An oft-seen version of the insuring agreement in Commercial General Liability (CGL) policies provides that the insurance company will pay for “any and all sums” the policyholder is “legally obligated to pay” for liabilities “imposed by law” or “assumed under contract.” In an effort to disclaim coverage for liabilities arising out of or related to contract, insurers have argued that the prong for liabilities “imposed by law” refers to tort-based liabilities only, thus seeking to avoid liability with a relationship to contract. This argument, however, defies the plain insuring language defining how the CGL policies are triggered. This post explains why, under a proper reading of the insuring language, contract-based liabilities should qualify under the “imposed by law” prong of a CGL insuring agreement.
A proper analysis begins with well-settled principles of policy interpretation. Generally accepted principles of policy interpretation require courts first to look to the language of the insurance policy and to read it broadly in favor of coverage. Black-letter principles direct courts to refrain from rewriting the insurance policy or disregarding policy language or rendering it “mere surplusage.” Often, courts must also read the language heeding the reasonable expectations of the policyholder. Finally, insurers, who are the masters of insurer-drafted policy language like that used in CGL policies, must state any limitation to coverage in clear and explicit language and bear the burden to show that an exclusion applies to preclude coverage for all of the policyholder’s loss.
Applying these principles, it follows that an insuring agreement covering liabilities “imposed by law” does not limit coverage to tort-based liabilities. If that were the intent, insurers could have made that meaning plain; they did not. For example, insurers could have written the language to limit covered liabilities to those “imposed by law [in tort law]” or to any other specific type of law (e.g., statutory, regulatory, administrative, or common law). Further, under a reasonable reading, obligations under a contract are “imposed by law.” Any contractual liability turns on the existence of duties created by force of law that are ultimately “imposed by law.” Moreover, if insurers wish to define coverage to apply only to claims with no relationship to contract, it is the insurers’ duty to do so. Insurers cannot retroactively read limiting language into a policy to try, at the point of claims, to narrow the scope of coverage for liabilities “imposed by law.”
An illustrative case applying the above reasoning is the landmark case, Vandenberg v. Superior Court, 21 Cal. 4th 815 (Cal. 1999). In Vandenberg, the California Supreme Court held that the provision “legally obligated to pay as damages” did not suggest “any special or legalistic meaning to the phrase.” (Id. at 840.) According to the court, “a reasonable layperson, cognizant that he or she is purchasing a ‘general liability’ insurance policy, would not conclude such coverage term only refers to liability pled in tort, and thus entirely excludes liability pled on a theory of breach of contract.” (Id.) Vandenberg provides a roadmap for policyholders seeking to pursue coverage for contract-based claims under the “imposed by law” insuring language.
In this regard, coverage for tort vs. contract-based liabilities has also been litigated in the context of the words “legally obligated to pay” in a CGL insuring agreement. New York courts, for example, have held that those words encompass both contractual and tortious liabilities. See, e.g., Charles F. Evans Co. v. Zurich Ins. Co., 731 N.E.2d 1109 (N.Y. 2000); Hotel des Artistes, Inc. v. General Accident Ins. Co. of Am., 775 N.Y.S.2d 262 (App. Div. 2004); Touchette Corp. v. Merchants Mut. Ins. Co., 429 N.Y.S.2d 952, 954 (App. Div. 1980).
In denying coverage, insurance companies have claimed that contract-based liabilities are not “imposed by law” because the policyholder voluntarily assumed the contract. Insurers then argue, despite the lack of policy language to support the argument and ignoring ambiguities, that the “imposed by law” language limits recovery to tort-based liability only. While this reasoning conflicts with the plain policy language (and the case law outlined above) and ignores ambiguity, at least some federal courts have accepted the insurers’ position. See, e.g., generally, Busch Properties, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 815 F.3d 1123 (8th Cir. 2016) (purporting to apply Missouri law); VBF, Inc. v. Chubb Grp. of Ins. Cos., 263 F.3d 1226 (10th Cir. 2001) (purporting to apply Oklahoma law).
Insurers also have argued that an insuring agreement covering liabilities “imposed by law” or “assumed under contract” must be read in the disjunctive. That is, the “imposed by law” prong cannot cover contract-based liabilities because any contract-related liabilities fall exclusively under the “assumed by contract” prong. This position, however, ignores the settled principle of contractual interpretation that phrases or clauses joined by the disjunctive “or” suggest that what immediately follows is the first of two, or more, alternatives. A contractual liability can therefore be covered if “imposed by law,” irrespective of whether it is also “assumed under contract.”
With a close analysis of the applicable law and policy language, as applied to the facts, policyholders faced with contract-based liabilities and “imposed by law” insuring language may advance solid arguments in favor of coverage.