;
2.	The insuring agreement;
3.	Who is insured;
4.	Limits of liability;
5.	Definitions;
6.	Conditions;
7.	Exclusions; and
8.	Endorsements.

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The declarations page is prepared individually for each policy; the other parts are standard provisions of the form policy. Each of the endorsements is usually itself a standardized form appended to the policy.

16.302 The Declarations Page. The declarations are usually listed on one or two pages appended to the general policy form. They summarize or particularize certain information related to various sections of the policy form, such as the identity of the insured, the policy period, the limits of insurance, the deductible if any, and the premium. The declarations may also list by name and number the endorsements attached to the policy.

Some CGL policies provide coverage subject to a deductible or a self insured retention (SIR), which is listed on the declarations page. The deductible is a dollar amount of a potential loss under an insurance policy that the insurer may recoup from the insured or require the insured to pay. The SIR is the dollar amount of a potential loss that is intentionally "retained" by the insured and for which the insured assumes all functions normally undertaken by an insurance company.

The declarations are to be read in conjunction with the more detailed sections of the policy form. Various sections of the policy will incorporate the declarations and refer to them for specific information, such as dollar limits on particular coverages not spelled out elsewhere in the policy.

16.303 The Insuring Agreement.

A. In General. Every CGL policy contains an insuring agreement that specifies the kind of losses for which the insurer will pay. The typical CGL policy provides coverage A for bodily injury or property damage liability, coverage B for personal and advertising injury liabilities, and coverage C for medical payments. The most commonly litigated coverages are coverages A and B.

The basic difference between coverages A and B is that coverage A applies to physical damage while coverage B encompasses damage to reputation, violation of privacy rights, infringement in advertisements, and similar nonbodily injury. Most of the risks covered by the policy are defined terms. Practitioners should closely examine the policy's "Definitions" section to comprehend its terms. For example, coverage A generally provides coverage for bodily injury or property damage arising from an occurrence, and the definition of an occurrence is all-important. Coverage B similarly depends on the definition of personal and advertising injury. Coverage A of the typical CGL insuring agreement provides that

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[w]e 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. ⁵

Coverage B provides coverage for

those sums that the insured becomes legally obligated to pay as damages because of "personal and advertising injury" to which this insurance applies.

B. The Risk Underwritten by Coverage A. Coverage A is premised on the idea that there are two types of risks that arise from an insured's work: the risk that the insured may incur liability for the repair or replacement of faulty work or product and the risk that an insured may cause accidental injury to persons or to property other than the work or product itself. ⁶ The first is a business risk in which liability is limited to the cost of replacement or repair and, as such, is an expense to be borne by the insured. On the other hand, the second is a risk of almost limitless liability that is properly underwritten by the insurer. ⁷

Consistent with this underlying purpose of CGL policies, the typical coverage A insuring agreement in Virginia provides coverage only for injuries to third parties. These injuries must arise out of the insured's own tortious conduct. CGL coverage does not extend to an insured's breach of contract where the only injury is for the cost to repair or replace the insured's faulty work or product. ⁸ Injuries insured against under coverage A are "bodily injury" and "property damage."

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In Boiler Brick & Refractory Co. v. Maryland Casualty Co., ⁹ the insured furnished and installed a boiler, which exploded when being started for the first time. The property owner would not accept a repaired boiler as contract performance, so the insured installed a second boiler. The boiler supplier sought coverage for the cost of installing the second boiler and for damage to the boiler house. The insurer reimbursed the insured for the damage to the boiler house but denied coverage for the cost to replace the boiler. The Virginia Supreme Court held that the boiler supplier was not entitled to coverage under its CGL policy for the cost to replace the boiler because its liability arose primarily out of contractual obligations, which were not covered. Only the cost to repair the boiler room would be recoverable in a tort action. ¹⁰

Although the court's decision in Boiler Brick is consistent with other courts and commentators, it leaves open the question of whether there is coverage under CGL policies for warranty claims or contract claims involving damage to "other" property. In resolving the issue, a Virginia court likely would look to the underlying purpose of CGL coverage and ask whether the claim arose from damage to the work or product warranted or to persons or property other than the work or product itself. ¹¹ If the damage arose from the cost to repair or replace faulty goods or work, there would be no coverage. ¹² If, on the other hand, the damage arose from harm to persons or other property, there would be coverage. ¹³

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C. Occurrence Versus Claims Made Policies. All policies specify what event related to a loss must happen during the policy period to make the insurance apply. On this issue, insurance policies are generally divided into two types, "occurrence" policies and "claims made" policies. These terms refer to the language, usually found in the insuring agreement, that provides insurance either for damages caused by "occurrences" or for "claims made during the policy period." In either type of policy, the insuring agreement provides that the insurance company will "pay those sums that the insured becomes obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies."

D. Occurrence Policies.

1. How Occurrence Policies Work. An occurrence policy provides coverage for losses caused by an "occurrence," regardless of when the insured is sued, or a claim is made, by a third party. What matters is when the injury or damage occurred. ¹⁴ Claims may be made decades after the occurrence giving rise to them and still be covered. ¹⁵ The running of the statute of limitations on the underlying claim would be a defense available to the insured and insurer alike but would not affect the viability of the coverage.

2. Standard Language in an Occurrence Policy. The language that distinguishes occurrence policies usually reads as follows:

This insurance applies to "bodily injury" and "property damage" only if:

The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory"; and

The "bodily injury" or "property damage" occurs during the policy period. ¹⁶

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"Occurrence" is defined in the definitions section of the policy. A standard definition is:

"Occurrence" means an accident, including continuous or repeated exposure to substantially the same general harmful conditions. ¹⁷

In general, an intentional injury is not "caused by" an accident and thus is not an "occurrence." ¹⁸ In AES Corp. v. Steadfast Insurance Co., ¹⁹ the Virginia Supreme Court revisited this general principle in a case involving a claim that an electric company contributed to global warming by emitting greenhouse gases. The Virginia Supreme Court noted that "even though

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the insured's action starting the chain of events was intentionally performed, when the alleged injury results from an unforeseen cause that is out of the ordinary expectations of a reasonable person, the injury may be covered by an occurrence policy provision." ²⁰ If, on the other hand, the insured knew or should have known that certain results were the natural and probable consequences of intentional acts or omissions, there is no "occurrence." ²¹ Arguably AES is limited in scope to analysis of the "eight corners rule," ²² but the full impact of AES remains unknown. ²³

E. Claims Made Policies. Generally, to be covered under a claims made insurance policy, a claim must be made against the insured during the policy period or within a period of time after the policy period that is specified in the policy, commonly referred to as an "extended reporting period." In general, as with an occurrence policy, the insuring agreement obligates the insurer to pay for losses "to which this insurance applies." A claims made policy differs from an occurrence policy in the description of what the insurance applies to:

This insurance applies to "bodily injury" and...