Topics covered:

Legal basis

History of products-completed operations coverage

CG 00 37

CG 00 37—section I

CG 00 37—section III

CG 00 37—section IV

CG 00 37—section V

CG 00 38

Legal Basis

A person who is injured or whose property is damaged by a product may rest his claim against the responsible party on several bases, for example, negligence (tort or civil wrong), breach of express or implied warranty, or strict liability.

Fundamentally, the same principles apply to a negligence claim involving products as any other relationship. However, there is often a wide gap both in time and place between the two ultimate parties to such action—the manufacturer or producer of the product and the person who suffers harm from its use or existence. Hence, various legal doctrines have been established that, for the most part, make successful prosecution of such a claim more possible. As an example, it is now generally held that a manufacturer has a duty to exercise reasonable care in the manufacturing, designing, and packaging of its product. And, this duty is owed anyone who may come in contact with the product, not merely the purchaser or consumer. Similarly, there is a duty on the part of a manufacturer to provide adequate warning of inherent dangers that are not obvious. A distributor—wholesaler, retailer, dealer, etc.—also has certain duties of care, for example, to keep perishable goods under refrigeration.

In the common type of products liability claim based upon alleged breach of warranty the injured party counts on either an express or implied warranty. In an express warranty, which can be written or oral, the manufacturer or seller represents certain characteristics about its products. When written, they can appear on labels or in advertising of the product. A warranty of fitness is implied where the buyer makes known to the seller the purpose for which use of the goods is intended and indicates that the buyer is relying on the seller's skill or judgment to furnish appropriate goods. Under such circumstances, there is an implied warranty that the goods are suitable for the purpose intended. The seller must, in effect, carry out the trust that is the basis of the sale and bodily injury or property damage resulting from the seller's failure to do so may become the basis of a products liability claim. An implied warranty of merchantability applies to any sale made by a merchant (unless the buyer had knowledge of a defect). In such a case, it is implied that the goods are of a quality comparable to that which is generally accepted in the merchant's line of trade.

The doctrine of strict liability in tort holds most sellers liable for injuries caused by defective and unreasonably dangerous products. The injured person is not required to prove negligence of the seller nor to prove breach of warranty. The user must show that the product was defective when it left the control of the seller, that the defect made the product unreasonably dangerous, and that the product was the ultimate cause of injury. (What is considered to be a defect within a product is not absolutely defined. It depends upon the circumstances in each case.) While this doctrine reduces the number of defenses available to sellers, it is not considered as an absolute liability. Sellers still may have some defenses against such claims, including the defense that the product was improperly used. Yet, based upon some of the decisions of courts, the strict liability rule appears to be imposing something close to absolute liability on sellers of various products.

With respect to liability for completed operations, building contractors historically were not held to be liable for injury arising out of their work once it was completed and accepted by the owner. However, there are now numerous exceptions to this rule, permitting recovery on the grounds of negligence, breach of contract, and in a growing number of jurisdictions, even strict liability. Thus, the law governing liability of building contractors for defects in their work is undergoing a liberalization around the country similar to that which has already affected products liability.

Before proceeding, note that the basis of liability for products or completed operations is distinct from products and completed operations insurance. Although the latter is intended to insure the former to a great degree, there can be cases in which an insured business will become legally liable for injury arising out of products or completed operations and yet will not be covered by its products and completed operations insurance. To cite but one example, a manufacturer may become liable for the replacement of a defective product under one of the theories of recovery enumerated earlier. But, products and completed operations insurance excludes coverage for property damage to the named insured's own product arising out of that product.

History of Products-Completed Operations Coverage

Products liability insurance first became available in the U.S. in 1910, twenty years after it first became available in England. One reason the demand for this insurance was not overwhelming was that the legal basis on which to prove liability was negligence, which has traditionally been difficult to prove. It was not until the 1916 case of MacPherson v. Buick Motor Co., 111 N.E. 1050 (N.Y.), which held that a cause of action was not limited solely to actions between the buyer and seller of a product, that both litigation and the demand for this insurance increased. The court in this case held that the manufacturer could also be sued by the ultimate consumer despite the absence of any contractual relationship (privity) between the two.

As time passed, the scope of products liability ultimately grew to the point where barriers to the application of proving negligence were largely eroded with additional legal theories, such as strict liability in tort (that is, absolute liability, or liability without proof of fault). Also contributing to the erosion have been the passage of many federal and state laws, such as the Pure Food, Drug, and Cosmetic Act, the Federal Hazardous Substances Act, and the Federal Flammable Fabrics Act. However, it was the passage of laws imposing strict liability in tort in the 1960s, coupled with the Consumer Products Safety Act in 1972, that have had the greatest impact on the activity of product producers and product litigation. (Note that the Consumer Products Safety Act is the basis for all of the product recalls in recent years.)

From 1941, when the standard comprehensive general liability policy was first introduced (with a number of other standard coverage forms) until the 1966 general liability policy provisions were introduced, products liability coverage also included completed operations coverage. It took some time, but insurers began to realize that including completed operations into the products liability coverage was not a good idea. The reason was that contractors did not feel the need to purchase this coverage because they felt they were not engaged in the sale of products and so, the coverage was not necessary. However, when completed operations claims were made against them, contractors argued that the combination of products and completed operations either created an ambiguity or was misleading and so, coverage existed. As a result, insurers were required to provide contractors with completed operations coverage even though it was not purchased. In 1966, therefore, the revised general liability policy provisions separated the two coverages with separate definitions of the "completed operations hazard" and the "products hazard".

There are a variety of standard forms that have provided products and completed operations coverage over the years. In addition to the comprehensive general liability policy and the separate completed operations and products liability coverage part, there were the special multi-peril liability and businessowners policies, all of which included some products and completed operations coverage along with coverage for the premises and operations liability. Storekeepers liability insurance and druggists liability insurance policies also provided products and completed operations coverage. The commercial general liability (CGL) forms have superseded the 1973 comprehensive liability policy, of course, but the CGL program has not offered counterparts to the SMP or storekeepers policies, and the druggists liability coverage is now provided by the basic coverage forms (though there is a separate endorsement providing insurance for injury or damage arising out of the rendering or failure to render professional services as a pharmacist should such activity be interpreted somehow as a product or completed operation).

The current commercial general liability program offers products and completed operations coverage under the general liability forms and the separate products and completed operations liability coverage forms. The current CGL program's coverage of the products and completed operations exposures is similar to that provided under previous forms, but there have been some changes that should be noted. For example, the definition of product is clearly stated not to apply to real property, only to goods or products manufactured, sold, or otherwise handled by the insured; an impaired property exclusion more clearly defines lack of coverage for product or work failure claims that do not involve physical injury to other property; and many of the provisions of the broad form property damage endorsement have been written into the CGL form. It should also be noted that damages because of injury within the products and completed operations hazard are subject to an aggregate limit separate from that under the general liability exposures.

The current versions of the products and completed operations liability coverage forms, an occurrence type (CG 00 37) and a claims-made type (CG 00 38), offer payment for damages because of bodily injury or property damage included within the products-completed operations hazard. Products and completed operations hazard is now defined as one term, namely, all bodily injury and property damage occurring away from the premises owned or rented by the named insured and arising out of the product or work of the named insured; the exception to the definition includes products that are still in the physical possession of the named insured or work that has not yet been completed or abandoned.

The territorial scope of products and completed operations liability insurance under current forms applies to claims for bodily injury or property damage within the United States, its territories or possessions, Puerto Rico, or Canada. With respect to products, coverage also extends to bodily injury or property damage happening in all parts of the world if the injury or damage arises out of goods or products made or sold by the named insured and the insured's responsibility to pay is determined in a lawsuit filed in the territory described above. The principal purpose of this extension of the policy territory is to provide coverage, which might otherwise be denied, where an ordinary item—say toothpaste—is purchased in this country by someone who then leaves on a trip to Europe, suffers injury through its use while on the trip, and presents a claim on his return, resorting to suit, if necessary, in a court here. The vital point is that this extension does not meet the needs of an insured who is producing or marketing products for foreign markets. This party needs products liability insurance applicable to claims brought in the country or countries where the product will be marketed or used. That usually calls for the services of an insurer with a foreign risks affiliation or department. This same procedure would be necessary for an insured who obtains foreign products for consumption or use in the United States. The reason is that these coverage forms (CG 00 37 and CG 00 38) along with the occurrence and claims-made CGL coverage forms stipulate that the insurance applies to bodily injury or property damage only if the injury or damage is caused by an occurrence that takes place in the policies' coverage territory.

(An example when none of the preceding forms would apply is where a foreign-made product is determined to have been defectively made during its manufacture. With the occurrence taking place in a foreign country, no coverage can be expected to apply unless the insured has purchased foreign products liability coverage.)

CG 00 37 offers products and completed operations liability insurance on an occurrence basis. Most simply stated, this means that a policy covers bodily injury or property damage if it occurs during the policy period. As an illustration, a product was manufactured in 2010, but the insured did not carry products liability insurance. The product was sold in 2011 and at that time, the insured did carry products liability insurance with company A. A purchaser of the product was injured in 2012 by an alleged defect in the product and sued the insured that same year; the insurer at this time was company B. Company B must defend this claim and pay the judgment if the insured is held liable. It was the insurer on line when the bodily injury occurred. It is of little consequence whether the alleged defect was part of the manufacturing process during 2010, or that the purchase was made in 2011. This is, of course, a simplified illustration and does not take into account the several theories that have been adopted by some courts as to when injury occurs. See Occurrence for a discussion of these theories.

CG 00 38 offers products and completed operations coverage on a claims-made basis. Here, of course, the coverage is triggered by the making of a claim against the insured. Using the illustration noted above, company B must still defend the claim and pay any damages, but the claim had to have been made during the policy period.

The April 2013 edition of the CGL forms revised some exclusions and where applicable CG 00 37 and CG 00 38 were also revised, as follows:

The liquor liability exclusion was changed to apply even if the claims against any insured allege negligence in the supervision, hiring, or training of others by that insured, or negligence in providing or failing to provide transportation with respect to any person that may be under the influence of alcohol. The exclusion also addresses the situation where the insured permits a person to bring alcoholic beverages onto the insured premises for consumption on the premises.

The electronic data exclusion was revised by introducing an exception to the exclusion to provide that the exclusion does not apply to liability for damages because of bodily injury.

CG 00 37

This products-completed operations liability coverage form is similar in wording in many respects to the CGL form, CG 00 01. For information on the CGL form, bodily injury and property damage liability coverage, see CGL Coverage Form—Coverage A. This article focuses on the information that reflects the nature of CG 00 37.

CG 00 37—Section I

 1.Insuring Agreement

a.We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" included within the "products-completed operations hazard" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury" or "property damage" to which this insurance does not apply. We may, at our discretion, investigate any "occurrence" and settle any claim or "suit" that may result. But:

(1)The amount we will pay for damages is limited as described in Section III – LIMITS OF INSURANCE; and

(2)Our right and duty to defend end when we have used up the applicable limit of insurance in the payment of judgments or settlements.

No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under SUPPLEMENTARY PAYMENTS.

Analysis

This insuring agreement makes clear that the coverage is for damages within the product-completed operations hazard; this is not the commercial general liability coverage form. Products-completed operations hazard is a defined term that guides the extent of this insuring agreement; that term will be discussed later in this article.

Note that the clause dealing with the end of the right and duty to defend does not mention coverage B or medical expenses under coverage C, as does the CGL form. This is because CG 00 37 does not offer personal and advertising injury liability or medical payments coverage.

 2.Exclusions

g.This insurance does not apply to "property damage" to:

(1)Property you own, rent or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another's property;

(2)Premises you sell, give away or abandon, if the "property damage" arises out of any part of those premises;

(3)Property loaned to you; or

(4)Personal property in the care, custody or control of the insured.

Paragraph (2) of this exclusion does not apply if the premises are "your work" and were never occupied, rented or held for rental by you.

Paragraphs (3) and (4) of this exclusion do not apply to liability assumed under a sidetrack agreement.

Analysis

This exclusion is notable for the absence of any references to "that particular part of real property on which you are performing operations" and "that particular part of any property that must be restored or replaced because your work was incorrectly performed on it". This reflects the scope of coverage and purpose for the products-completed operations liability coverage. It would destroy the purpose of such coverage if the products-completed operations coverage form were to contain exclusions that declared that the insured's operations were not insured occurrences.

Incidentally, note that CG 00 37 does not have a pollution exclusion, an aircraft, auto or watercraft exclusion, or a mobile equipment exclusion as does the CGL form. This is not surprising with reference to the pollution exclusion since an examination of the pollution exclusion on the CGL form shows that, under certain circumstances, the exclusion does not apply to injury or damage arising out of the insured's products and completed operations. As for the auto and mobile equipment exclusions, if a loss involving an auto or aircraft or watercraft or mobile equipment can somehow fit within the definition of "products-completed operations hazard", CG 00 37's insuring agreement will allow the form to apply to the loss. Continuing down this path, CG 00 37 12 07 does not have as a supplementary payment the $250 cost for bail bonds required because of accidents or traffic law violations arising out of the use of any vehicle as does the CGL form; so, even if CG 00 37 does respond to a claim involving an auto, the insured is on his or her own if he or she needs to post vehicle bail bonds.

CG 00 37 also does not have provisions for covering fire legal liability. There is no reference to a fire damage limit and no clause stating that the exclusions do not apply to damage by fire to premises while rented to the named insured.

 CG 00 37—Section III

 1.The Limits of Insurance shown in the Declarations and the rules below fix the most we will pay regardless of the number of:

a.Insureds;

b.Claims made or "suits" brought; or

c.Persons or organizations making claims or bringing "suits".

2.The Aggregate Limit is the most we will pay for damages because of "bodily injury" and "property damage" included in the "products-completed operations hazard".

3.Subject to 2. above, the Each Occurrence Limit is the most we will pay for damages because of all "bodily injury" and "property damage" arising out of any one "occurrence".

Analysis

This section of CG 00 37 serves as the limit on the amount paid by the insurer for coverage under the products-completed operations liability form. CG 00 37 has an aggregate limit and an each occurrence limit and both limits must be observed when it comes to a claim or a lawsuit against the insured.

CG 00 37—Section IV

 4.Other Insurance

If other valid and collectible insurance is available to the insured for a loss we cover under this Coverage Part, our obligations are limited as follows:

a.Primary Insurance

This insurance is primary. Our obligations are not affected unless any of the other insurance is also primary. Then, we will share with all that other insurance by the method described in b. below.

b.Method of Sharing

If all of the other insurance permits contribution by equal shares, we will follow this method also. Under this approach each insurer contributes equal amounts until it has paid its applicable limit of insurance or none of the loss remains, whichever comes first.

If any of the other insurance does not permit contribution by equal shares, we will contribute by limits. Under this method, each insurer's share is based on the ratio of its applicable limit of insurance to the total applicable limits of insurance of all insurers.

Analysis

This section of CG 00 37 is presented to show that the product-completed operations liability coverage is offered on a primary basis; there is no excess insurance clause as exists in the CGL form.

Note that the other insurance clause states that "if other valid and collectible insurance is available to the insured", meaning that other insurance has to be available to the insured for the clause to come into play. Just having other insurance applicable to a claim is not enough; that other insurance has to be available to the insured.

CG 00 37—Section V

 12."Products-completed operations hazard":

a.Includes all "bodily injury" and "property damage" occurring away from premises you own or rent and arising out of "your product" or "your work" except:

(1)Products that are still in your physical possession; or

(2)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.

Work that may need service, maintenance, correction, repair or replacement, but which is otherwise complete, will be treated as completed.

b.Does not include "bodily injury" or "property damage" arising out of:

(1)The transportation of property, unless the injury or damage arises out of a condition in or on a vehicle not owned or operated by you, and that condition was created by the "loading or unloading" of that vehicle by any insured;

(2)The existence of tools, uninstalled equipment or abandoned or unused materials; or

(3)Products or operations for which the classification, listed in the Declarations or in a policy schedule, states that products-completed operations are included.

Analysis

This definition is basically the same as the one found on the CGL form, but it is included here since this article deals with products-completed operations liability coverage. For more information on the definition, see Commercial General Liability Definitions.

CG 00 38

This form is the claims-made version of the products-completed operations liability coverage form. It differs from CG 00 37 only in its use of claims-made phrasing, such as a "retroactive date" and "extended reporting periods". For more information on claims-made policies, see Claims-Made CGL Form.