Understanding CGL Insurance
Commercial General Liability (CGL) insurance protects businesses against third-party claims for bodily injury, property damage, and personal/advertising injury. Most CGL policies follow a standard form developed by the Insurance Services Office (ISO), but variations and endorsements can significantly affect coverage.
A CGL policy provides two distinct benefits:
- Duty to Defend: The insurer must provide (and pay for) legal defense against covered claims
- Duty to Indemnify: The insurer must pay covered damages up to policy limits
CGL Coverage Parts
A standard CGL policy contains three main coverage parts:
- Coverage A - Bodily Injury and Property Damage: Covers third-party claims for physical injury or damage to tangible property caused by an "occurrence"
- Coverage B - Personal and Advertising Injury: Covers claims for defamation, false arrest, invasion of privacy, copyright infringement in advertising, and related torts
- Coverage C - Medical Payments: Pays limited medical expenses for injuries on your premises, regardless of fault
The Duty to Defend
The duty to defend is one of the most valuable aspects of CGL coverage. When a third party sues your business, the insurer must provide and pay for your legal defense if there is any potential for coverage.
How the Duty to Defend Works
When you are sued, you must promptly notify your insurer. The insurer then compares the complaint's allegations to your policy. If the allegations, if proven true, could potentially trigger coverage, the insurer must defend you.
The "Four Corners" Rule vs. Extrinsic Evidence
States differ on what evidence insurers can consider when deciding the duty to defend:
- Four Corners Rule: Some states (like Texas) limit the analysis to the "four corners" of the complaint and the policy. If the complaint's allegations potentially trigger coverage, the insurer must defend regardless of what actually happened.
- Extrinsic Evidence: Other states allow insurers to consider facts outside the complaint. Even if the complaint alleges covered conduct, the insurer might use outside evidence to argue the claim is not actually covered.
California follows the broad interpretation of the duty to defend. Under Gray v. Zurich Insurance Co. (1966), an insurer must defend if there is any potential for coverage based on the complaint's allegations, liberally construed. California also allows the insured to present extrinsic evidence in favor of coverage.
Importantly, California holds that the duty to defend extends to all claims in a lawsuit if any claim is potentially covered. The insurer cannot cherry-pick which claims to defend.
Consequences of Wrongful Refusal to Defend
If an insurer wrongfully refuses to defend and you are later found liable, the insurer may be:
- Liable for the entire judgment (even if it exceeds policy limits)
- Liable for your defense costs
- Subject to bad faith damages, including emotional distress and punitive damages
- Estopped from later claiming coverage defenses it could have raised
If your insurer refuses to defend, do not ignore the lawsuit. You must still respond to the lawsuit and defend yourself. Document the insurer's refusal carefully, as this becomes critical evidence in any subsequent bad faith claim.
Common CGL Exclusions
CGL policies contain numerous exclusions that limit coverage. Insurance companies rely heavily on these exclusions to deny claims. Understanding them helps you evaluate coverage disputes.
Expected or Intended Injury Exclusion
CGL policies cover "accidents," not intentional harm. This exclusion bars coverage for injury or damage the insured expected or intended. However, courts interpret this narrowly - if you intended the act but not the harm, coverage may still apply.
Contractual Liability Exclusion
Generally, CGL does not cover liability you assume under a contract. However, there is an exception for liability in an "insured contract" - typically including construction contracts with indemnification provisions.
Employer's Liability Exclusion
Injuries to your employees are excluded from CGL coverage. Workers' compensation is the exclusive remedy for employee injuries in most cases.
Professional Services Exclusion
Many CGL policies exclude liability arising from professional services. Professionals need separate errors and omissions (E&O) coverage for malpractice claims.
Pollution Exclusion
Standard CGL policies contain a broad "absolute" pollution exclusion that bars coverage for bodily injury or property damage arising from pollution. Courts have struggled with how broadly to interpret this exclusion.
Your Work / Your Product Exclusions
CGL policies typically exclude damage to your own work or products, though they may cover damage that your defective work causes to other property.
California interprets policy exclusions narrowly against the insurer. Under the doctrine of contra proferentem, any ambiguity in an exclusion is resolved in favor of coverage. The insurer bears the burden of proving an exclusion applies.
California courts have also been relatively restrictive in applying the pollution exclusion, particularly when pollutants are released as part of normal business operations rather than environmental contamination.
Coverage Triggers: Occurrence vs. Claims-Made
CGL policies come in two main types based on what triggers coverage:
| Feature | Occurrence Policy | Claims-Made Policy |
|---|---|---|
| Coverage Trigger | When the injury/damage occurs | When the claim is first made |
| Time of Policy | Policy in effect when occurrence happened | Policy in effect when claim is made |
| Future Coverage | Covered even if policy lapses | No coverage if policy lapses before claim |
| Tail Coverage | Not needed | May need Extended Reporting Period |
| Common For | Standard CGL policies | Professional liability, D&O |
The "Occurrence" Requirement
Standard CGL policies cover bodily injury or property damage caused by an "occurrence," defined as an accident, including continuous or repeated exposure to conditions. Key issues include:
- What is an "accident"? Generally, an unexpected and unintended event. Intentional acts with unintended consequences may qualify.
- When does the occurrence happen? For latent injuries (like asbestos exposure), courts differ on whether the occurrence is the exposure, the manifestation of injury, or the entire period.
- Which policy applies? When injury spans multiple policy periods, courts use various trigger theories to determine which policies respond.
Common CGL Disputes
Construction Defect Claims
One of the most litigated areas of CGL coverage. Disputes include:
- Whether defective work is an "occurrence"
- Whether damage to your own work is covered
- Whether the "your work" exclusion applies when subcontractors perform the work
- Additional insured coverage for general contractors on subcontractor policies
Additional Insured Issues
Many contracts require one party to name another as an additional insured on their CGL policy. Disputes arise over:
- Scope of additional insured coverage (limited or as broad as named insured)
- Whether the additional insured endorsement matches the contractual requirement
- Priority of coverage between policies
Number of Occurrences
Policy limits apply "per occurrence." Whether related incidents constitute one occurrence or multiple can dramatically affect available coverage. Courts use various tests, including the "cause" test (focus on the originating cause) and the "effect" test (focus on the injuries).
Late Notice
Policies require prompt notice of claims and occurrences. Insurers often deny coverage for late notice. However, many states (including California) require the insurer to show prejudice before denying coverage for late notice.
California requires insurers to demonstrate actual prejudice before denying coverage based on late notice. Under Shell Oil Co. v. Winterthur Swiss Ins. Co., mere late notice is insufficient - the insurer must show the delay actually harmed its ability to investigate or defend.
For construction defect claims, California courts have generally found that defective construction can be an "occurrence" and have allowed coverage for resulting property damage, though coverage for the cost of repairing the defective work itself remains disputed.
What to Do When Coverage Is Denied
If your CGL insurer denies a claim or refuses to defend, take these steps:
1. Get the Denial in Writing
Request a detailed written explanation citing specific policy provisions. This locks the insurer into its position and may reveal weaknesses in its reasoning.
2. Review the Policy Carefully
Obtain a complete copy of your policy, including all endorsements. Compare the denial letter to the actual policy language. Insurers sometimes cite exclusions incorrectly or ignore coverage grants.
3. Respond to the Lawsuit
If you are being sued, you must still defend the lawsuit even if the insurer refuses. Failing to respond can result in a default judgment against you.
4. Consider a Declaratory Judgment Action
You can file a lawsuit asking the court to declare the insurer's coverage obligations. This forces a judicial determination of the coverage dispute.
5. Document Everything
Keep detailed records of all communications with the insurer. Note dates, times, and the content of conversations. This documentation is crucial for any subsequent bad faith claim.
6. Consider a Demand Letter
A well-crafted demand letter citing relevant policy language and case law can sometimes prompt an insurer to reconsider a denial. It also documents the insurer's unreasonable conduct for a potential bad faith claim.
Bad Faith in CGL Disputes
When an insurer wrongfully denies coverage or fails to defend, it may be liable for bad faith. In CGL cases, bad faith can arise from:
- Wrongful refusal to defend: Failing to provide a defense when the allegations potentially trigger coverage
- Unreasonable coverage denial: Denying indemnity without a reasonable basis in policy language and facts
- Failure to settle: Rejecting a settlement within policy limits when liability is clear, exposing the insured to excess judgment
- Inadequate investigation: Failing to properly investigate the claim before denying coverage
California recognizes bad faith claims for commercial policyholders just as for individuals. Under Comunale v. Traders & General Ins. Co., an insurer that wrongfully refuses to settle within policy limits can be liable for the entire excess judgment.
For wrongful refusal to defend, California courts have held that the insured can recover defense costs, any resulting judgment, and consequential damages including bad faith damages if the insurer's conduct was unreasonable.
CGL Coverage Dispute?
I help businesses challenge wrongful CGL denials and refusals to defend. Whether you need a demand letter, coverage analysis, or representation in a declaratory judgment action, I can help protect your business.