-Partners in Practice -

CGL? It used to be an acronym for Comprehensive General Liability Insurance. No longer. A new "Commercial" General Liability policy form lies just over the horizon. It has been on the drawing boards for several years. It has been debated, revised, glorified, and vilified, but has survived. It is scheduled for introduction by the major carriers as early as January 1, 1986, and it could have a significant impact on your practice.

For architects and engineers, CGL has always been the other liability insurance. If a client were to fall and be injured in your office, your general liability policy would respond. Beyond this, however, the coverage afforded has always been something of a mystery.

There is a huge "gray area" between losses which arise out of professional acts, errors, or omissions and those which do not--an injury on a job-site, for example, caused by a series of events in which one of your field representatives was involved. It is this "gray area" that has led general liability insurers to refuse to provide CGL coverage to architects and engineers unless professional liability insurance is also in place.

The new CGL form is the subject of a massive information campaign within the insurance industry. The purpose is to educate agents and brokers, corporate risk managers, and insurance company staff on the dramatic and, for many, confusing changes about to be introduced. The consequences are far-reaching. It is likely to take years of litigation before the equilibrium of a common, industry-wide understanding of the intent of the policy is restored.

How does all this affect you? Consider the following major differences (and reductions in coverage) under the new policy form:

• Defense costs within the limits
• Conversion to "claims-made" coverage
• Absolute pollution & asbestos exclusions
• Aggregate limits of liability
• Contractual liability restrictions

Of these changes, the first is the least certain. It was introduced late in the process, and it is still a subject of intense debate. If you were to bet even money on the outcome in this difficult market, however, the odds would be heavily weighted against the retention of defense costs in excess of the limits of liability. The intent is to place a ceiling on the exposure of an insurer to unpredictable and uncontrolled legal expenses. It is the product of runaway costs incurred in the defense of large, complex claims long after limits of liability would otherwise have been exhausted.

"Claims-made" policies are nothing new to architects and engineers. Professional liability insurance has been written on a "claims-made" basis for many years. What it means is that the policy in force at the time a claim is actually made is the policy that will respond to a covered loss--regardless of when the "occurrence" leading to the loss took place. Under most current CGL Policies, on the other hand, coverage is determined by the date of the incident which gives rise to the claim.

In theory, insurers will have the option of changing from an occurrence" to a "claimsmade" policy form, and it is presently unclear whether or not they will choose to exercise that option as respects architects and engineers. Because the change has the effect of reducing uncertainty about the extent of the risk being underwritten, however, a good guess would be that they will.

Proponents of the change point to the fact that shifting to a "claims-made" form should produce reductions in premium (because new policies will exclude coverage for prior acts still covered under the old "occurrence" forms). But, in a market in which premiums are already escalating at a breathtaking pace, this is only a relative advantage, and it is one you will never even notice if the carriers refuse to offer "occurrence" policies as an option. It can also be more of a deferred cost than a real savings, for like your professional liability exposure now, your general liability exposure will not disappear should you decide to close down your practice and go fishing in the mountains. It will require the purchase of extended protection on a run-off basis.

The absolute pollution and asbestos exclusion is yet another unwelcome development. It will parallel similar exclusions already being incorporated into professional liability policies across the board. The intent is to shift, from the insurance industry to the public, responsibility for coping with what, arguably at least, are fundamental social problems--problems more appropriately addressed in the political arena. The industry's fear is that this will never be accomplished as long as an insurance resource of any kind exists as a remedy for those who have been injured by years of environmental abuse.

Bodily injury and property damage coverages under most CGL policies issued to architects and engineers are currently written on a "per occurrence" basis, and it is not unusual to find insurance requirements in agreements drafted by your clients which call for "per occurrence" coverage. This means that the limits of liability apply separately to separate losses. Effective January 1st, it may no longer be possible to meet such a requirement. CGL policies are expected to provide bodily injury and property damage coverage, "per occurrence and in the aggregate," thus placing an absolute ceiling on the amount an insurer could be called upon to pay during any one policy year.

Far and away the most significant impact the new CGL form is likely to have lies in the contractual liability coverage restrictions incorporated into the new form. These restrictions could well throw traditional mechanisms for allocating risk and insurance costs in the construction industry into a certain amount of disarray. They limit the extent to which you can reasonably indemnify your client against general liability losses to the consequences of your negligence and your client's "tort liability to third parties" (liability that would be imposed on your client in the absence of any indemnity agreement).

The effect of all this is likely to be a disruption of what have come to be relatively routine contracting practices. Insurance requirements will have to be more carefully negotiated, and you can expect that your clients will very quickly begin to insist on your agreement to maintain insurance in force for an extended period following substantial completion of the project.

You can also expect the negotiation of the indemnity provisions of your agreements to become even more complex than they already are, partly because of the new restrictions, and partly because it will take time for the changes in policy language to work their way into reasonable accommodations in your clients' standard agreements. We will address these complexities and how you might deal with them in a future Part II.