Actuarial Notes

CGL Conditions

Study guide: Exam DISC-IA

CGL Conditions are the nine provisions in Section IV of the ISO Commercial General Liability Coverage Form (CG 00 01, 04 13 edition) that set the insured's and the insurer's duties after the policy is bought: what the insured must do after an occurrence, offense, claim or suit, when the insurer can be sued, how it shares a loss with other insurance, how the premium is audited, and how it treats several insureds. They sit beside the Common Policy Conditions that apply to every coverage part of a commercial package.

\text{Share}_1^{\text{equal}} = \min\left(\frac{X}{2},\ L_1\right)

\text{Share}_2^{\text{equal}} = X - \text{Share}_1^{\text{equal}}

\text{Share}_j^{\text{limits}} = X \times \frac{L_j}{\sum_i L_i}

  • Symbols: X is the loss shared by the primary insurers and L_j is insurer j's applicable limit. The equal-shares lines are written for two insurers with L_1 \le L_2 and X \le L_1 + L_2: each pays the same amount until the smaller policy reaches its limit, and the larger pays the rest. Under contribution by limits, each pays the ratio of its limit to all insurers' limits.
  • 1. Bankruptcy: The bankruptcy or insolvency of the insured or its estate does not relieve the insurer of its obligations.
  • 2. Duties in the event of occurrence, offense, claim or suit: (a) The named insured must see that the insurer is notified as soon as practicable of an occurrence or offense that may result in a claim, including, where possible, how, when and where it happened, the names and addresses of injured persons and witnesses, and the nature and location of the injury. (b) If a claim is made or a suit brought, it must immediately record the specifics and the date received and notify the insurer as soon as practicable, and see that the insurer receives written notice. (c) The named insured and any other involved insured must immediately send copies of demands, notices, summonses and legal papers; authorize the insurer to obtain records; cooperate in the investigation, settlement or defense; and help the insurer enforce rights against others who may be liable to the insured. (d) No insured may voluntarily make a payment, assume an obligation or incur an expense, other than for first aid, without the insurer's consent, except at its own cost.
  • 3. Legal action against us: No one may join the insurer in a suit seeking damages from an insured, or sue the insurer under the policy unless all its terms have been complied with. A person may sue the insurer to recover on an agreed settlement or a final judgment against an insured, but not for damages the policy doesn't cover or that exceed the limit. An agreed settlement is one signed by the insurer, the insured and the claimant or the claimant's legal representative.
  • 4. Other insurance, primary: For Coverages A and B, the insurance is primary unless the excess provision applies. If other insurance is also primary, the insurers share by the method in paragraph c.
  • 4. Other insurance, excess: The insurance is excess over other insurance, whether primary or not, that is fire, extended coverage, builder's risk, installation risk or similar coverage for "your work"; fire insurance for premises rented to or temporarily occupied by the named insured; insurance the named insured bought to cover its liability as a tenant for damage to such premises; or insurance for aircraft, autos or watercraft not excluded under Coverage A. It is also excess over any other primary insurance under which the named insured has been added as an additional insured. When excess, it has no duty to defend if another insurer has that duty (and if none defends, it will, taking over the insured's rights against the others); it pays only its share of the loss above what all the other insurance would pay plus their deductibles and self-insured amounts; and it shares that remainder with any other insurance not described in this provision and not bought specifically to apply above its limits.
  • 4. Other insurance, method of sharing: If all the other insurance permits contribution by equal shares, this policy does too: each insurer contributes equal amounts until it has paid its limit or none of the loss remains. If any of it does not, the insurers contribute by limits.
  • 5. Premium audit: The insurer computes all premiums by its rules and rates. The advance premium is only a deposit; at the end of each audit period the insurer computes the earned premium and notifies the first named insured, and returns any excess of advance and audit premiums paid over the earned premium. The first named insured must keep the records needed and send copies on request (Premium Audit).
  • 6. Representations: By accepting the policy, the named insured agrees that the statements in the declarations are accurate and complete, that they are based on its representations, and that the insurer issued the policy relying on them.
  • 7. Separation of insureds: Except for the limits of insurance and any rights or duties given specifically to the first named insured, the insurance applies as if each named insured were the only named insured, and separately to each insured against whom a claim is made or suit brought. One insured can therefore be covered for a claim brought by another, but the limits are not multiplied (CGL Limits of Insurance).
  • 8. Transfer of rights of recovery against others to us: If the insured has rights to recover any payment the insurer has made, those rights pass to the insurer; the insured must do nothing after a loss to impair them, and at the insurer's request must bring suit or transfer the rights and help enforce them. This is the insurer's right of subrogation, which a waiver of subrogation endorsement gives up against a named party (CGL Endorsements).
  • 9. When we do not renew: If the insurer decides not to renew, it must mail or deliver written notice to the first named insured at least 30 days before expiration; proof of mailing is sufficient proof of notice.

Two Primary Policies Share a Loss A contractor is an insured under its own CGL (limit $1,000,000) and, for one project, under another primary policy with a $2,000,000 limit. Neither policy is excess over the other. Find each insurer's share of a $1,800,000 loss and of a $2,500,000 loss, (a) if both permit contribution by equal shares, and (b) if the other policy does not.

Answer (a) Equal shares: each pays the same until one reaches its limit.

\begin{align*}
X = 1{,}800{,}000:\ \text{Share} &= \frac{1{,}800{,}000}{2} \\
&= 900{,}000 \text{ each} \\
X = 2{,}500{,}000:\ \text{Share}_1 &= 1{,}000{,}000 \\
\text{Share}_2 &= 2{,}500{,}000 - 1{,}000{,}000 \\
&= 1{,}500{,}000
\end{align*}

(b) By limits: each pays in proportion to its limit, one-third and two-thirds.

\begin{align*}
X = 1{,}800{,}000:\ \text{Share}_1 &= 1{,}800{,}000 \times \tfrac{1}{3} \\
&= 600{,}000 \\
X = 2{,}500{,}000:\ \text{Share}_1 &= 2{,}500{,}000 \times \tfrac{1}{3} \\
&= 833{,}333.33
\end{align*}

The second insurer pays the rest: $1,200,000 and $1,666,666.67. Equal shares favours the larger policy on a small loss; contribution by limits loads the larger policy throughout.

After the Accident A customer falls on a wet floor in a café. The owner pays for her taxi to the hospital and, to keep her goodwill, promises to cover all her medical bills and lost wages. The owner tells no one, and three months later the customer sues; the owner sends the summons to the insurer two weeks after receiving it. At audit the café's sales turn out lower than estimated, so the earned premium is $10,800 against a $12,000 deposit. Which conditions are involved?

Answer

  • Voluntary payments: The owner may provide first aid, but promising to pay medical bills and wages assumes an obligation without the insurer's consent, so that promise is at the owner's own cost.
  • Notice: The owner had to notify the insurer as soon as practicable of an occurrence that might result in a claim, and, once sued, to immediately send copies of the summons. Saying nothing for three months and holding the summons for two weeks do not meet those duties.
  • Premium audit: The $12,000 advance premium was a deposit. The earned premium is $10,800, so the insurer returns $1,200 to the first named insured.

How it appears on the exam

  • DISC-IA: Section 11 asks candidates to apply the conditions to a claim: did the insured meet its post-loss duties, can the claimant sue the insurer directly, which policy is primary, and how is a loss shared.
  • Other insurance calculations: Contribution by equal shares and by limits are the calculation in this objective, usually with two primary policies of different limits.
  • Coverage analysis: The conditions are one step of the coverage analysis framework, after the insuring agreement and before the exclusions are applied.

Exam traps

  • Equal shares is not pro rata: Under equal shares, a small loss is split evenly whatever the limits. Only contribution by limits divides in proportion to the limits.
  • Excess over additional insured coverage: The named insured's own CGL is excess over other primary insurance under which it is an additional insured. A primary and noncontributory endorsement on the other party's policy changes the order for that party (CGL Endorsements).
  • No direct action: A claimant cannot sue the insurer to establish the insured's liability; it can sue only to collect an agreed settlement or a final judgment.
  • First aid is the exception: An insured may give first aid at the scene; anything beyond it, paid or promised, is at its own cost unless the insurer consents.
  • Separation is not multiplication: Separation of insureds lets each insured be treated as if insured alone, but the limits still apply once for all of them.