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ConstructionWebLinks.com
The
insurance industry has recently introduced a new general liability
policy that offers premium savings in exchange for reduced coverage
benefits. Although the up-front savings may be attractive,
contractors and other insureds should be mindful of the limitations
of the new coverage before abandoning their existing liability
insurance program.
The new policy, known as a "modified occurrence"
form, is a hybrid of existing occurrence and claims-made policies.
Despite its title, the policy resembles a claims-made policy more
than an occurrence policy. This means that unlike a traditional
occurrence policy where coverage is triggered by property damage
during the policy period, coverage under the modified occurrence
policy applies only under the following four conditions:
| 1. |
The occurrence and/or accident occurs as a result of operations conducted after the policy term begins;
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| 2. |
The occurrence/accident must manifest or occur during the policy period;
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| 3. |
The claim must be made during the policy period; and
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| 4. |
The claim must be reported to the insurer during the policy period or within any applicable extended reporting period. |
These
limitations are much more restrictive than traditional occurrence
coverage found in comprehensive general liability ("CGL")
forms that do not require a claim to be reported during the policy
period or that the accident or occurrence take place during the
term of the policy.
Insureds opting for the new modified occurrence coverage should
also closely review the policy language defining the insurer's
defense obligation. Possibly the most significant benefit
of CGL coverage is the insurer's duty to defend all claims, even
if false or fraudulent, that potentially give rise to coverage
under the policy. By contrast, the modified occurrence form
gives the insurer the "right" to defend suits, but may
not obligate the insurer to defend claims. One possible
version of the policy states that there is no defense duty while
another includes the following provision:
"We do not have any duty to defend any claim or 'suit' seeking
damages for which we have determined there is no coverage."
Insureds purchasing a modified occurrence policy that does not
provide for a defense must recognize that they will be responsible
for all defense costs unless the insurer chooses to defend the
claim at its expense. In addition, defense expenditures
traditionally do not "erode" the indemnity limits of
an occurrence CGL policy.
Insureds should also consider that use of the "modified occurrence"
coverage potentially will create a gap in liability coverage for
ongoing or progressive damage claims that would otherwise not
exist with occurrence-based policies. This issue was recently
addressed by the California Supreme Court in Montrose Chemical
Corporation of California v. Admiral Insurance Company (July
3, 1995) 95 C.D.O.S. 5148.
The Montrose case involves a dispute between a chemical
manufacturer and its insurers regarding liability insurance coverage
for environmental damage claims asserted against the manufacturer
by environmental regulatory agencies and private parties.
The underlying claims arose from environmental damage at hazardous
waste sites in Southern California. In Montrose, the Supreme
Court resolved that coverage under occurrence CGL policies is
triggered solely by property damage that occurs during the policy
period. The Court's finding, based on the plain language
of the policies at issue, rejected contentions by Montrose's insurers
that coverage was provided only by the policy in effect at the
time the property damage "manifests" or when the accident
or occurrence causing the property damage occurred. Although
the Court's ruling focused on environmental property damage that
had gone undetected for years, its ruling expands coverage for
other forms of progressive property damage such as personal injury
caused by asbestos and undetected construction defects.
In contrast to the "continuous" coverage found in Montrose,
the modified occurrence policy may not cover claims for property
damage that goes undetected for several policy periods.
A break or gap in coverage could result if damage is not discovered
until several policy periods after the event causing the damage.
In that instance, the insured would be unable to report the claim
during the policy period in which the accident or occurrence causing
the damage occurred.
Finally, insureds should scrutinize policies obtained by subcontractors
and material suppliers to assure that they are receiving all the
expected benefits (of the occurrence policy) as an additional
named insured under those policies. Indeed, owners and contractors
may well choose to revise their standard contracting and purchase
order agreements to specify that contractors and material suppliers
can only satisfy their liability insurance obligations by purchasing
traditional occurrence-based CGL coverage and not the so-called
"modified occurrence" policy.
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