Knowing is Winning: How to Trigger Insurance Coverage in Commercial Litigation
By Susan G. Schellinger
Quite simply, successful litigation from the plaintiff’s perspective is one that results in a net recovery. Whether or not a business should invest in litigation against a supplier, customer, or competitor is a business decision. That business decision often turns on many factors, but one crucial inquiry is whether or not a potential monetary recovery will materially exceed the financial investment in the litigation to make the time and distraction worthwhile. Therefore, of utmost concern before commencing a case is evaluating the potential collectability of the defendant. Regardless of the collectability of the defendant itself, it is imperative that a plaintiff consider whether or not the defendant’s insurance coverage can be triggered to maximize recovery. As such, it is critical to know and understand the types of insurance policies that are most likely to be held by the defendant and how to trigger coverage under those policies. The factual allegations in a complaint as they relate to insurance coverage are as important as alleging all of the legal elements of the causes of action.
The nature of the allegations of the complaint will initially dictate whether or not there is potential coverage. Coverage is easily triggered in the typical negligence case that alleges personal injury. More care is required to trigger coverage in a commercial dispute. Contrary to common belief, coverage can, and often is, triggered even in a run-of-the-mill breach of contract dispute if the complaint is artfully drafted.
The most common type of policy held by most businesses is a commercial general liability (CGL) policy. Coverage is triggered where there is “property damage” caused by “an occurrence.” Thus, plaintiffs should take care to allege both of those elements by generally describing all of the categories of damages and precisely how those damages were caused. “Property damage” is typically defined as physical injury to tangible property. There are standard exclusions that preclude coverage for the policyholder’s own work and damage to its own product. Thus, if there is any damage, regardless of how minor, to property other than the defendant’s product, it should be articulated in the complaint. For example, in the manufacturing context, did a supplier’s product not only fail to meet specifications, did your business incorporate the supplier’s product into your product? Did you have to discard some of your inventory as a result? Have you received claims by your customers as a result of damage caused by a faulty product that incorporated the supplier’s part? In the construction context, identify all damages caused by defective construction or defective construction components. Did a leaky roof or windows cause damage to drywall, carpeting, or contents of the building?
Importantly, property damage within the meaning of a CGL policy also includes loss of use of tangible property, even if that tangible property is not physically injured. This coverage provision, which provides coverage for a complete loss of use, or even a partial loss of use, is often overlooked. For example, if a supplier’s defective part, product or machine causes your business to be affected such that you cannot operate parts of your plant or production line, or even if it has only diminished your production capacity, coverage may be triggered.
Standard CGL policies also require an allegation that an “occurrence” caused the physical damage to the tangible property or the loss of use. An “occurrence” is typically defined as an accident, including continuous or repeated exposure to the same general harmful conditions. It is an event that takes place without foresight or expectation. Insurers will argue that a breach of contract is not an “occurrence.” Thus, the complaint should go beyond merely stating that the defendant breached a contract. It should describe not only the damages that trigger coverage, it should describe the precise mechanism that caused the property damage or loss of use. For example, rather than merely alleging that a supplier breached a contract by providing a defective part, describe how that defective part caused the breakdown of a machine, causes continuous wear and tear on a machine, or resulted in product or packaging that is lost or damaged. Likewise, while defective construction may not be an “occurrence”, continuous moisture damage caused to tangible property by defective construction will constitute an occurrence. Care should be taken to identify whether defective construction allowed water leakage which in turn caused the damage.
Finally, coverage under a CGL policy is ordinarily triggered by the date of the occurrence, and not the date the claim is made. Therefore, care should be taken to allege the dates that harm was caused. If the harm was caused over an extended period of time, there is the possibility of triggering multiple policies and thus, multiple policy limits.
In addition to CGL coverage, there are multiple different types of policies written for directors and officers liability, professional liability, employment practices liability and multiple other liability coverages specific to the nature of the defendant’s business and industry. All of these types of potential coverages should be considered and form policies should be consulted to identify the typical coverage grants and the typical exclusions in order to guide the nature of the plaintiff’s allegations. Knowing how to trigger coverage is knowing how to ensure a win in commercial litigation.
This article appeared in the May 2016 edition of the Wisconsin Law Journal.