Your First Insurance Policy Coverage Dispute, 0220 COBJ, Vol. 49, No. 2 Pg. 42
| Author | BY RONALD M. SANDGRUND, THOMAS W. HENDERSON, STEPHEN J. BURG, AND JOSEPH F. (TRIP) NISTICO III |
| Position | Vol. 49, 2 [Page 42] |
TORT AND INSURANCE LAW
BY RONALD M. SANDGRUND, THOMAS W. HENDERSON, STEPHEN J. BURG, AND JOSEPH F. ("TRIP") NISTICO III
This primer on insurance contract disputes helps practitioners spot basic issues and understand general coverage terms.
A client walks into your office with several serious concerns. Her daughter is suffering from devastating medical problems following exposure to formaldehyde emanating from inside her new home. Medical bills are running into die hundreds of thousands of dollars, and die child is expected to live with a permanent physical impairment. The cost of mitigating the formaldehyde-containing building products exceeds $ 100,000. Your client's health insurer is denying payment of much of die claim because it deems most of die medical treatment "experimental." Her homebuilder is on its way to insolvency due to a downturn in die housing market, and its liability insurance carrier says its policy excludes pollution and contamination injuries. The client's homeowners' insurer is denying formaldehyde mitigation coverage on various grounds. Your client and her homebuilder paid substantial premiums for insurance coverage that they thought would respond to these losses. How do you determine your client's coverage, and what should you do to resolve die disputed coverage issues?
This article is a primer on insurance contract disputes for attorneys who confront these matters only occasionally. The article focuses on die format and content of commercial general liability (CGL) insurance, which is insurance that protects insured businesses against third-party liability claims.
Common Types of Insurance Policies
Identifying die type of insurance policy implicated is usually straightforward, but it is worth while to have a working knowledge of die different types of insurance that may be available. Coverage can sometimes be found in unexpected places.
The following are examples of general types of insurance. Some policies contain combinations or hybrids of these coverages.
■ Liability In1surance: CGL, Employer's Liability, Homeowners Liability, Renters Liability, Automobile Liability, Personal Umbrella Liability, Excess Liability.
■ Professional Liability Insurance: This is a specialized liability insurance for various professionals, including all kinds of Errors and Omissions (E&O) Insurance, such as Legal and Medical Professional Liability; Design Professional E&O; and Broker and Investment Advisor E&O.
■ Directors and Officers (D&O) Insurance: This is a specialized liability insurance for directors, officers, managers, and other legal entity personnel, and may include protections for the entity itself.
■ Property/Casualty Insurance: Homeowners Property, Renters Property, Business All-Risk, Builders Risk, Business Interruption, Fire, Boiler, Inland Marine,1 Travel, Flood, Hurricane, Earthquake, Automobile Collision and Comprehensive Insurance.
■ Life, Health, Disability, Workers' Compensation, and Long-Term Care Insurance: These insurances generally provide compensation for death or injury, or pay for medical or other care.
Sometimes different insurance coverages are simultaneously triggered or even overlap. For example, if a bicycle delivery person and a tourist on a rental scooter collide and both are injured, workers' compensation and health insurance might pay benefits for the delivery person's medical bills and injuries, although one may be deemed primary (first to respond) versus the other. The scooter driver's homeowner's insurance and the delivery person's employer's business liability insurance might be implicated if they sued one another in tort for compensation. If a credit card was used to rent die scooter, the credit card company might afford some insurance benefits, perhaps for damage to the scooter, and the scooter rental company rental agreement might offer some property and liability coverage options as well. Finally, the scooter driver's automobile liability and property damage insurance might be implicated if the scooter fell within the policy's definition of a motor vehicle.
Contracts that are Not Insurance
The law views some contracts often thought of as insurance as a three-party credit or guarantee rather than as equivalent to a two-party insurance contract. Examples of such contracts include payment and performance bonds, and fidelity, bail, and surety bonds, all of which are beyond the scope of this article.2
Differences among Policy Types
Different policy types contain significant distinctions. For example, distinct events activate coverage under the policies: liability policies are usually implicated by "occurrences"3 and "offenses"; auto policies usually involve "accidents" or "auto accidents"; property policies are typically triggered by "all risks of physical loss or damage"; and professional liability policies are often activated by the insured's receipt of notice of a "claim" or "wrongful act."
There are also significant differences in how the contracts are structured and compiled. For example, health insurance policies often consist of a single form that is updated over time (sometimes referred to as a Certificate of Coverage), while business liability and property policies typically consist of multiple forms, including endorsements, that were published at different times but that are combined into a single contract.
This article primarily uses examples from third-party liability insurance to illustrate the interpretive principles discussed. (Determining and analyzing collection options is as important as evaluating liability because a money judgment has no value if it cannot be collected, and insurance proceeds often represent the primary, if not the only, source for collection.) While the terminology used in other types of policies may differ from the terminology used in liability policies, the same interpretive principles used to construe liability policies generally apply to all insurance policies.4 This article assumes Colorado law controls. In some cases, complicated choice of law issues may arise that are beyond the scope of this discussion.5
Interpretation Basics
The basic principles of insurance policy interpretation are relatively simple and essentially track those of ordinary contract interpretation. But due to the unique format and structure of insurance policies, interpreting a specific policy is rarely straightforward.
The broad principles described for interpreting CGL policies apply to most other kinds of insurance contracts, including first-party coverage that insures against losses or expenses an insured sustains, as opposed to third-party coverage that insures against liabilities owed to others. From time to time, this article refers to a CGL policy form currently in use. This standardized policy language was first compiled by insurance rating bureaus, which have been succeeded by an industry policy writing group, the Insurance Services Organization (ISO). The CGL format originated more than a half-century ago and was known as a General Comprehensive Liability policy. Over time, the word "Comprehensive" was replaced with "Commercial." This change underscores the most important rule of policy interpretation: Every word is important! And each word must be interpreted within the context of die entire policy.
The mechanics of compiling a complete copy of die insurance contract (not just die cover sheet and some of the policy's pages) and grasping t he meaning and interrelation of its complex provisions can be challenging. And parsing insurance coverage questions often involves frequent communications between insureds and their insurers. Because new liabilities may arise from insurer-insured dealings due to unique common law and statutory duties and obligations imposed on insurers, it is critical to carefully manage these communications.
CGL Policy Structure
The more important provisions in a standard CGL policy are:
■ the Declarations, which typically describe who is entitled to receive the policy's benefits, the time period during which those benefits are afforded, the benefits' monetary limits, deductibles, and a description of what documents the insurance contract comprises. The Appendix contains a sample liability insurance Declarations.
■ the Coverage Grant (also known as the Insuring Clause), which typically describes the universe of events and/or losses covered by the policy. A policy may contain more than one coverage grant, each directed at a different class of risks. In a business liability policy this might include coverage for certain property damage and bodily injury, advertising and personal injury,6pollution liability, and employment practices.
■ A Coverage Grant also usually distinguishes between "occurrence" and "claims-made" coverage: the happening of a specific injury or loss during the policy period triggers "occurrence" coverage, while notice of a potential claim triggers "claims-made" coverage.7Some policies contain Additional Coverages separate from the Coverage Grant, usually describing a subset of insured risks independent and distinct from the Coverage Grant, and often accompanied by their own special terms and monetary limits.
■ the Exclusions, which typically carve out a subset of matters that, although within the Coverage Grant's scope, are not afforded the policy's benefits.
■ the Exceptions to Exclusions, which typically describe a subset of matters not subject to a specific policy Exclusion.
■ the Definitions, which provide meaning to certain policy terms.
In addition, most insurance policies contain Conditions, often consisting...
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