Presenting a live 90-minute webinar with interactive Q&A CGL Contractual Liability Coverage: Navigating the Scope of the Liability Exclusion and its Exceptions Advocating Coverage Positions for Policyholders and Insurers TUESDAY, APRIL 19, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: David M. Kroeger, Partner, Jenner & Block, Chicago Kristine M. Sorenson, Partner, Walker Wilcox Matousek, Houston David Taubenfeld, Partner, Haynes & Boone, Dallas The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. 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Program Materials FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: • Click on the ^ symbol next to “Conference Materials” in the middle of the left- hand column on your screen. • Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program. • Double click on the PDF and a separate page will open. • Print the slides by clicking on the printer icon. Contractual Liability Exclusion Kristine M. Sorenson Walker Wilcox Matousek LLP 1001 McKinney Street, Suite 2000 Houston, Texas 77002 (713) 343-6580 [email protected] Exclusion b Contractual Liability Exclusion CG 00 01 04 13 “Bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. This exclusion does not apply to liability for damages: (1) That the insured would have in the absence of the contract or agreement; or (2) Assumed in a contract or agreement that is an “insured contract,” provided the “bodily injury” or “property damage” occurs subsequent to the execution of the contract or agreement. Solely for the purposes of liability assumed in an “insured contract”, reasonable attorneys’ fees and necessary litigation expenses incurred by or for a party other than an insured are deemed to be damages because of “bodily injury” or “property damage,” provided: 6 Exclusion b Contractual Liability Exclusion CG 00 01 04 13 (a) Liability to such party for, or for the cost of, that party’s defense has also been assumed in the same “insured contract”; and (b) Such attorneys’ fees and litigation expenses are for defense of that party against a civil or alternative dispute resolution proceeding in which damages to which this insurance applies are alleged. 7 History of Contractual Liability Exclusion • 1973 ISO general liability form excluded coverage for liability assumed under any contract or agreement, except an “incidental contract” • “Incidental contract” defined to include the leases, easements, indemnification of a municipality, sidetrack agreement and elevator maintenance agreement. • If construction contractor desired coverage for liability assumed in an indemnification or hold harmless agreement, had to purchase separate coverage. 8 History of Contractual Liability Exclusion • 1986 ISO general liability form revised to exclude “bodily injury” or “property damage” for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement. • Exception for liability or damages “assumed in a contract or agreement that is an ‘insured contract’ or that the insured would have in the absence of a contract or agreement.” • “Insured contract” defined to include contracts encountered in the construction business including hold harmless and indemnification agreements. • Specifically references assumption of another party’s tort liability for injuries/damage to third parties. 9 Scope of Exclusion • “Liability assumed by the Insured under a contract or agreement presents an uncertain risk which cannot be determined in advance for the purpose of fixing premiums.” Gibbs M. Smith, Inc. v. U.S.F.&G. Co., 949 P.2d 337 (Utah 1997). • Before determining if the exclusion applies, the Insured must show that the Insuring Agreement is triggered. American Family Mut. Ins. Co. v. American Girl, Inc., 673 N.W.2d 65 (Wis. 2004). • The Insured must show that the underlying lawsuit alleges “property damage” or “bodily injury” caused by an “occurrence” and not just purely economic damage for breach of contract. Id. • Does not mean coverage is excluded for all causes of action for breach of contract. Desert Mountain Properties, Ltd. v. Liberty Mut. Fire Ins. Co., 236 P.3d 421 (Ariz. App. 2010); Olympic, Inc. v. Providence Wash. Ins. Co., 648 P.2d 1008 (Alaska 1982). • Applies solely to liability for “property damage” or “bodily injury” assumed under a contract. • Some courts apply the exclusion only to the insured’s contractual assumption of a third party’s liabilities. • Some courts also apply the exclusion also to the insured’s contractual assumption of its own liabilities, but only in certain situations. 10 How do Courts interpret “Assumption of Liability in a Contract or Agreement”? • When the Insured contractually assumes the liability of a third party, such as an indemnification or a hold harmless agreement. American Family Mut. Ins. Co. v. American Girl, Inc., 673 N.W.2d 65 (Wis. 2004). • When the Insured contractually assumes any obligation (not just the liability of a third party – can be an obligation related to the Insured’s own work) that it would not ordinarily owe under a general duty of care. Gilbert Texas Const., L.P. v. Underwriters at Lloyds London, 327 S.W.3d 118 (Tex. 2010). 11 American Family Mut. Ins. Co. v. American Girl, Inc., 673 N.W.2d 65 (Wis. 2004). • Insured is a construction contractor. • Contracted to design and build a distribution center warehouse. • Warranted that the design would be free from defects. • After construction completed, the warehouse began to sink, causing the property to buckle and crack. • Insured was asked to pay for repairs under a breach of contract theory. • Insurer filed declaratory judgment lawsuit. Wisconsin Supreme Court: “Assumption of liability” means situations where the insured has contractually assumed the liability of a third party. “[I]t does not operate to exclude coverage for any and all liabilities to which the insured is exposed under the terms of the contract it makes generally.” Limits exclusions to indemnification and hold harmless agreements and risks the insured cannot control or reasonably foresee. Because Insured sued for defect in its own work, exclusion does not apply. 12 Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010). • Insured is a construction contractor. • Contracted to build light rail system for Dallas Area Rapid Transit Authority. • Agreed in the contract to protect the work site and surrounding property. • Building on adjacent property flooded after heavy rains and Insured sued for negligence and breach of contract (under third party beneficiary theory). • Insurer reserved rights under contractual liability exclusion and Insured filed declaratory judgment lawsuit. Texas Supreme Court: Contractual liability exclusion is not limited to situations where the Insured assumes the liability of a third party under a hold-harmless or indemnification. Rather, the exclusion applies anytime the Insured contractually assumes a liability (even for itself) that would not be ordinarily be owed. Here, the Insured contractually agreed to protect the surrounding property, an obligation that would not have been owed absent the contract. Thus, the exclusion applies. 13 Ewing Const. Co., Inc. v. Amerisure Ins. Co., 420 S.W.3d 30 (Tex. 2014). • Insured is a construction contractor. • Contracted with school district to build tennis courts. • After construction completed, tennis courts flaked, crumbled and cracked. • School district sued insured for negligence and breach of contract. • Insurer denied coverage due to contractual liability exclusion. Texas Supreme Court: Contractual liability exclusion does not apply even though the Insured was sued for a defect in its own work. Rather, the contractual liability exclusion applies when the Insured’s duty of care is enlarged by a contract. The Insured was sued for failure to construct the tennis courts in a good and workmanlike manner, which is an ordinary obligation owed by a construction contractor. There is nothing in the contract that enlarges the Insured’s duty of care or creates any obligation that would not ordinarily be owed. Thus, the contractual liability exclusion does not apply. 14 Travelers Property Cas. Co. v. Peaker Services, Inc., 855 N.W.2d 523 (Mich. App. 2014) • Insured services commercial power-generation systems. • Contracted with the University of Michigan to install an electrical system at a power plant. • Warranted its goods and services were free from defects and contractually agreed to return the University’s property to “as is” condition if damaged during construction.