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E&O and the CGL Policy

The line of insurance with proportionately the highest incidence of E&O claims is CGL coverage. This is probably not surprising given the broad use of this liability coverage, the complexity of exposures that it's used for, and the number of endorsements that can be overlooked. We polled the VU faculty to see if we could get some more specific examples of things to look out for in the CGL program that could lead to E&O claims.

1. The title of my CGL seminar is "The Most Confusing Policy On The Planet." It is because the CGL form is so broadly written. Coverage A is "open peril" thus the policy under Coverage A insures infinite losses, unless one of the a. thru q. (2007 edition) exclusions apply. Restated, "infinite possibilities of coverage, no coverage—seventeen possibilities" (from Mealey's Litigation Report, 12/18/2008).

2. Coverage is given in the policy by "open peril" in Coverage A, Named Peril under B and C. Coverage is given in Definitions, and Exclusions (exceptions), it is taken away in Definitions (see exclusion for electronic data in the definition of "Property damage"). It is given in one part of the policy, then taken away in another then given back in some other place.

3. There are no telling how many ISO endorsements there are, plus there are 8 ISO Edition Dated forms I see in the marketplace. Then the insurers take that and make their own changes.

4. There are more court cases than "bailout money" which vary by state and form edition.

5. It is only because there are few major CGL losses that agents are not sued everyday.

1. The sheer size of the CGL's scope of coverages, plus the extremely diverse types of risks covered, make it the Mt. Everest of insurance in my estimation.

2. In addition, there are a huge number of endorsements, some of which provide additional coverages, and some of which restrict/exclude coverages, that add to the complexity.

3. In any given agency, there are probably several editions of the CGL in use, considering all the liability markets an agency of any size might have access to. And not only are there different editions of the ISO CGL around, many insurers, and certainly many surplus insurers, have either a proprietary edition, or have some unique endorsements which change coverage.

4. Many commercial liability insureds sign contracts with their customers, and the provisions/requirements of most business contracts used today demand coverages and/or conditions which can be difficult, if not impossible, for the CGL to adequately respond to.

5. Coordinating the CGL with excess, buffer, and/or umbrella policies is usually challenging, given that these policies are usually not standard.

6. Certificates of insurance generate a number of E&O cases all by themselves.

7. Litigation continues to be a big player in liability insurance, and some E&O losses by agents are probably the result of an adverse court decision over coverage, or some duty related to providing coverage, more than a true error by the agent.

8. Issues related to providing additional insured coverage are complex, and seemingly ever-changing. Witness the on-going changes to the CG 20 10, etc. Most of the national caliber instructors I know have developed half-day seminars on this subject.

9. The appetite of insurers to provide certain coverages frequently changes, and this is as true in commercial liability as anyplace in insurance. This presents a real problem with renewals, where communication about newly added restrictive endorsements is often not handled properly. Based on what some E&O attorney friends tell me, policy checking of renewals is sorely lacking in many agencies.

10. Coordinating the CGL and the BAP on mobile equipment is also a potential problem, especially given the 2004 changes. Again, with different edition dates of CGL and BAP in the marketplace, and in many agencies, gaps are a sizeable hazard.

The biggest problem is a lack of policy understanding by the producer. I think that has been true for a long time. In the "old days," insurers would actually backdate on the proper coverage and have the producer pay the annual premium. That stopped sometime in the 1970's.

With an industry that still uses the phrase "inland marine policy" to describe a form that can cover anything from goods in transit to builder's risk to cellular towers is it any wonder why agents get sued?

Even when required to use "plain English," carriers have by and large done a terrible job of packaging the product so that insureds can understand it. I work with these policies day in and day out as a consumer as well as a lawyer defending liability claims and I have to say it's always a challenge to know what's covered. And I at least had the benefit of a class in insurance law while in law school, which isn't typical for most of my peers.

We get a declaration page and then a bunch of standard ISO forms and then another few endorsements, riders, and state-specific forms that over-ride, amend, and otherwise make it impossible to know exactly what we bought without doing a diagram or cut-and-paste exercise. It takes an act of will to read it. Most insureds stuff it in a drawer and don't attempt to figure out what they have until after they have suffered a loss.

Add to that the fact that most producers are out chasing new business and delegating to staff the chore of packaging and delivering the policy for the client, and you have now created the perfect recipe for misunderstandings, gaps in coverage, and ultimately E&O claims against the agent. This picture is getting uglier by the day as the "old hands" are retiring and the process is getting more automated.

The courts are also not cutting the agent any slack. In our jurisdiction, the courts recently allowed an insured to assign her E&O claim against her agent (for failing to recommend the right coverage) to the third party claimant who sued her.

From my experience, the agents who have done the best job of avoiding these pitfalls do the following:

1. Stay close to their clients and talk to them, in person, at least once a year to make sure they know what the insured is doing in his or her business.

2. Understand the insured's industry so that the agent can independently assess the most likely risks for that client.

3. Ask the insured questions that draw out the need for extensions of coverage or new coverages to protect against most likely risks. Even if they don't buy it, by documenting that they had the discussion, the agent might dodge the E&O bullet later.

4. Recommend the coverage.

5. If the client doesn't buy it, note your file.

6. If the client won't buy sufficient cover for the likely risk (i.e., if an unreasonably low limit makes the insured a candidate for a limits demand on every claim), then don't take the business.

7. Don't process renewal applications for insureds who habitually wait till the very last minute (after ignoring all your prior reminders, requests, offers to fill out the application for them, etc.) to seek a quote.

8. Make sure your outgoing voicemail message and email out-of-office response states that coverage can't be bound by voicemail or an email request.

• Occurrence—Not only understanding that you have to have "one of these" to trigger the coverage but also that a party must be insured at the time of the occurrence and the coverage that will be "in place" is the coverage at the time of the occurrence—not when the work is done; not when the cert is issued; not when the contract is signed but when the "snap, crackle, pops" which causes BI/PDF to a third party. There is a litany of items that arise out of this word from the need for discontinued products and on and on.

• Contractual Liability has nothing to do with the performance of contracts.

• CL only covers BI/PD not "any and all." (Get the word blanket out of your vocabulary.)

• Differences between Named Insureds and Additional Insureds. There is no such thing as an "Additional Named Insured" endorsement.

• The pollution exclusion is NOT absolute.

• The pollution exclusion involves BI as well as PD and clean up. EVERY client that you have has a pollution exposure; the only question is how big is it.

• Definitions usually show up as part of exclusions or limitations, not as coverage definitions.

No question that I have heard more denial problems with GL over the last 2 years than the previous 30. Coming from big carriers also. A major national carrier seems to be the #1 problem. Almost like they had a national meeting and said use the following 2 or 3 items right away to deny all GL claims:

• If it caused any damage, it had to be intentional.

• The whole "no occurrence" thing which ties in with above. It can't possibly be an accident if damage takes place. They won a big one in PA with this issue.

• No defense of ANY kind until suit is actually filed.

Many an insured sits there and says—what did I pay for?

1. Per location or per project aggregates (or absence of same).
2. Per claim deductibles (vs. per occurrence).
3. AI endorsements (missing, wrong one, etc.).
4. New, restrictive endorsements added at renewal—not pointed out.
5. Damage to property of others exclusions/limitations (the whole batch).
6. Carrier enhancement endorsements—change carriers and don’t point out differences.
7. Not adding Employee Benefit liability.
8. Not adding Non-owned and Hired Auto when there are no owned autos.

It's a terrific question and I'll be very interested to see what the rest of the faculty has to say. Despite all the time and energy spent fly-specking the CGL form, almost all of the E&O defense work I've done as an expert witness has involved property coverages rather than liability. The few liability matters didn't really involve the policy language. Instead, they involved disputes over notice of cancellation, whether non-owned auto was (or should have been) included, etc.

If I had to predict which area would be most likely to cause trouble, it would be the property damage exclusions: CCC, property being worked on, damage to "your work," damage to "your products," etc. The other serious problem is the pollution exclusion. I don't think most agents fully appreciate the extent of that one.

I find that the majority of questions I get in class that relate to Coverage A are what I call the "Stooges" exclusions: j. damage to property, k. damage to your product, l. damage to your work, and m. damage to impaired property. Under Coverage B no one seems to know what is covered for "advertising injury." Everyone seems to get Personal Injury, however. Everyone is completely mystified by impaired property.

I think some of the problem too is that adjusters deny covered claims. A lawsuit follows that includes the agent and carrier. One potential solution is to use a process like the VU “Ask an Expert” service to opine on the claim. We’ve been successful in getting a number of claims paid that were initially denied. I have a feeling we prevented lawsuits on at least a few of them

1. I think the size of the claims is important to this discussion. It is surprising to me the number of times I am approached as an expert, and it turns out it is just NOT WORTH LITIGATING! It is easy to find case law involving casualty claims. The exposure is just larger and the claims are worth litigating! Just go and search for case law involving everyday property claims or auto physical damage. It simply is not there unless it involves an exposure that is MUCH larger.

2. Property exposures are easier to identify and quantify. Exposure identification and analysis in casualty insurance is much more difficult, and you cannot just look at the risk and see all of them. In property there is a "thing" to look at to trigger the exposure in the mind! In casualty there are a myriad of exposures that are not self evident. As the industry has restructured and the exposures have evolved, the forms have evolved and there has been a profit-motivated narrowing of coverage offered by the forms. EPLI, D&O, Claims Made Exposures, Pollution and other issues rear their ugly heads and would have garnered no more than a passing glance thirty years ago. Many of them would have been considered covered by the forms!

3. Insureds are in denial. They simply are not going to have a claim. When you try to sell higher limits, the Insured thinks that these things are not going to happen to them. If it does happen it will NEVER hit huge limits like that. I was an expert on a case where there was a 2.5 Million Dollar settlement, and million per occurrence limit on the insurance. This is enough to compel the insured to seek relief from someone else, and that someone else was the agent who sold the coverage. It is also enough to compel the attorneys who take the cases on a contingency basis.

In this case I could document NINE TIMES the insured had been offered higher limits and not acted on them! NINE Times! We won the case on summary judgment, with my brief saying the insured would NEVER have bought the limits until after the claim!

Pre Loss Apathy, leads to Post Loss Aggression! The aggression takes on a much more ardent fervor when the amount at risk exceeds seven figures! When it is an uninsured building, it simply is not worth going after for the attorneys! You seldom approach these numbers in property claims, only casualty.

So why not in commercial auto liability? Well...many of these BI claims that are uncompensated are borne by the health insurance and disability insurance carriers. While this happens in GL claims too, many claims are for a much higher dollar amount and many involve complicated coverage like contractual liability and intricate exclusionary language in the GL form.

Bottom line in my opinion, casualty exposures are much more undefined, much more serious, and much more difficult to manage. People also rely on certificates of insurance (how do you take a blank piece of paper and render it totally worthless) and agents are NOT experts in contract analysis, AND the agent does not even KNOW about the contract until AFTER the claim.

I delivered the six hour CGL lecture addressing the 1986 ISO changes to 27 different audiences in Virginia, Pennsylvania and West Virginia. I quickly realized a very large percentage of the audience didn't understand the 1973 CGL policy. I changed my lecture to clearly communicate the application of coverage under the 1973 CGL and then tell the audience how the 1986 changes applied, along with several other changes that materially improved audience understanding of the subject.

I started doing litigation support and litigation support work after the U.S. Supreme Court's decision in Daubert in 1993. About 20% of my cases have involved CGL. About 90% of the CGL cases have been on the defense side — either carrier or agent E&O.

With few exceptions I will describe the problems as a fundamental lack of understanding. Some involved agents with utterly no comprehension of CGL coverage. You can only imagine what they told their insured. Of course, there was no documentation. Other cases involved underwriter or adjuster errors.

A major problem, in my view, is agent's lack of understanding of liability exposures faced by small and middle market accounts and how the CGL coverage applies. Small account liability exposures are no less complex than large accounts. In fact, the organizational structure of many small businesses make their liability exposures more complex than a large firm.

The CGL policy is a very complicated agreement. The 2004 form contains 17 pages. The 8th edition of Don Malecki's book explaining the policy contains 238 pages with over 100 pages of appendices. The International Risk Management Institute's Commercial General Liability manual contains over 1,500 pages. The Pre-License Training Manual required to obtain a Property & Casualty insurance license contains five (5) pages on the CGL.

Far, far too many agent's grasp of this policy is limited to their five (5) page education in the Agent's Pre-Licensing manual. They need to have an understanding of Malecki's book.

I've lectured on CGL for over 20 years. In my opinion audience grasp of CGL today is worse than the audiences 20 years ago. Closure of the insurance company agent training schools has materially reduced core knowledge of personnel entering the industry since the early to mid-1990's.

Let me suggest a focus of effort in several areas:

1. Improve the agent's interview process to identify the structure of the insured's ownership and the relationship of facilities, operations and activities to the application of CGL coverage.

2. Educate the agents on leases, contracts and the application of CGL coverage.

3. Improve the agent's communication of CGL coverage to the insured within the context of (1) and (2) above.

4. Use real claims examples to communicate the complexity and problems. Real examples are more interesting, plus they make great sales tools.

5. Make 75% of claims examples within 80% of the policy limit. Make 25% of your claims examples in excess of the policy limit. Using large claims as examples let people know how serious this subject truly is. It also helps keep the audience awake.

6. Use gray area claims examples that may or may not be within the CGL policy.

7. Instruct the agents in the integration of CGL with Pollution, Employers Liability, EPLI, D & O, Professional Liability, etc. CGL is only one part of liability exposures.

I am happy to provide my view of the problems agents and brokers have with the CGL. Of course, it would be helpful to me if the information you divine from your case files was something you can share with me. In other words, what areas of the CGL have you found are usually the grounds for the E&O claim? However, in my experience over the last decade or so, here are my views:

Complex Policy. For the most part, the CGL policy is a relatively complex policy with an unusual number of twists and turns – exclusions, exceptions to exclusions, etc. It is my impression, and this becomes particularly clear when speaking on the CGL to thousands of agents and brokers through the country and Puerto Rico, that most agents and brokers grossly overestimate how well they understand the CGL. Put another way, agents' and brokers' general understanding of the CGL is superficial and in too many cases is simply wrong and is based on some common misconceptions (see recent IRMI article on that topic). A simple question that agents and brokers should ask themselves regarding a CGL coverage issue or exposure is “what is the basis for my belief?” or “where in this CGL policy does it state that?” Such simple questions can be very revealing and unmask very quickly that no genuine foundation exists.

Coverage Trigger. In my view, to begin with, the insuring agreement is not well understood. In particular, there is great confusion as to when a CGL policy is triggered. That the BI or PD must take place during the policy period to trigger the coverage is a surprise to too many agents and brokers. The result is that the implications of this – including the need for discontinued products-completed operations – are often overlooked. Further, the definition of property damage is often overlooked, including newer CGL editions which remove electronic data as tangible property.

Insured Contract. Many agents and brokers believe the definition of “insured contract” provides coverage for additional insureds. The distinction between being an indemnitee and an additional insured is rarely understood. In fact, the entire concept of hold harmless and indemnity agreements and how liability may result is often foreign.

Insureds and Additional Insureds. Similar to the above, understanding the difference among named insureds, automatic insureds and additional insureds is often lacking. In particular, the scope of coverage of provided to additional insureds – vicarious liability, concurrent or sole negligence coverage – is also not understood or even considered. Forget “primary and non-contributory” and how this might be a problem. Insureds are routinely left off or improperly identified.

Exclusions. The CGL has numerous exclusions with various exceptions. It is not practical for agents and brokers to have an in-depth understanding of the complexities and subtleties of each CGL exclusion. However, agents and brokers should have firmly in mind at least one solid example of how each exclusion in the CGL would apply. Otherwise, when clients ask coverage questions or have certain exposures, that an exclusion might apply does not even occur to an agent or broker. Having an authoritative source to help understand CGL exclusions is important – such as VU or IRMI. Usually this has to be something beyond what is known in the office or offices. Many of the misconceptions are based the result of “Joe is the most knowledgeable person I know about insurance and he says….” Agents and brokers need to get beyond relying solely on the interoffice memo or conversation. What is sad as I travel around is that maybe 1 in 10 agents have ever heard of IRMI or the VU.

Legal Concepts. The basis for legal liability – negligence, strict liability, breach of warranty, contract, statute, etc. – is usually poorly understood. Some believe that liability is only imposed for negligence. Also, how policies are interpreted is not something on which agents and brokers should necessarily be experts, but an agent or broker should have some basic understanding. For example, it is too common for an agent or broker to tell their client that since they can’t understand an exclusion or policy provision that it is ambiguous and will be resolved in their favor (this is pretty dangerous). Or if they (the agent) are wrong, the client still has insurance – through the agent’s E&O. This grossly understates to their client the issues involved with agent and broker liability and the cost to the client of the need to litigate against the insurer or agent to recover. That the courts ultimately decide what policy wording means is often news to agents and brokers. Along the same lines, letters from underwriters that contradict the plain meaning of the policy are worthless if the insurer decides to dispute coverage – the idea (and I know it is ideal) that the policy has to be endorsed to change its policy wording should be in the forefront of the minds of agents and brokers.

Insurers. The last person I would suggest that an agent or broker ask about the meaning of the standard CGL policy is the underwriter. It is not the underwriter’s job to be a coverage expert and any advice they give the agent or broker is not enforceable unless the policy already states so.

Sell at All Costs. While I believe it is a relatively small number, some agents and brokers are not concerned with what they are selling – whether it provides protection for their insured. Their only goal is to sell, sell, sell! Like politicians, they make promises they cannot keep regarding everything, including CGL coverage, to meet their overriding goal of selling – regardless of the cost. This is short term thinking, and not unique to insurance, but is too prevalent.

This is just a general overview. It is not my goal to be hard on agents or brokers as insurers, in my view, have an even poorer understanding of the CGL unless and until competent legal counsel is involved in a claim. Then it is usually too late for the agent or broker. This idea that insurers often resist providing their agents with any meaningful guidance in interpreting the insurers’ policy is problematic – because the insurer certainly has a definite opinion on the same situation or circumstances when a claim is made.

Last Updated: May 22, 2009