The Good, the Bad & the Ugly: New Changes to the CGL Policy

Ready or not, the new and “not necessarily so improved” 2004 CGL Policy is coming soon to a theatre near you!

The Insurance Services Office has modified the Commercial General Liability policy, and while the changes may not be earth shattering news to insureds, the changes nevertheless broaden coverage in one area and reduce coverage in other areas. And for insureds that are related to the construction industry, these changes have an even more adverse effect on their business.

Following is a summary of the major changes. The only unknown at this time is exactly when each insurance company will begin using the new form. Some will begin immediately, while others may wait a few months.

The good
One positive found within the new CGL form pertains to the area of pollution. The insurance industry historically has been very consistent in excluding coverage for any lawsuits arising from pollution on an insured’s premises. Furthermore, the definition of a “pollutant” is extremely broad.

Several years ago, the CGL policy made an exception to this exclusion by giving back coverage for injury caused by a pollutant on the premises if the injury was sustained within a building and caused by smoke or fumes from equipment that is used to heat the building.

An enhancement made to the new CGL policy is basically an expansion of this exception. With the new policy, insureds are given back coverage for lawsuits arising from injury if sustained within a building and caused by smoke or fumes from equipment that is used to heat the building and from equipment used to cool or dehumidify the building, or equipment that is used to heat water for personal use by the building’s occupants or their guests. This is a nice enhancement. There have been lawsuits over the last few years resulting from fumes released from equipment used to cool or dehumidify buildings, or from hot water heaters, and such lawsuits have not been covered by the policy.

Note: You should know that the additional coverage as provided by this new provision within the CGL policy could possibly be eliminated in a CGL policy if a more exclusionary endorsement is attached to the policy.

The bad
A new exclusion has been added to the CGL policy, which reiterates the intent of the CGL policy to specifically exclude coverage for damages arising out of the loss of use or damage to electronic data (or software). Obviously, this exclusion is of more concern to insureds who are involved in computer programming or software design, but it also has implications for other businesses.

As an example, a contractor could be working on equipment above the ceiling and in the attic space of an office building and accidentally drop a piece of equipment through the ceiling and onto the office’s main frame computer. While damage to the hardware should be covered by that contractor’s CGL policy, if the accident also causes damage to the electronic data stored within the main frame computer, then there would be no protection for the contractor if he is later sued.

At the same time, endorsement CG 04 37 (entitled, Electronic Data Liability) is designed to give back this coverage for damage to electronically stored data as long as it results from an occurrence that first causes physical injury to the computer hardware. Furthermore, ISO has introduced a new policy coverage form entitled Electronic Data Liability Coverage Form (i.e. CG 00 65), which is designed to provide coverage when an insured is liable for an electronic data incident which causes loss of electronic data even without their first being physical injury to computer hardware.

The ugly
Perhaps the biggest change to the policy and one that has the potential to have the most adverse consequences pertains to mobile equipment. The definition of mobile equipment on the CGL policy is very lengthy, but in a nutshell, the types of equipment that are considered mobile equipment and therefore covered for liability purposes under the CGL policy include such equipment as: bulldozers, forklifts, mobile cranes, mobile shovels, trucks providing mobility to mounted drills, road construction equipment such as graders, scrapers or rollers, and the list goes on and on.

Again, lawsuits arising from accidents involving the use of such equipment are covered by the CGL policy. Unfortunately, a paragraph has been added to the technical definition of mobile equipment, which states the following:

“However, mobile equipment does not include any land vehicles that are subject to a compulsory or financial responsibility law or other motor vehicle insurance law in the state where it is licensed or principally garaged. Land vehicles subject to a compulsory or financial responsibility law or other motor vehicle insurance law are considered autos.”

Your first question may be the same question that I asked myself. What in the heck does that mean? What is meant by the words, “subject to a compulsory or financial responsibility law or other motor vehicle insurance law in Texas?”

To make a long story short, many land vehicles that have previously been considered mobile equipment (and therefore not scheduled on the Auto policy and charged a separate premium) will now be considered automobiles (and will have to be specifically scheduled on the Auto policy for an additional premium). This change will therefore result in additional premiums to insureds.

An example of this would be a truck that provides mobility to a permanently mounted drill. Oftentimes, such trucks are owned by companies that are drilling piers for foundations. Before this change, these types of vehicles were considered mobile equipment and automatically covered for liability purposes under the CGL policy. Under the new definition, they will now be considered automobiles and will have to be added to the auto policy for an additional premium

To understand which mobile equipment items are specifically affected by this change, we must consider the Texas Motor Vehicle Safety Responsibility Act, which is the financial responsibility law in Texas. This act states that a person may not operate a motor vehicle in Texas unless financial responsibility is established for that vehicle. The Act then defines a motor vehicle to mean, a “self propelled” vehicle designed for use on a highway, a trailer or semi-trailer designed for use with a self-propelled vehicle or a vehicle propelled by electric power from overhead wires and not operated on rails. As per the Act, the term, motor vehicle, does not include: road rollers, graders, tractor cranes, power shovels, well drillers and a few others.

Therefore, you can see from these limited exceptions, a contractor could have several land vehicles that have previously been classified as mobile equipment that will now have to be classified as automobiles (i.e. trucks providing mobility to permanently mounted drills, concrete pumping trucks, etc.)

To complicate things just a tad bit more, the new CGL policy goes on to say that the operation of machinery or equipment that is attached to land vehicles that would typically qualify under the definition of mobile equipment if it were not subject to a compulsory or financial responsibility law or other motor vehicle insurance law, is covered under the CGL policy and not the Auto policy. So as an example, this basically means that when the truck with a mounted drill has reached its destination and the drill is being used to drill a pier for a foundation, any damage or injury arising from the use of the drill is covered under the CGL policy even though the “over the road” exposure will be covered by the Business Auto policy.

Words of wisdom
The bottom line is simply this. You’re going to need to communicate with your insureds and make certain that all of their mobile equipment that needs to be added to their Business Auto policy is added. Communicating with your insureds can’t be emphasized enough in this regard.