In any lawsuit, it is imperative that counsel have a detailed understanding of the nature of insurance coverage that may be available to defend and potentially indemnify the defendant for claims made against it. From the plaintiff’s perspective, triggering insurance coverage may very well mean the difference between receiving cash money or being left holding an empty bag, even if victorious at trial. For that reason, plaintiff’s counsel must know how to “plead to coverage” to ensure the best chances of a monetary recovery. To be able to “plead to coverage,” 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 craft a complaint to trigger coverage under those particular policies. The factual allegations in a complaint that relate to insurance coverage are just as important as alleging all of the legal elements of the causes of action. From the defendant’s perspective, payment of defense fees alone can have a crippling effect on a business. Having a defense provided by an insurance company may mean the difference between mounting a successful defense or a business closing its doors because it does not have the financial wherewithal to fund a defense. The availability of insurance money to fund a settlement or judgment is also obviously critical. Breach of contract claims and business tort claims such as those for breach of fiduciary duty, fraud, unfair trade practices, tortious interference, trademark infringement, and theft of trade secrets are often covered, at least in part.
Coverage for Breach of Contract Claims
Commercial general liability (CGL) coverage is the most common policy held by most businesses. Most litigators are familiar with Coverage A, which provides coverage for “bodily injury” or “property damage” caused by an “occurrence.” It is well understood that such coverage is triggered where a person’s negligence causes an event such as an explosion that physically hurts a person or physically damages property of others. However, Coverage A can, and often is, triggered even in a run-of-the-mill breach of contract dispute if the complaint is artfully drafted.
The key requirements for a plaintiff to show are that there was “property damage” and that it was 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, if a supplier’s product not only failed to meet specifications but caused any kind of injury to physical elements of the plaintiff’s plant or to its product or packaging, coverage may be triggered if those allegations are made in the complaint.
It is important to note that 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 a partial or complete shutdown of the plaintiff’s plant or production line, coverage may be triggered. Care should be taken to evaluate whether coverage can be triggered by a damage claim for “loss of use.”
Coverage A of a standard CGL policy also requires 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. An “occurrence” 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 but also 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, the complaint should describe how that defective part caused the breakdown of a machine, caused continuous wear and tear on a machine, or resulted in product or packaging that was 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.
Coverage for Business Torts
Claims for trademark infringement and unfair competition may also trigger potential coverage under a standard CGL policy. The standard CGL policy includes “Coverage B Personal Injury and Advertising Injury Liability.” Among other things, “personal and advertising injury” includes injury arising out of the use of another’s advertising idea in your advertisement or “[i]nfringing upon another’s copyright, trade dress or slogan in your ‘advertisement’.” An “advertisement” in turn means any notice that is broadcast, telecast, or published to the general public or to market segments for the purpose of attracting customers. “Advertisements” include material placed on the Internet. If any of the defendant’s advertisements or Internet activity touch on the plaintiff’s copyright, trade dress, or slogan, that should be alleged in the complaint to trigger coverage. Although the insurance companies may argue that certain exclusions for actual infringement (as opposed to infringement in the advertisement) apply, allegations of advertising injury can trigger a defense, which often leads to an insurer providing funding for a settlement of even uncovered claims.
Certainly, many business torts are intentional. Intentional torts and statutory violations often entitle a victorious plaintiff to enhanced damages and, potentially, attorney fees. However, intentional acts are nearly always excluded under insurance policies. Thus, to trigger potential coverage, claims that assert mere negligence or other unintentional conduct should be considered as alternative claims to supplement claims requiring proof of intentional action.
Finally, care should be taken by plaintiffs’ counsel to allege dates of occurrences and injuries in the complaint. While some liability policies are “claims made” policies that are triggered based on the date a claim is made, coverage under a CGL policy is ordinarily triggered by the date of the occurrence. Therefore, the plaintiff should 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, the monetary limits of multiple policies.
In addition to CGL coverage, there are multiple different types of policies written for director’s and officer’s 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 to guide the nature of the plaintiff’s allegations. Defense counsel should always advise their clients to tender the claim to all potentially available insurance carriers. One way to ensure all policy benefits are obtained is for merits counsel to partner with counsel specializing in insurance coverage. Knowing how to trigger coverage is knowing how to ensure a win in commercial litigation.
Keywords: litigation, breach of contract, business torts, insurance coverage, commercial general liability