reprinted by permission from IA&B:
Who’s considered an insured at the time of a loss under a commercial general liability (CGL) policy will make all the difference in a claim. Under SECTION II – WHO IS AN INSURED of the CGL, the first category of an insured refers to named insureds. Who is an insured in addition to the named insured under this category is determined by the type of business designated as the named insured.
If the named insured is designated on the declarations as:
1. an individual (sole proprietor), the named individual and the spouse of the individual are insureds, for activities on behalf of the business of which the named insured is the sole owner.
2. a partnership or joint venture, the partners of the named partnership, or the members of the named joint venture, and their spouses are insureds with respect to the conduct of the business of the named insured.
3. a limited liability company, the members (owners) are insureds for the conduct of the business, and the managers (executives) are insureds while performing their duties as managers of the named insured.
4. a corporation, the executive officers and the directors are insureds while performing their duties on behalf of the corporation, and the stockholders are insureds for their liability as stockholders.
5. a trust, the trustees are insureds with respect to their duties as trustees.
Could the above individuals (partners, members, managers, executive officers, directors, stockholders and trustees) be an insured when a negligent act was committed and not an insured when a later loss occurs? The answer to this question is a definite “yes.” The following are a few examples that illustrate this problem.
Example 1
Melvin operated his business for 10 years as a sole proprietor under the trade name, Mel’s Heating and Cooling. He incorporated the business two years ago as Melvin’s Mechanical Contractors, Inc. Mel is the CEO of the corporation. For 10 years Mel had a CGL with “Melvin DBA Mel’s Heating and Cooling” as the named insured. For the past two years, the named insured on the CGL has been “Melvin’s Mechanical Contractors, Inc.”
A furnace installed by Mel five years ago exploded last month. A claim for the injuries and damages that resulted from this explosion has been filed against Mel. Is Mel an insured for this loss? No! Mel is being sued for injuries and damages arising out of work he did as an individual. The CGL in effect at the time of the loss insures Mel but only for his duties as CEO of the named corporation.
How do we solve this problem? We include “Melvin DBA Mel’s Heating and Cooling” as an insured under the current CGL policy issued to the corporation. Mel needs completed-operations coverage for work he did as a sole proprietor for a minimum of 12 years in Pennsylvania, 10 years in Maryland and six years in Delaware.
Example 2
Carl was a self-employed contractor specializing in home improvements for 35 years. He decided to retire last year and called his agent and canceled his CGL policy.
Carl has received a complaint alleging that several people were injured when a deck he built three years ago collapsed and that the collapse was a result of his faulty work. The collapse occurred six months after Carl retired. Is Carl covered for this loss? Again, no!
What is the solution for this scenario? Carl should have purchased discontinued-operations coverage, which is a CGL providing completed-operations coverage after the business has been closed or sold.
Example 3
Ellen founded Electronics, Inc. in 1970. Last year she retired and moved to her condominium on the beach. Her son and daughter continued to operate the business.
Ellen has just been notified that a machine manufactured by Electronics a few years ago malfunctioned. A fire resulted and caused extensive damage to the customer’s building.
A claim has been filed against Electronics, Inc. and Ellen personally for these damages. Does she have coverage? Once again, no! Ellen was an insured under a CGL when the machine was manufactured and sold, but when the loss occurred, she no longer qualified as an insured since she was no longer an executive officer or employee of the named insured.
Many claims-made liability policies (D&O, Employment Practices, Professional, etc.) cover past, current and future officers and employees. But, the CGL only covers current officers and employees. If coverage needs to be continued for officers when they retire, then they must be added as insureds.
The CGL covers bodily injury and property damage that occurs during the policy period. As these examples illustrate, you can be an insured when the work was done but not an insured when the loss occurs.
These issues affect contractors, manufacturers, processors, etc. As always, you need to advise them of these exposures when they change their business name, close their business or retire.
Jerry Milton, CIC, contributed this resource. The legal profession recognizes him as an expert on insurance coverages. He is also an education consultant for IA&B, working with CISR, CIC and continuing education programs.
