CHAPTER § 5.04 Insurance Coverage for Third-Party Losses

JurisdictionUnited States

§ 5.04 Insurance Coverage for Third-Party Losses

[1] General Liability

A comprehensive general liability policy covers the risk that the insured's goods, products, or work will cause bodily injury or damage to property other than the product or completed work of the insured.103 For example, a general liability policy provides coverage if the insured work or product actively malfunctions, causing injury to an individual or damage to another's property.104

The most common type of third-party liability insurance in use today is the Commercial General Liability ("CGL") policy.105 CGL insurance is "occurrence-based" and therefore, as explained further in Section 5.02[3], will cover damages incurred for any "occurrence" during the policy period regardless of when the claim for such damages is made against the policyholder. An "occurrence" is defined in the Insurance Services Office's ("ISO") standard-form Commercial General Liability policy as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions."106 Consequently, CGL insurance is the type of insurance that policyholders, particularly those in the pharmaceutical industry, look to first for coverage for "long-tail" or "latent" injury claims discussed in Section 5.01.

The basic CGL insurance policy provides coverage up to the face amount of the policy for acts resulting in "bodily injury" and/or "property damage." The 2013 edition of the CGL defined "bodily injury" and "property damage" as follows:

• "'Bodily injury' means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time."
• "'Property damage' means: a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured."107

Many CGL policies also contain separate coverage for "personal and advertising injury," which is injury, including consequential "bodily injury," arising out of one or more of the following offenses:

• False arrest, detention or imprisonment;
• Malicious prosecution;
• The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor;
• Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;
• Oral or written publication, in any manner, of material that violates a person's right of privacy;
• The use of another's advertising idea in your "advertisement"; or
• Infringing upon another's copyright, trade dress or slogan in your "advertisement."108

Emotional-Distress Damages: The significant weight of authority holds that the phrase "bodily injury" does not encompass "nonphysical injuries," such as emotional distress.109 Courts, however, "have frequently found that the term 'bodily injury' is ambiguous 'as it relates to emotional distress accompanied by physical manifestations.'"110 Thus, if emotional distress accompanies bodily injury, that emotional distress may be a loss under the bodily-injury coverage.

Medical Monitoring. There is also sometimes a dispute as whether costs incurred for medical monitoring—such as costs of medical testing to detect and prevent the onset of a possible future illness—constitute damages for "bodily injury" under a CGL policy.111 Courts that have held medical-monitoring damages are for "bodily injury" have generally reasoned that exposure to harmful conditions, even when such exposure has not yet manifested into physical injuries, is itself bodily injury.112 One state supreme court held that medical-monitoring damages are for "bodily injury" reasoned that a "plaintiff is entitled to recover for the prospective consequences of the defendant's tortious conduct if the injury is reasonably certain to occur."113 However, not all claims seeking medical monitoring as the result of exposure to a harmful substance will allege "bodily injury" sufficient to trigger CGL coverage, particularly where the thrust of an underlying complaint is that a company violated a standard of care in the manufacture, marketing, or distribution of its product rather than caused personal injury to the claimant.114

Defective Components. The question of whether defective components in and of themselves constitute property damage has frequently been litigated. Courts have typically concluded that the diminished value of defective components and the damage resulting from defective components are excluded from the property coverage of the general liability policy.115

Data, Cyber Liabilities, and Intangible Property. The definition of "property damage" specifically excludes damage or loss to "electronic data."116 However, some courts have found coverage for certain damages related to a cyber breach under a CGL policy.117 As a result, many CGL policies now include broad exclusions for cyberrelated claims. Additionally, intangibles such as good will and reputation are not included in the definition of covered property.118

PCOH Coverage. Some CGL policies also extend coverage to liabilities falling under the "Products-Completed Operations Hazard" or "PCOH." A typical PCOH coverage applies to "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except:

• Products that are still in your physical possession; or
• Work that has not yet been completed or abandoned. However, "your work" will be deemed completed at the earliest of the following times: (a) When all of the work called for in your contract has been completed. (b) When all of the work to be done at the job site has been completed if your contract calls for work at more than one job site. (c) When that part of the work done at a job site has been put to its intended use by any person or organization other than another contractor or subcontractor working on the same project.119

"Your product" is defined to mean "any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by" the policyholder or others trading under the policyholder's name. Notably, for pharmaceutical companies, the PCOH includes "warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of 'your product' and (2) the providing of or failure to provide warnings or instructions."120 Thus, PCOH coverage may insure liabilities for product-liability claims otherwise excluded under a CGL policy. However, this coverage is often subject to its own limits that may differ from the general aggregate policy limits.

[2] Directors and Officers

Directors and officers ("D&O") liability insurance provides coverage for claims arising out of the wrongful acts of corporate policyholders, and their directors and officers in the performance of their duties as they relate to the company. D&O insurance policies are generally written on a "claims-made" basis, which means that the particular policy's coverage is activated or triggered when a "claim" is made against the policy-holder during the policy period. D&O policies, like other third-party liability insurances, include the following two fundamental obligations on the part of the insurer. First, the insurer agrees to pay directly, or reimburse the policyholder for "defense costs," the costs incurred in defending the policyholder against a lawsuit or other proceeding seeking to establish the policyholder's liability. Second, subject to the terms and conditions of the particular insurance policy, the insurer agrees to pay directly, or reimburse the policyholder for, any settlement, judgment, or other award of damages for which the policyholder is responsible.

D&O insurance coverage typically provides three distinct coverages within one policy.121 The first coverage, referred to as the personal or Side A coverage, reimburses individual directors and officers for losses where the company is not legally or financially able to fund indemnification.122 The second coverage, identified as Side B coverage...

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