Liability insurance policies generally are derived from standardized policy language first compiled by insurance rating bureaus, the successor to which is a property-casualty industry policy writing group, the Insurance Services Organization (ISO).17 The ISO is an umbrella organization owned by insurance companies, originally formed in 1971 when 11 predecessor insurance rating bureaus consolidated.18

The ISO drafts insurance forms, files them with state insurance commissioners for approval, develops underwriting guidelines, and publishes explanatory circulars describing the intent and effect of policy provisions.19 The standard insurance forms changed significantly in 1955, 1966, 1973, 1985, 1998, and 2001, and additional changes are always being discussed by ISO drafting committees. These changes do not necessarily limit coverage; they often clarify coverage in response to developing case law or expand coverage in reaction to market demands.

The insurance industry gravitates towards the use of standard forms for three main reasons:

1) Marketing. Generic forms make it easier for a policyholder to analyze and compare prices of insurance "products" (i.e., the so-called standard coverages). Generic forms also make it easier to market insurance, because agents and brokers may have to explain coverages less as policyholders become more familiar with these forms over time.
2) Better Risk Prediction. Generic forms make it easier to evaluate and underwrite the risk insured. This risk is not simply whether a covered loss will occur, but includes the risk that a court will say that a covered loss has occurred in light of specific policy language. Using the same language from policy to policy leads to greater certainty regarding how courts likely will interpret and apply policy provisions and, thus, greater certainty in assessing potential losses.
3) Acceptance. The various state insurance commissioners may be more inclined to accept the use of a particular insurance product in their state if a generic form has been previously approved for use by an insurance commissioner from another state.

Although standardized insurance contracts and sharing information to set premiums seems to implicate antitrust laws, the McCarran-Ferguson Act20 exempts insurers from certain federal antitrust laws and helped pave the way for creation of the ISO and its work. The insurance industry's exemption from antitrust laws is not without its limits, however, as industry members discovered in the wake of the multi-billion-dollar environmental coverage litigation of the 1980s and 1990s and resulting effort by insurers to limit their liability for this exposure.21

Due to unanticipated liabilities flowing from court opinions regarding application of liability insurance to long-term bodily injury (e.g., asbestos, lead paint, etc.) and property damage (e.g., environmental pollution and latent construction defects), many insurers have moved to partially "scripted" policies in lieu of the standard ISO forms. Scripted policies may consist of provisions used by just one or a small number of insurers or, in very unusual cases, language specifically negotiated by an insurer and a particular policyholder. Usually, only the most commercially sophisticated policyholders are able to negotiate unique policy provisions.

§ 12.2.1—The CGL Insurance Policy

"CGL" used to mean "comprehensive general liability" insurance policy. These policies are now referred to as "commercial general liability" (CGL) policies because many policyholders and some courts found the modifying term "comprehensive" significant. This name change underscores the importance of every word, comma, and period when interpreting an insurance contract.

The typical CGL policy contains provisions relating to the insurer's obligation to provide or pay for the policyholder's legal defense against liability potentially covered by the policy, as well as the insurer's obligation to indemnify the policyholder against such liability. That the trigger for the duty to indemnify must normally await a determination of actual liability presupposes that indemnity flows from the nature of the ultimate verdict, judgment, or settlement.22

Duty to Defend

An insurer seeking to avoid its duty to defend a policyholder bears a heavy burden. The duty to defend arises when the underlying complaint against the policyholder alleges any facts that might fall within the policy's coverage. The actual liability of the policyholder to the claimant is not the operative criterion. Rather, the obligation to defend arises from allegations in the complaint, which, if sustained, would impose liability covered by the policy.23 Under some narrow circumstances, facts outside the pleadings may trigger the duty to defend; however, Colorado has not yet embraced this view.24 The Colorado Supreme Court has said that while it assumes that the rule that the duty to defend must be gauged from the four corners of the complaint "applies to bona fide allegations," it remains an "open . . . question whether allegations framed to trigger an insurance policy create a duty to defend."25

The insurer has a duty to defend unless it can establish that the allegations in the complaint are solely and entirely within the exclusions in the insurance policy.26 Where the insurer's duty to defend is not apparent from the pleadings, but the allegations state a claim that is potentially or arguably within the policy coverage, or there is some doubt as to whether a theory of recovery within the policy coverage has been pleaded, the insurer must defend the claim.27 If the underlying complaint includes multiple claims, a duty to defend against all claims arises if any of the claims arguably constitutes a risk covered by the policy.28 To avoid policy coverage, and, thus, the duty to defend, an insurer must establish that the exclusion claimed applies in the particular case, and that the exclusions are not subject to any other reasonable interpretations. An unreasonable failure to defend can result in statutory double damages and an attorney fees award, as well as extra-contractual liability.29 See § 12.2.27, "Extra-Contractual Claims and the Implied Covenant of Good Faith and Fair Dealing."

An insurer is not excused from its duty to defend unless there is no factual or legal basis on which it might eventually be held liable to indemnify the policyholder.30 An insurer's "breach of the duty to defend does not preclude [it] from contesting its duty to indemnify."31 Some policies contain "deemer" clauses purporting either to negate the insurer's duty to defend or to render it secondary in the event the insured simply gives notice of and requests a defense to a pending lawsuit from another insurer. One court voided the provision as contrary to public policy and unenforceable, holding that the provision seeks to effect an unfair policy benefit forfeiture by eliminating the insurer's duty to defend if the "insured merely requests a defense from another insurer," and purports to void that duty to defend "if another carrier validly refuses the insured's request for a defense."32

The Tenth Circuit Court of Appeals held that the fact that one insurer provides a defense does not relieve another insurer of its duty to defend.33

Apportionment Issues (Duty to Defend)

In the great majority of jurisdictions, if the pleadings assert at least one potentially covered claim, and all policy conditions have been satisfied, all claims must be defended, including non-covered claims.34 Most CGL policies place no monetary limit on the defense obligation. Some errors and omissions policies contain "Pac-Man® " clauses that cap the defense cost obligation at the indemnity limits, and provide that accruing defense costs reduce available indemnity limits pro tanto. For more discussion of Pac-Man® policies, see § 12.1, "First-and Third-Party Coverage Distinguished."

Occasionally, courts consider whether an insurer can avoid paying to defend non-covered claims if defense efforts can be reasonably apportioned between covered and non-covered claims. To date, Colorado's appellate courts have refused to impair a policyholder's legitimate expectation of a complete defense to a lawsuit even where only some of the claims may be covered.35 A few courts outside of Colorado allow apportionment of defense costs between covered and non-covered claims in theory, where such costs can be reasonably apportioned.36 In practice, such apportionment is very difficult and often raises potential conflicts for defense counsel.

One provision seen in at least one liability insurance policy form provides,

If any insured requests an insurance company, including us, to defend, pay or indemnify any amount or otherwise respond to any claim or "suit" under any insurance policy incepting prior to the first day of the policy period of this Policy, this Policy shall not apply to damages sought in that claim or "suit." The previous sentence does not apply to the request for defense, payment or indemnification of any claim or "suit" to any insurance carrier with regard to a policy which is specifically written to be excess of this Policy.

If an insurer urges that this provision voids its defense and indemnity obligations, serious questions may arise whether it is enforceable. Such a provision may be unenforceable if it effects an inequitable forfeiture37 of valuable policy benefits where an insured: (1) reasonably gives notice under other insurers' policies per the insured's contractual obligation to give prompt notice of claims and suits; or (2) is unsure which policy or policies may apply to the claim or suit, yet prompt notice of such claim or suit is required under all policies.38

Some policyholders argue that if an insurer insists on apportioning defense costs, it should lose control over settlement of the case, or be required to fairly consider the economic burden to the policyholder...

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