Note: This article originally appeared in the September 8, 2014 issue of the Insurance Journal.
The commercial general liability (CGL) occurrence form policy is like a row of briefcases each filled with $1 million.
Inscribed on the front of each briefcase is a year representing a specific annual policy period. Each briefcase has a combination lock. If you have the right combination, you can open the briefcase and take as much money as you need to pay damages covered by that year’s policy.
The above describes a row of CGL insurance policies that each have $1 million occurrence limits and $1 million aggregate limits. The occurrence limit is the most the policy will pay for any one occurrence. The aggregate limit is the total amount the policy will pay, regardless of the number of occurrences. If you have an occurrence that is covered by the policy, you have the right combination to access the policy’s $1 million limits. Once the aggregate limit is paid, the briefcase is empty.
The Right Combination
What is the right combination? Coverage A of the CGL policy is designed to cover bodily injury or property damage caused by an occurrence during the policy period. If there is an occurrence during a policy period for which the insurance applies that is not excluded by the policy, you have the right combination to open the brief case.
Which policy will pay depends on when the occurrence happens. If your client receives a lawsuit this year that says they caused covered occurrences in each of the last four years, you would have the correct combination to go to the four prior policy/briefcases. This means that your insured has access to a total of $4 million because they are going to open four different briefcases that each has a maximum of $1 million. Their current policy would not pay unless the occurrence also took place during the current policy period. This is true even though they received the lawsuit (claim) this year. The correct combination is based on when the occurrence took place; not when the claim is made.
The Prior Work Exclusion
Many CGL policies for contractors contain a prior work exclusion. The prior work exclusion changes the combination on the briefcases so that there is no coverage for any occurrences arising out of work the contractor completed prior to the policy period. If a 2014 policy had a prior work exclusion, it is saying that it will not cover any occurrences arising out of work done prior to 2014. This is true even if the occurrence takes place during 2014. The exclusion creates a wall between the 2014 and 2013 briefcases.
Speaking of walls, imagine that you are a mason, and in 2013, you built a wall. In 2014, the wall fell on a person causing bodily injury. You get sued. You go to the 2014 briefcase, enter the combination, and you get a letter back apologizing that you do not have the correct combination. There is no coverage because, although there was an occurrence during the 2014 policy period, the policy/briefcase contains a prior work exclusion. This exclusion excludes any work that you did prior to the 2014 policy. You built the wall in 2013 and so there is no coverage from the 2014 CGL policy with the prior work exclusion even though the occurrence happened in 2014.
You then try to open the 2013 policy/briefcase. Once again you get a letter back apologizing that you do not have the correct combination. The 2013 letter is shorter. It just says that they only pay occurrences that occur during the 2013 policy period and your occurrence took place in 2014.
If a 2014 policy has a prior work exclusion, there is no coverage for occurrences that take place during 2014 that arise out of work that the insured did prior to 2014. The 2014 policy will deny coverage because, even though the occurrence took place during 2014, the policy excludes occurrences arising out of prior work. Previous policies will deny coverage because the 2014 occurrence did not take place during their policy periods and they only pay for occurrences during their policy periods. If you are considering a policy with a prior work exclusion for your insured, evaluate the insured’s risk of being sued for any work that they have ever done in the past.
The Sunset Provision
Whereas the prior work exclusion is designed to eliminate exposures from the past, the sunset provision is designed to reduce exposures in the future. Imagine that you are the insurance company that owns that row of briefcases, each filled with $1 million. That is your money. Over the years, maybe you have had to pay some money out of the briefcases for covered occurrences, but hopefully there is still some money in those briefcases. At some point, you would like to put some of that money in your own pocket. You risked money. Now you are looking for your reward.
But what if someone sues today for an occurrence that took place four years ago, or 10 years ago? If a policyholder has the right combination to open the briefcase from four or 10 years ago, you need to make sure the money is available for the policyholder. Does the insurance company need to keep the money available in the briefcases forever?
The sunset provision changes the briefcase/policy combination so that there is no coverage available if the policyholder does not report a claim within a certain amount of time.
A two year sunset will say that there is no coverage unless the policyholder reports a claim within two years of the end of the policy period. A three year sunset requires reporting the claim to the insurance company within three years, and so on. After the designated period of time in the sunset provision has passed, the sun has set on the policyholder’s opportunity to file a claim against the policy.
Imagine that the 2012 policy/briefcase has a two-year sunset provision and you are an electrician. You were working on a project in 2012 when a pedestrian was injured on the jobsite. The pedestrian eventually sues the project’s owner, developer, and general contractor. More time passes and then you get added as a defendant in the lawsuit. The 2012 briefcase holds the money to pay damages for 2012 occurrences. If you notify your 2012 policy within the two year sunset provision (2013, 2014), you have the right combination to open the policy/briefcase.
When you celebrate the arrival of 2015, two years will have passed since the end of your 2012 policy. The sun has set on your policy. Not only has the combination been changed on the briefcase, the insurance company owner walked into that room, picked up the 2012 briefcase, and walked out with it. If you are the insurance company, it’s a Happy New Year. You finally get to enjoy whatever money is left in the 2012 briefcase. If you are the policyholder, the sun has set on your opportunity to file a claim against the 2012 policy.
Depending on your state and its applicable statutes of limitation, the sunset provision may not be as scary as it sounds. This is because a statute of limitation is essentially a sunset provision imposed by law. Just like the CGL sunset provision required notice of a claim within a certain amount of time, statutes of limitation require people to file their lawsuits within a certain amount of time.
For example, California might say that if you want to sue the contractor who installed the irrigation system on your new house, you need to sue the contractor within one year after the close of escrow. (Cal. Civil Code § 896 (g)(7)). If you decide to sue this contractor after the statute of limitation has passed, you will be barred from recovery.
Statutes of limitation vary by state and the type of work performed. If your client always does work that has a statute of limitation shorter than policy’s sunset provision, they may not have a problem with the sunset provision. Just remember that there is no coverage for claims made after the sunset period ends.
If you are considering a CGL policy with a sunset provision for an insured, you should evaluate their risk of being sued after the sunset period ends.