Chapter Twenty-Six

• Jurisdiction: New York

Chapter Twenty-six

Exclusions in Commercial General Liability Policies

Vincent G. Saccomando, Esq. Stacy A. Marris, Esq.

I. Introduction

An exclusion is a provision in an insurance policy that eliminates coverage where, were it not for the exclusion, coverage would have existed. A number of exclusions in commercial general liability (CGL) policies, however, contain exceptions that, in certain circumstances, negate the exclusion.

As with any insurance policy provision, exclusions are always construed in favor of the insured. This is especially true when ambiguities are found within an exclusionary clause.³⁵⁵⁵ The carrier has the burden of proving that an exclusion applies³⁵⁵⁶ and must show that no reasonable interpretation of the exclusion permits coverage.³⁵⁵⁷ The court, however, should not attempt to impose coverage through a strained, implausible reading of the complaint “that is linguistically conceivable but tortured and unreasonable.”³⁵⁵⁸ Although it may not always be necessary, it is safer for the carrier to plead any exclusion upon which it relies as an affirmative defense in its answer to an insured’s declaratory judgment complaint.³⁵⁵⁹ Once the carrier proves that an exclusion applies to a particular case, the burden switches to the insured to demonstrate that the exclusion is negated by an exception.³⁵⁶⁰

II. Types of Exclusions in CGL Policies

A. The “Expected or Intended Injury” Exclusion

The “expected or intended injury” exclusion typically provides that the insurance does not apply to “ ‘[b]odily injury’ or ‘property damage’ expected or intended from the standpoint of the insured.”³⁵⁶¹ The exception to this ex clusion provides that “[t]his exclusion does not apply to ‘bodily injury’ resulting from the use of reasonable force to protect persons or property.”³⁵⁶²

New York courts read the “expected or intended” provision narrowly.³⁵⁶³ All mishaps for which insurance is purchased are in some sense “expected,” using the term in its broadest sense. As a result, the courts have generally read “expected or intended” provisions to exclude only those losses or damages that are not accidental, “[since] ‘accidental’ is, generally speaking, the opposite of ‘intentional’ or ‘expected.’ ”³⁵⁶⁴

The Court of Appeals has stated that a loss is accidental if, from the point of view of the insured, it is “unexpected, unusual and unforeseen.” ³⁵⁶⁵

In attempting to determine whether an event is “accidental,” the courts focus on the nexus between an intentional act and the resulting damage. Courts have drawn a distinction between “damages which flow directly and immediately from an intended act, thereby precluding coverage, and damages which accidentally arise out of a chain of unintended though expected or foreseeable events that occurred after an intentional act.”³⁵⁶⁶

An act is not “intentional” if the insured simply took a calculated risk, even when the insured was warned that the act may result in damages.³⁵⁶⁷ Rather, the exclusion will apply only if the insured intended the damages³⁵⁶⁸ or because the insured knew that damages would flow directly and immediately from its intentional act.³⁵⁶⁹ For example, in McGroarty v. Great American Insurance Co.,³⁵⁷⁰ the insured’s construction work had caused a great weight of rocks and water to shift against a neighboring property owner’s garage wall. The Court of Appeals held that the damages could be found to have been accidental, despite the neighbor’s warnings of the potential damage.³⁵⁷¹

In City of Johnstown v. Bankers Standard Insurance Co.,³⁵⁷² the Second Circuit rejected the carrier’s argument that the “expected or intended injury” exclusion barred coverage for the city in a pollution case because, while the city was aware of potential contamination, the city neither intended the damages nor knew that damages would flow directly and immediately from its intentional acts.

In 1989, the Third Department took a broader view of the definition of “expected or intended,” holding that “personal injuries or property damages are expected if the actor knew or should have known that there was a substantial probability that a certain result would take place.”³⁵⁷³

In Mattress Discounters v. U.S. Fire Insurance Co.,³⁵⁷⁴ the plaintiff in the underlying action alleged he was injured in an assault by the insured’s employees. The court held that the exclusion applied and the negligent hiring and supervision claims were of no consequence since “the operative act giving rise to any recovery [was] the assault.”

It is the carrier’s burden to show that the “expected or intended injury” exclusion applies. However, in a policy where there is no such exclusion and where, instead, “accident” or “occurrence” are defined as “unintended or unexpected” events, it is the insured’s burden to prove the unexpected or unintended nature of the accident or occurrence. ³⁵⁷⁵

B. The “Contractual Liability” Exclusion

The “contractual liability” exclusion typically provides that the insurance does not apply to “ ‘[b]odily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.”³⁵⁷⁶ The exception to this exclusion provides:

This exclusion does not apply to liability for damages: (1) assumed in a contract or agreement that is an “insured contract,” provided the “bodily injury” or “property damage” occurs subsequent to the execution of the contract or agreement; or (2) that the insured would have in the absence of the contract or agreement. ³⁵⁷⁷

An “insured contract” is typically defined as “[t]hat part of any other contract or agreement pertaining to your business under which you assume the tort liability of another to pay damages because of ‘bodily injury’ or ‘property damage’ to a third person or organization.”³⁵⁷⁸

The exclusion for the assumption of liability in contract or agreement applies only to indemnification claims.³⁵⁷⁹ In order to fall within the exception for an “insured contract,” the assumption of liability must be for “tort liability,” and the contract must relate to the insured’s business.

Although the exclusion may operate to exclude coverage assumed by the insured under a particular contract, where the insured would be liable for the same damages under a different theory, such as common law indemnification, the carrier is still obligated to provide coverage. As explained by the Fourth Department, in Aetna Casualty & Surety Co. v. Lumbermens Mutual Casualty Co.³⁵⁸⁰:

The fact that [the plaintiff’s] recovery against [the insured] could have been based upon a contract of indemnity does not preclude the existence also of a common-law right to indemnity. Where the facts are such that an insured’s liability exists on one theory as well as another and one of the theories brings liability within coverage, the insured may avail itself of the coverage. ³⁵⁸¹

In a case where one carrier’s policy covers common law indemnification claims but excludes contractual indemnification claims, and another carrier’s policy covers contractual indemnification claims but excludes common law indemnification claims, the two carriers will share the liability equally up to the limits of the lowest policy.³⁵⁸²

C. The “Workers’ Compensation and Similar Laws” Exclusion

The “Workers’ Compensation and similar laws” exclusion typically provides that the policy does not apply to “any obligation [of] the insured [...] under workmen’s compensation, unemployment compensation or disability benefits law, or under any similar law.”³⁵⁸³ The Workers’ Compensation exclusion bars coverage for a claim brought by the insured’s employee against the insured, since such a claim would be covered under the Workers’ Compensation Law, unemployment compensation or disability benefits law. The exclusion, however, does not eliminate coverage for a third-party action brought against the insured by a defendant sued by the insured’s employee.³⁵⁸⁴

D. The “Employer’s Liability” Exclusion

The “employer’s liability” exclusion typically provides that in the case of “bodily injury,” the policy does not apply to:

(1) An “employee” of the insured arising out of and in the course of: (a) employment by the insured; or (b) performing duties related to the conduct of the insured’s business; or (2) the spouse, child, parent, brother or sister of that “employee” as a consequence of paragraph (1) above. This exclusion applies: (1) whether the insured may be liable as an employer or in any other capacity; and (2) to any obligation to share damages with or repay someone else who must pay damages because of the injury. ³⁵⁸⁵

1. The Employer’s Liability Exclusion and the Indemnification/Contribution Distinction

The policy must distinguish between claims for indemnification and contribution. In policy language, the caveat that the employer’s liability exclusion applies “to any obligation to share damages with or repay someone else who must pay damages because of the injury” is the result of caselaw holding that the exclusion did not exclude coverage for a third-party claim seeking contribution, as opposed to indemnification for an injury to the insured’s employee. Previously, the typical exclusion stated that the policy did not apply “to bodily injury to any employee of the insured arising out of and in the course of his employment by the insured or to any obligation of the insured to indemnify another because of damages arising out of such injury.”³⁵⁸⁶ In Insurance Co. of North America v. Dayton Tool & Die Works,³⁵⁸⁷ the Court of Appeals emphasized that “indemnity” and “contribution” are distinct legal concepts and held that, since the exclusion spoke only of “indemnity” and not “contribution,” third-party claims for contribution were not excluded.³⁵⁸⁸

2. The “Insured Contract” Exception

Where a policy defines “insured contract” as an agreement in which the insured contractually “assumes” the tort liability of another to pay damages for bodily...