20.2 COMMERCIAL GENERAL LIABILITY POLICIES
20.201 Insurer's Duties to Defend and Indemnify. An insurer has two main duties under the insuring agreement of a CGL policy. First, the insurer has a duty to defend its insured against a suit that alleges facts or circumstances that may be covered by the policy. Second, the insurer has a duty to indemnify the insured for sums that the insured becomes legally obligated to pay as damages to which the insurance applies.
The duty to defend is very broad and arises if a complaint against the insured "alleges facts and circumstances, some of which would, if proved, fall within the risk covered by the policy." 8 To determine whether an insurer has a duty to defend, courts apply the "eight corners" rule, which requires review of the four corners of the policy language to ascertain the terms of the coverage and the four corners of the underlying complaint to determine whether any claims alleged in the complaint are covered by the policy. 9 The insurer
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has no duty to defend only if it appears clearly that the insurer would not be liable under its contract for any judgment based upon the allegations. 10
The insurer's duty to indemnify is narrower than its duty to defend. 11 While the duty to defend arises when the allegations of a suit may be covered by the policy, 12 the duty to indemnify arises only when the insured becomes legally obligated to pay damages. The insurer will have no duty to indemnify the insured unless a duty to defend first exists. 13
In determining whether a suit is potentially covered by a CGL policy it is necessary to consider, among other things, who is insured under the policy, whether the suit involves a risk that is within the insuring agreement of the policy, whether any exclusions in the policy operate to defeat coverage, and whether the insured has complied with the conditions of the policy.
20.202 Who Is Insured. CGL policies provide coverage to the named insured and, under certain circumstances, parties who qualify as "additional" insureds. The named insured is the person or entity identified in the policy declarations. Policies often separately identify additional insureds, such as the named insured's directors, officers, or employees, who may also be covered with respect to certain types of claims.
For example, if the named insured is a partnership or joint venture, a CGL policy may provide that the named insured's partners, members, and their spouses are insureds, but only with respect to the conduct of the named insured's business. 14 If the named insured is a limited liability company, the policy may provide that its members are insureds, but only with respect to the conduct of the insured's business, or that its managers are insureds, but only with respect to their duties as managers. 15 Other types of additional
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insureds may include employees, volunteer workers, or stockholders, officers, or directors of a corporation. 16
In a construction context, one party may agree to add another as an additional insured under its CGL policy. For example, a subcontractor on a project may agree to add the general contractor or owner to the subcontractor's existing CGL policy. This is often done by adding an endorsement to the policy naming the party in question as an additional insured. 17
CGL policies typically contain a Separation of Insureds clause, which provides that the insurance applies "[s]eparately to each insured against whom claim is made or 'suit' is brought." 18 A Separation of Insureds clause requires consideration of each insured as separate and distinct from every other insured under the applicable policy. This means that where there is more than one insured, coverage defenses applicable to one insured may not be applicable to another. 19
20.203 Bodily Injury and Property Damage Coverage.
A. Insuring Agreement. CGL policies typically provide three types of coverage: (i) "bodily injury" and "property damage" coverage; (ii) "personal and advertising injury" coverage; and (iii) medical payments coverage.
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"Bodily injury" and "property damage" coverage is the type most likely to be implicated in a construction setting, and will be addressed in the greatest detail here. "Personal and advertising injury" and medical payments coverage will be addressed briefly in section 20.205 below.
The "bodily injury" and "property damage" insuring agreement of a CGL policy commonly provides that:
We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. We will have the right and duty to defend any 'suit' seeking those damages.
. . . .
This insurance applies to "bodily injury" and "property damage" only if:
(1) The "bodily injury" or "property damage" is caused by an "occurrence" that takes place in the "coverage territory;" [and]
(2) the "bodily injury" or "property damage" occurs during the policy period. 20
This language contains a number of requirements, all of which must be satisfied by the insured for a claim or suit to be covered by a CGL policy. 21 First, the claim or suit must be for a sum that the insured may be "legally obligated to pay as damages." Second, the claim or suit must seek damages for "bodily injury" or "property damage." Third, the "bodily injury" or "property damage" must have been caused by an "occurrence." Finally, the "bodily injury" or "property damage" must have occurred within the coverage territory (usually, the United States) during the policy period. 22 A claim or suit potentially will be covered by a CGL policy only if the insured shows that all of these requirements are met.
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B. Amounts the Insured Is "Legally Obligated to Pay as Damages." The phrase "legally obligated to pay as damages" encompasses damages for injury to or destruction of property but does not cover damages resulting from imposed or assumed contractual liability. 23 A contractual duty to pay costs, without a coercive legal duty to pay those costs as damages, does not qualify as a legal obligation to pay. 24
Damages incurred by a contractor or subcontractor in fulfilling a contractual obligation to repair or replace its faulty work do not fall within the phrase "legally obligated to pay." 25 For example, in Boiler Brick & Refractory Co. v. Maryland Casualty Co., 26 a contractor installed a boiler at a plant, and the boiler exploded when it was started for the first time. The explosion damaged other property in the boiler room, and the boiler itself had to be replaced. The Virginia Supreme Court held that the contractor's liability policy did not cover the cost incurred by the contractor to replace the boiler because that cost arose from the contractor's contractual obligations to the plant owner and would not be recoverable in a tort action. 27
The Fourth Circuit has also held that the phrase "damages" does not include injunctive or restitutionary relief. 28 In Maryland Casualty Co. v. Armco, Inc., 29 the Fourth Circuit held that the legal meaning of "[d]amages, as distinguished from claims for injunctive or restitutionary relief, includes only payments to third persons when those persons have a legal claim for damages." 30 If the term "damages" in a CGL policy were construed to mean any form of monetary relief, then that term would become "mere surplusage, because any obligation to pay would be covered." 31
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C. "Bodily Injury" and "Property Damage." A common definition of "property damage" in a CGL policy is:
Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
Loss of use of tangible property that is not physically injured. 32
Under this definition, physical injury to or loss of use of tangible property is considered "property damage." For example, if a general contractor or subcontractor negligently caused a fire that burned another party's property, that fire damage likely would be considered "property damage" under a CGL policy. On the other hand, purely economic losses such as the cost to replace work that does not conform to contract specifications are generally not "property damage" within the meaning of a liability policy because the losses result from disappointed contractual expectations. 33
"Bodily injury" is usually defined in CGL policies as "bodily injury, sickness, or disease sustained by a person at any time, including death resulting from any of these at any time." 34 "Bodily injury" does not include emotional distress or purely nonphysical, emotional harm. 35 But even very slight physical injury may qualify as "bodily injury." 36
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D. "Occurrence." CGL policies cover harm only if it is caused by an "occurrence." A common definition of "occurrence" is an "accident, including continuous or repeated exposure to substantially the same general harmful conditions." 37
An "occurrence" is an event that is unexpected from the standpoint of the insured. 38 Intentional acts in general are not covered by CGL policies because they are not accidental and, therefore, do not qualify as "occurrences." 39 But in AES Corp. v. Steadfast Insurance Co., 40 the Virginia Supreme Court revisited this general principle in a case involving a claim that an electric company contributed to global warming by emitting greenhouse gases. The Virginia Supreme Court held that "even though the insured's action starting the chain of events was intentionally performed, when the alleged injury results from an unforeseen cause that is out of the ordinary expectations of a reasonable person, the injury may be covered by an occurrence policy provision." 41 If, on the other hand, the insured knew or should have known that certain results were the natural and probable consequences of intentional acts or omissions, there is no "occurrence." 42 The full impact of...
