Filed Under:Agent Broker, Commercial Business

The 8 most misunderstood coverage issues in CGL insurance

Many insurance coverage terms are found in policies, but their meaning is a mystery. (Photo: Shutterstock/Orla)
Many insurance coverage terms are found in policies, but their meaning is a mystery. (Photo: Shutterstock/Orla)

There have long been issues that cause confusion or are mysterious among those involved with coverage. To be clear, I’m not talking about the debate over whether faulty workmanship is an “occurrence” or whether the pollution exclusion should apply narrowly or broadly. Those are disagreements over policy interpretation that everyone understands—they just don’t agree.

I’m talking about something simpler: a misunderstanding of an issue at its core or just lack of knowledge. These are the issues about which, if you ask five coverage professionals what something means, you’ll get more than one answer, perhaps some wrong answers and perhaps some “I don’t knows.”

What follows is a list of eight of the greatest coverage mysteries that I have seen over the years.

Editor’s Note: A version of this article was originally published at www.CoverageOpinions.info.

Train-cars-on-railroad-siding-SS-Ian Law

(Photo: Shutterstock/Ian Law)

1. What is a ‘Sidetrack Agreement?’

We’ve all seen the term “sidetrack agreement” in a commercial general liability (CGL) policy. It’s one of the six enumerated things that qualify as an “insured contract,” which is itself an exception to the Contractual Liability exclusion. But we virtually always brush over the “sidetrack agreement” on our way to the only part of the definition of “insured contract” that ever really comes into play: that part of the contract involving the assumption of another’s tort liability.

But just what is a “sidetrack agreement,” and does it ever come up in a case?

Not surprisingly, there is certainly not an abundance of case law addressing sidetrack agreements in the context of coverage disputes. In fact, very few. One court that addressed it was United Fire & Cas. Co. v. Gravette, 182 F.3d 649 (8th Cir. 1999).

The Gravette court observed that the term “sidetrack agreement” was not defined in the policy so it turned to the dictionary for guidance, noting that “sidetrack” means “to shunt, to shift, as a train, from the main line to a siding.” Thus, the court concluded that “the common understanding of ‘sidetrack agreement’ would be an agreement regarding a railroad track or siding.” Based on that super-helpful definition, the court held that “the trash hauling contract had nothing to do with railroads. It was not a ‘sidetrack agreement’ and therefore was not an ‘insured contract’ under the policy.”

You get a sense that the Gravette court was relieved that it could resolve the issue as simply as that and hightail it out of there. 

The greater mystery than what a sidetrack agreement is may be what it’s even doing in the policy—along with some of the other definitions of “insured contract” that are also pretty obscure, with likely almost no applicability.

[Related: Do you know these 10 property insurance terms? Do your clients?]

Nuclear-power-plant-San-Onofre-CA-SS-julius fekete

(Photo: Shutterstock/julius fekete)

2. Why is the ‘Nuclear Exclusion’ an endorsement in every CGL policy?

Everyone likes the “Nuclear Exclusion.” That’s because, when you’re reviewing a commercial general liability policy, it’s two pages that you can safely skip over as inapplicable.

The Nuclear Exclusion is ubiquitous. It’s an endorsement that appears in every CGL policy. But why? I know. Nuclear is associated with catastrophe, and insurers would not, could not, take on such monumental risk. But if you look at the language of the Nuclear Exclusion this makes absolutely no sense. In general, the Nuclear Exclusion applies to insureds that are in the business of owning or operating nuclear facilities or providing services or equipment to them. Needless to say, the number of entities specifically in nuclear-related businesses is infinitesimal. Nonetheless, show me a policy issued to a candy store, plumber or nail salon, and I’ll show you the Nuclear Exclusion.

Woman-with-cervical-collar-and-Xray-in-hospital-SS-Gelpi JM

(Photo: Shutterstock/Gelpi JM)

3. Why does the definition of ‘Bodily Injury’ refer to a bodily injury?

I always thought it was a cardinal rule of document drafting that you do not use the term being defined as part of the definition. That certainly makes sense.

Then why has ISO’s standard-bearer commercial general liability policy, curiously, long-defined the critical term “bodily injury” as “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time?”

There doesn’t seem to be any solution to this mystery or any clues.

Notice-of-employee-termination-with-glasses-and-ballpoint-pen-SS-Ekaterina_Minaeva

(Photo: Shutterstock/Ekaterina_Minaeva)

4. Why doesn’t Coverage Part B (‘Personal and Advertising Injury’) contain any Employee Exclusion?

There can be no doubt that Coverage Part A (“Bodily Injury” and “Property Damage”) of a commercial general liability policy has no interest whatsoever in providing coverage for injuries sustained by an insured’s employee. The policy’s “Employer’s Liability Exclusion” makes that crystal clear.

But Coverage Part B (“Personal and Advertising Injury”) doesn’t include an “Employer’s Liability Exclusion,” and the definition of “Personal and Advertising Injury” includes slander and libel of a person. It’s not at all uncommon for employees, bringing a claim against an employer for wrongful termination, to allege that they were defamed in the course of their termination. Barring any other issues, such a claim should trigger a defense under a CGL policy.

Most insurers have no interest in providing coverage under a CGL policy, however, for wrongful termination or any other employment practices. After all, they’re busy selling stand-alone Employment Practices policies. That’s why most CGL policies are endorsed with a specific exclusion for various types of employment practices. If insurers have no appetite for providing CGL coverage for employment practices, as evidenced by the widespread adoption of an employment practices exclusion endorsement, then why not include such an exclusion in the body of the policy?

Insurance-coverage-spiral-bound-papers-SS-RAGMA IMAGES

(Photo: Shutterstock/RAGMA IMAGES)

5. When is a claim made under a ‘Claims Made’ policy?

An important aspect of a “claims made” policy is when a claim is “made.” ISO’s “claims made” CGL policy, and others, state:

c. A claim by a person or organization seeking damages will be deemed to have been made at the earlier of the following times:

(1) When notice of such claim is received and recorded by any insured or by us, whichever comes first; or

(2) When we make settlement in accordance with Paragraph 1.a. above.

I’ve always found this a curious provision. Is it possible for an insurer to settle a claim before notice of such claim is received by the insured or insurer?

Fire-in-fireplace-red-flames-black-background-SS-RomanSlavik.com

(Photo: Shutterstock/RomanSlavik.com)

6. What is a ‘Hostile Fire?’

Just like a “sidetrack agreement,” “hostile fire” is another phrase contained in a commercial general liability policy that we all see but never stop at to say “howdy.” The term “hostile fire” appears in the CGL policy’s absolute pollution exclusion. The exclusion generally precludes coverage for pollutants at certain premises, but contains exceptions, including one for bodily injury or property damage arising out of heat, smoke or fumes from a “hostile fire.” A “hostile fire” is defined as “one which becomes uncontrollable or breaks out from where it was intended to be.”

But what does that mean: a fire which becomes uncontrollable or breaks out from where it was intended to be? It can’t mean just any old fire—or the exception to the pollution exclusion would be for bodily injury or property damage arising out of heat, smoke or fumes from a “fire.”

It works like this (and, believe me, I had to look this up). Courts historically interpreted fire insurance policies to exclude damages from “friendly fires.” The rationale for this being that the insurer should not assume the risk for a fire that was intentionally ignited and remained confined where intended. Thus, the term “hostile fire” came to be the judicially created term for a fire outside the exclusion for “friendly fires.” Now I get it.

Businessman-marking-date-on-paper-calendar-SS-Andrey_Popov

(Photo: Shutterstock/Andrey_Popov)

7. How does an ‘Extended Reporting Period’ work?

An “extended reporting period,” or ERP, is an important component in a “claims made” professional liability policy. Yet I often am amazed when I hear variations in explanations of it and actually see substantive differences in the way it’s expressed in policy language. Despite all this, an “Extended Reporting Period” has just one meaning. It provides coverage for claims that are first made against the insured during the Extended Reporting Period—provided that the act, error or omission (the wrongful act) took place after the retroactive date and before the expiration of the policy, that is, before the commencement of the Extended Reporting Period. An ERP doesn’t provide coverage for wrongful acts that take place during the “Extended Reporting Period.”

It’s remarkable how often I hear an “Extended Reporting Period” being explained as a policy provision that extends the period of time for which a claim, made against the insured prior to the end of the policy period, can be reported. Although the name “Extended Reporting Period” may suggest this meaning, it’s neither accurate nor logical. If a claim is made prior to the end of the policy period, wouldn’t it be easier, and cheaper, for the insured to simply report it to the insurer before the end of the policy period, instead of purchasing an extension so that the claim can be reported later? Clearly the name “Extended Reporting Period”—which has little to do with reporting—is causing some confusion over what it means.

Bag-labeled-liability-insurance-with-US-currency-spilling-out-SS-arka38

(Photo: Shutterstock/arka38)

8. Why is contractual liability coverage provided in the manner it is?

An important aspect of coverage, under a commercial general liability policy, is for an insured’s obligation, to contractually indemnify another, for its tort liability for bodily injury or property damage to a third person or organization. This isn’t some once-in-a-lifetime claims situation, like the $250 provided for bail bonds following a traffic accident.

To the contrary, the providing of coverage, for an insured’s contractual indemnity obligation, for another’s tort liability, is a critical component of the CGL policy. It seems curious that such an important coverage grant is provided in such an obscure manner: by way of an exception to the exclusion for contractually assumed liability.

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