Bonds in the CGL Policy
A Look at Bail Bonds and Bonds to Release Attachments in the CGL Policy
This article originally appeared in the Winter, 2015 issue of Resources Magazine, a publication of The National Alliance for Insurance Education and Research.
Most people do not think of the Commercial General Liability (CGL) Policy as a place to get payment for bonds, but the CGL Policy provides payment for two types of bonds: (1) up to $250 for the cost of bail bonds, and (2) the cost of bonds to release attachments. This coverage is found in the Supplementary Payments section of the CGL Policy.
Bail is a deposit made to a court of law, intended to encourage individuals to show up for their trial. For example, if you are involved in a traffic accident, you may need to go to court to face trial. An effective way to ensure that you show up for trial is to hold you in jail until your trial date. Instead of waiting in jail for your trial, you would probably prefer to pay a bail amount that would allow you to go home and live your normal life until your trial date arrived. Let us say that a judge sets your bail at $10,000. If you write a check to the court for $10,000, you are free to go home. If you appear for your trial, you will get your bail money back. If you do not show up for your trial, you will not get your money back.
If you do not have the money to post bail, you can purchase a bail bond. In California and several other states, the cost of a bail bond is set at 10% of the total amount. This means that if you need to post $10,000 bail, you can go to the corner bail bond shop and pay $1,000—10% of the total bond amount—to purchase a bail bond. The bail bond company will then post the $10,000 bail with the court. The bail bond company will get the $10,000 back when you show up for trial. If you do not show up for trial, bail bond companies are often affiliated with bounty hunters who have the job of hunting you down and delivering you to court so that the bond company can receive its $10,000.
The Supplementary Payments section of the CGL Policy will pay up to $250 for bail bonds “required because of accidents or traffic law violations arising out of the use of any vehicle to which the Bodily Injury Liability Coverage applies” (CG 00 01 04 13, Insurance Services Office, Inc., 2012).
What does a $250 bail bond purchase? In 2014, 19-year old Justin Bieber was arrested after allegedly arguing with police, smelling like alcohol, and trying to race a yellow Lamborghini against a red Ferrari in a residential area of Miami Beach. After an hour in jail, a Miami judge released Bieber with a $2,500 bond. If this bond price was set at 10% of the total bond, then the $250 available from the CGL Policy’s Supplementary Payments section would have been enough to cover the cost of the $2,500 bond needed to release Justin Bieber from jail.
Now that you understand how bonds work and what bond you can purchase for $250, there is still a question of when a CGL Policy would pay for such a bond. The $250 is for “bail bonds required because of accidents or traffic law violations arising out of the use of any vehicle to which the Bodily Injury Liability Coverage applies” CG 00 01 04 13, ISO, 2012, Page 8. Coverage A of the CGL Policy excludes aircraft, autos, or watercraft. When would there be bodily injury relating to a traffic law violation arising out of the use of a vehicle that would not be excluded by the aircraft, auto, or watercraft exclusion?
To answer this, you need to remember the difference between an auto and mobile equipment. Both autos and mobile equipment are considered vehicles. Autos are not covered under the CGL Policy, but liability from mobile equipment is covered. Therefore, going back to the example of Justin Bieber in 2014, imagine that instead of racing a yellow Lamborghini, he was racing a yellow forklift. If there was an accident or traffic law violation triggering coverage, Supplementary Payments could have paid up to $250 for the cost of the $2,500 bond he needed to stay out of jail. [See Footnote 1 below].
In offering payment for the bonds, the insurance policy makes it clear that the insurance company does not need to furnish the bonds. That is, they do not need to pay the $2,500 to the court. The supplementary payment is only for the $250 necessary to purchase the bond from a bond company.
Bonds to Release Attachments
The CGL Policy Supplementary Payments Section also pays for “the cost of bonds to release attachments, but only for bond amounts within the applicable limit of insurance” CG 00 01 04 13, Insurance Services Office, Inc., 2012, Page 8. An attachment is a legal process to seize property through the courts. It can be an action to take property to satisfy a debt, or to take back property that was wrongfully taken.
To understand how bonds work with the attachment process, imagine that I accuse you of stealing my baseball card collection. You say that you did not steal my baseball card collection and that the baseball cards in your possession have always been your cards. The legal claim to return wrongfully disposed personal property to the rightful owner is called “replevin.” In order to get back my baseball card collection, I would file a replevin lawsuit against you. I am the plaintiff. You are the defendant.
In the common law tradition, the plaintiff (in this case, me) was entitled to the immediate return of the personal property when the replevin lawsuit was initiated. If the plaintiff won the lawsuit, the plaintiff got to keep the personal property and recover damages for the original wrongful detention of the personal property. If the plaintiff lost the lawsuit, the plaintiff had to return the property. This means that in the common law tradition, I would get the baseball cards back immediately when I filed the lawsuit. If I won the replevin lawsuit, I would get to keep the cards. If I lost the lawsuit, the baseball cards would be returned to you.
In the majority of jurisdictions today, the plaintiff is required to post a security bond when initiating a lawsuit for replevin. The bond is to cover damages (plus interest) suffered by the defendant as a result of being without the property in the event that the plaintiff loses the replevin lawsuit. For example, what if people visit your store because of your baseball card collection? You may lose business as a result of being without your baseball cards. If you win the replevin lawsuit that I file against you, you would be entitled to get your cards back as well as financial damages for any lost business that you suffered as a result of being without your baseball card collection. The plaintiff bond that I, the plaintiff, had to purchase when initiating the lawsuit is designed to cover the financial damages you might suffer while being without your baseball cards.
Imagine that you were really attached to your baseball cards and did not like the idea that you had to turn them over to me just because I called them “mine” and sued you for the cards. Or, imagine that the personal property I claim is mine is something more personal—like your pet dog—or something crucial to your business operations—like all of the coin laundry machines in your coin laundry machine business. You probably are not excited about giving me your pet dog even if I post a plaintiff bond along with my lawsuit. You want to keep your property. To address this issue, the defendant can purchase a defendant bond. The defendant bond enables the defendant to keep the property during the lawsuit. The amount of the defendant bond is designed to pay damages (plus interest) to the plaintiff if the plaintiff wins the lawsuit.
Now you know that an attachment is a legal process to seize property through the courts. You also know how bonds work in the attachment process. What are the “bonds to release an attachment” that are covered by the CGL Policy?
To explain bonds to release attachments, imagine that you own a coin laundry machine business and you owe me $20,000. Your laundry machines are worth $20,000. You make about $10,000 per month from these laundry machines. This is your only income. I go to court to start the attachment process so that I can get your laundry machines and sell them to satisfy the $20,000 debt that you owe me. If I take the laundry machines, you will have no more income.
As we saw with the defendant who wanted to keep the baseball cards (or dog, etc.) in the replevin action, you could get a bond to release the attachment on the laundry machines. The bond to release the attachment would allow you to keep the attached property (the laundry machines). It would cover the $20,000 owed, plus any interest on the $20,000. This would allow you to continue operating your coin laundry business so that you could earn the money to cover your obligation without ever losing the machines.
The Supplementary Payments section of the CGL Policy pays for “the cost of bonds to release attachments.” Therefore, assuming a one-year attachment with an annual interest rate of 10%, the bond necessary to release the $20,000 attachment would be at least $22,000. In a state that charges 10% for such a bond, the cost of the bond would be $2,200. The insurance policy would pay this $2,200 for the bond to release the attachment.
Although the Supplementary Payments section states that “payments will not reduce the limits of insurance,” it will only pay for the cost of bonds to release attachment when the “bond amounts [are] within the applicable limit of insurance” CG 00 01 04 13, Insurance Service Office, Inc., 2012, Page 8. For example, in Graf v. Hospitality Mutual Insurance Company, 754 F.3d 74 (First Circuit, 2014), a court ruled that an insurance company was not required to pay for the cost of an attachment bond after the insurance company had exhausted its limits.
In the above case, Hospitality Mutual Insurance Company issued a Liquor Liability Policy to Torcia and Sons, Inc., owner and operator of the Fat Cat Bar and Grill. Graf, a patron who was injured while on Fat Cat’s premises, secured a judgement in her favor. Hospitality paid $500,000, exhausting the per-person, per-incident policy limit. This was not enough to pay for the entire judgement awarded to the plaintiff. To collect the remaining balance, Graff secured an attachment on Torcia’s liquor license. Just as in the earlier example, the laundry operator wanted to keep the machines necessary to stay in business, Torcia wanted to retain the license in order to keep Fat Cat in business. Torcia wanted a bond to release the attachment on the liquor license and argued that its CGL Policy should pay for it. Hospitality refused because it had already paid the full policy limits, and argued that it did not have to pay because the cost of the attachment bond was not “within the applicable limit of insurance.” The court agreed. The supplementary payment for the cost of bonds to release attachments is paid in addition to any damages paid under coverage A and B. However, since the payment for these bonds has to be “within the applicable limit of insurance,” there will be no payment for the cost of these bonds once a policy’s limits are exhausted.
Keep in mind that the insurer is under no obligation to furnish a bail bond or the bond to release attachments. Even though there is a supplementary provision that indicates that the CGL will provide for payment for the cost of a bail bond and the cost of a bond to release attachments, it is important to understand the terms under which the policy will make these payments.
Footnote 1: Although not mentioned in the published article, a more likely example of the bail bond getting covered by the CGL policy would come from the Aircraft, Auto or Watercraft exclusion’s exception that will cover parking an ‘auto’ on, or on the ways next to, premises owned or rented by the insured (Exclusion G). If an employee totals Bieber’s Lamborghini while the employee is parking a guest’s car on the street in front of the business, there could be coverage for the Lamborghini from the CGL Policy, and there could be a bail bond required because of the accident or traffic law violation. CGL coverage applies and so the required bail bond would be covered by the CGL policy.
The contents of this article come from my book Understanding the CGL Policy. The book is available as an ebook or paperback at https://www.lulu.com/shop/search.ep?keyWords=dwight+kealy&type= or as an audiobook at https://www.audible.com/pd/Understanding-the-Commercial-General-Liability-Policy-Audiobook/B07G5JBS45?source_code=AUDFPWS0223189MWT-BK-ACX0-124130&ref=acx_bty_BK_ACX0_124130_rh_us or wherever you purchase audiobooks.