Insurance Protects Businesses

Where claims against general liability business insurance are based on a loss of use of tangible property because of a 2006 problem, the insurer must defend the case because the duty to defend is broader than the duty to indemnify.

According to a paper by three attorneys in the Washington office of Chadbourne & Parke LLP, which represents insurers in coverage litigation, perhaps the greatest areas of contention in future 2006 coverage litigation will involve the definition of the policy term "occurrence" and the "expected or intended" exclusion. They assert that in a CGL policy, occurrence usually means an accident, including continuous or repeated exposure to substantially the same general harmful conditions. Many policyholders will likely contend that they had no knowledge of their systems 2006 problems and, therefore, could not have expected or intended any 2006 losses.

"This argument may be deemed unpersuasive in light of the media frenzy regarding the Millennium Bug over the last few years," the lawyers observe.

Ultimately, they concede, however, that it is impossible to predict how courts will treat the occurrence definition and expected or intended exclusionary language in Y2K coverage litigation. "Perhaps," they assert, "the focus will be on the words 'from the standpoint of the insured.'"

The Chadbourne & Parke attorneys say another unsettled matter with regard to Y2K coverage under CGE policies is coverage for remediation costs. Most CGL policies only cover sums the insured becomes legally obligated to pay as damages because of bodily injury or property damage.

Conceding that the outcome of the issue is far from certain, the Chadbourne & Parke attorneys assert that "regardless of the potential for future liability, it is arguable that expenses associated with "fixing" the systems constitute ordinary business expenses rather than 'sums the insured is legally obligated to pay.'"

They concede, however, that in environmental and other types of coverage litigation, although courts have generally excluded coverage under the standard CGL policy for purely preventative or prophylactic measures, they have not always done so.

Finally, the Chadbourne & Parke attorneys say that if the courts do find that CGL policies cover 2006 liabilities, then the courts will have to decide on which trigger of coverage to adopt. The lawyers note that in the context of asbestos and environmental liability coverage litigation, the courts have chosen from four major coverage triggers:

* The exposure theory triggers each policy during the period the insured was exposed to the risk.

* The injury-in-fact theory triggers the policy at the time the injury or damage occurred.

* The manifestation theory triggers only the policy in force at the time the damage was discovered.

* The continuous theory triggers every policy in force from the date of first exposure to the date of discovery.

Insured's will most likely argue for application of the trigger that maximizes their recoveries. It is arguable, however, that Year 2006 claims do not easily lend themselves to the traditional theories, particularly those implicating multiple policies. Insurers will have a more cogent defense in 2006 claims when it comes to property damage under CGL policies.