Businesses frequently purchase comprehensive general liability (CGL) coverage, which is often referred to as “litigation insurance.” It covers businesses for the costs incurred defending and reasonably resolving suits seeking to hold them liable for alleged bodily injuries or property damage. Companies or businesses that render professional services or advice often also purchase “professional liability” (PL) coverage. An insured may find itself temporarily without its valuable defense coverage despite having two policies that potentially cover the loss when, because the plaintiff pleads alternative theories of liability, the insurers each look to one another to honor that “first dollar” duty to defend.

Distinctions Between Coverage

CGL policies typically obligate the insurer to “pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury'…to which this insurance applies.” A CGL policy will customarily attempt to exclude claims for property damage or bodily injury arising out of the rendering or failing to render “professional services.” A PL policy typically obligates the insurer to pay “'damages' an 'insured' is legally obligated to pay as a result of a 'claim' caused by…an act, error or omission.” The PL “claim” requires an alleged liability for damages arising from an act, error or omission relating to the performance of professional services.

Duties to Defend, Indemnify

Both CGL and PL policies can impose on the insurer a duty to defend. That duty is exceedingly broad and is triggered by a potentially covered allegation in the underlying complaint. A liability insurer owes a defense of an underlying suit as a matter of law unless the insurer can establish “that there is no possible factual or legal basis on which the insurer might eventually be obligated to indemnify [the insured] under any provision contained in the policy.” Villa Charlotte Bronte v. Commercial Union Ins. Co., 64 N.Y.2d 846, 848 (1985). “If any of the claims against [an] insured arguably arise from covered events, the insurer is required to defend the entire action.” Town of Massena v. Healthcare Underwriters Mut. Ins. Co., 98 N.Y.2d 435, 443, 749 N.Y.S.2d 456, 459 (2002).

The duty to defend is “distinctly different” from the duty to indemnify. “[T]he duty to indemnify requires a determination of liability.” Greenwich Ins. Co. v. City of New York, 122 A.D.3d 470, 471 (1st Dept. 2014) (citation omitted). “[E]ven in cases of negotiated settlements,” the duty to indemnify requires a finding of “covered loss.” Servidone, 64 N.Y.2d at 423 (reversing summary judgment and remitting for further proceedings); see also Frontier Insulation Contractors v. Merchants Mut. Ins. Co., 91 N.Y.2d 169, 178, 667 N.Y.S.2d 982, 986 (1997) (denying summary judgment on duty to indemnify in the absence of a “determination of the insurers' liability.”).

The obligations of CGL and PL insurers routinely arises in, for example, the construction/real estate development arena because underlying lawsuits often allege both general negligence (e.g., failure to maintain control of a worksite) and professional negligence (e.g., failure to conduct a proper survey). In that scenario, both the CGL and PL insurers may have a defense obligation because the underlying complaint is potentially covered under both policies.

Role of 'Other Insurance' Provisions

“Other insurance” provisions identify the “primary” and “excess” insurers when two policies cover the same policy period and same loss.

Primary insurance coverage is insurance coverage whereby, under the terms of the policy, liability attaches immediately upon the happening of the occurrence that gives rise to liability…. Excess or secondary coverage is coverage whereby, under the terms of the policy, liability attaches only after a predetermined amount of primary coverage has been exhausted.

JPMorgan Chase & Co. v. Indian Harbor Ins. Co., 31 Misc.3d 1240 at *5, 930 N.Y.S.2d 175 (Sup. Ct. N.Y. Cnty. May 26, 2011) (citation omitted). When both policies are “primary,” each insurer may be responsible either for equal shares of the loss or their respective allocable shares based upon the limits of both policies.

As discussed in Fieldston Property Owners Association v. Hermitage Insurance Co., 16 N.Y.3d 257, 264, 920 N.Y.S.2d 763, 767 (2011), the primary insurer is obligated to defend the entire underlying action without contribution from the excess insurer. There, the parties “conceded at least the possibility that both Hermitage's CGL and Federal's D&O policies cover the injurious falsehood claims in the two underlying actions.” Id. The Court of Appeals held that the CGL policy was primary and the D&O policy was excess “as they relate to defense costs” “based on the 'other insurance' clauses.”

The court further held that “[i]n the context of primary and excess insurance, we have explained that a primary insurer has the primary duty to defend on behalf of its insureds and it generally has no entitlement to contribution from an excess insurer.” 16 N.Y.3d at 265 (citations and internal quotation marks omitted); see also Firemen's Ins. Co. v. Fed. Ins. Co., 233 A.D.2d 193 (1st Dep't 1996) (“It is settled that a primary [CGL] insurer has the obligation to defend without any entitlement to contribution from an excess [D&O] insurer”) (citing cases); Poalacin v. Mall Props., 155 A.D.3d 900, 911 (2d Dept. 2017) (“Inasmuch as the Harleysville policy is excess to the Netherlands policy, Harleysville has no obligation to defend.”) (citing cases). Thus, Fieldston's general liability insurer was obligated to defend both underlying actions in their entirety without contribution from the excess D&O insurer.

The “other insurance” provision also dictates which insurer has the ultimate duty to indemnify because it applies when both policies cover the same loss. This necessarily requires a judicial determination of what “loss” was adjudicated in the underlying action in order to identify which insurer(s) has the duty to indemnify that loss.

Deductible Provisions

An insured may advocate for the triggering of one policy over another based upon deductible provisions and other policy considerations.

The assumption of a defense obligation by two insurers should not result in the insured being billed for two deductibles. An often cited and long-considered pro-insurer treatise includes a section on this very issue entitled “Liability of one insurer for another insurer's deductible,” which states in pertinent part:

A frequently recurring problem is when two policies of insurance covering the same year provide coverage, but the deductibles in the policies differ. The liability of the insurance company with the smaller deductible depends on whether its policy provides coverage at the same level as the other policy. It has been held that if it does, the company should be liable for that portion of the loss encompassed by the higher deductible. Otherwise, part of the insured's loss would not be covered, and the company with the smaller deductible would unfairly receive the benefit of the other insurer's deductible. It has been held, therefore, that the proper procedure is to (a) prorate the loss between the insurers…(b) subtract from each insurer's liability the amount of its deductible, and (c) add to the liability of the insurer with the smaller deductible the amount of the larger deductible.

Allan Windt, 2 Insurance Claims and Disputes (6th ed.) §7:7 (citing cases). In fact, “[i]t has been held that under no circumstances should the allocation of defense costs among insurers result in any liability to the insured beyond the smallest applicable deductible.” Id. at n.2 (citing Air Prods. & Chems. v. Hartford Accident & Indem. Co., 707 F. Supp. 762, 771 (E.D. Pa. 1989), on reconsideration in part, 1989 WL 7356 (E.D. Pa. 1989) and order aff'd in part, vacated in part, 25 F.3d 177 (3d Cir. 1994), modified on other grds., Air Prods. & Chems. v. Hartford Accident & Indem. Co., 25 F.3d 177 (3d Cir. 1994)).

With regard to the indemnity obligation, a PL policy often affords larger aggregate limits of liability but an equally larger deducible as compared to a CGL policy. Insureds should consider the potential application of a deductible when advocating for the trigger of one of its policies indemnify an underlying settlement or judgment.

Conclusion

Professional service businesses should understand the scope and breadth of available insurance when considering the purchase of CGL and PL coverage. Insureds should also understand the circumstances in which one or both such insurers have defense and indemnity obligations in connection with an underlying claim and the extent to which insureds may have deducible and other obligations as a condition to coverage.

Jeffrey L. Schulman is a partner at Pasich LLP.