Any person or organization that purchases commercial general liability (CGL) insurance or anyone who provides advice to those who purchase CGL policies should have a working knowledge of how the limits of liability of a CGL apply to the payment of claims. This is important not only in choosing reasonable CGL limits but also in complying with the underlying requirements of an umbrella or excess liability policy.
Section III—Limits of Liability of the April 2013 edition of the Insurance Services Office, Inc. (ISO), Commercial General Liability Coverage Form begins by making it clear that the limits shown in the declarations fix the most the insurer will pay regardless of the number of insureds, claims made, suits brought, or persons or organizations making a claim or bringing suit. In other words, the limits do not increase simply because a claim or suit names multiple insureds, the incident involves multiple claims or suits, or numerous persons or organizations make a claim or file a suit.
To illustrate, say a building contractor accidentally breaks an electrical cable, resulting in loss of utility service to several surrounding businesses. Each business suffering the loss of service brings a separate suit against the building contractor for damage to inventory that has spoiled. In this illustration, the limit will remain fixed—the fact that there are multiple suits from multiple organizations does not increase the limit shown on the declarations.
Six Interrelated Limits
The CGL policy lists on the declarations six different limits. While the policy lists separately each of the six limits, it is important to recognize that the limits are all interrelated. That is, a reduction of one limit by the payment of damages will also reduce another limit. More on how this actually works later in this article. To see how the limits apply to specific claim scenarios, see the illustration of Nick's Casino, Inc., located at the end of the article.
Aggregate Limits
Two of the most important limits of the CGL policy are the aggregate limits. An aggregate limit is the most the insurer will pay during the policy period. Once an insurer pays as damages the full amount of an aggregate limit (payment must be pursuant to a judgment or settlement), the insurer has no further obligation to any insured for any claims or suits that fall within the exhausted aggregate limit. This means that, for the remainder of the CGL policy period, the insurer has no further responsibility to any insured to pay damages for subsequent claims or suits covered by the CGL policy if those claims or suits fall within the exhausted aggregate limit
Exhaustion of an aggregate limit also extinguishes an insurer's duty to defend an insured against any subsequent suits that fall within the fully depleted aggregate limit. An important function of an umbrella or excess policy is to "drop down" over an exhausted aggregate underlying limit.
A Caveat
After issuance of a CGL policy, any attempts to extend the policy period by endorsement for an additional period of less than 12 additional months will adversely affect the aggregate limits. Any such endorsement will not reinstate the aggregate limits for the additional period; the same aggregate limit will instead apply to the additional period of coverage. 1 For example, extending a CGL policy with an annual policy period by endorsement after issuance for an additional period of 9 months would cause the aggregate limits to apply to the entire period of 21 months—12 months plus the additional 9 months.
In this situation, it is preferable to either write a 21-month policy period at policy inception or write the CGL policy to expire on its normal anniversary date and write a second short-term CGL policy for the 9-month additional period. In either case, the aggregate limits would apply to the 12-month period and then separately to the 9-month period. If a policyholder has an umbrella policy, the short-term policy option is generally recommended, as umbrella insurers usually require unimpaired aggregate limits (no damages have been paid that reduce the aggregate limits prior to the umbrella policy inception date).
The General Aggregate Limit
The general aggregate limit is the most the insurer will pay for damages under Coverage A because of bodily injury or property damage and damages under Coverage B—Personal and Advertising Injury because of an offense and expenses under Coverage C—Medical Payment. The only circumstances in which the general aggregate limit does not apply is to damages because of bodily injury or property damage arising out of the products-completed operations hazard. The definition of products-completed operations hazard is included in the CGL policy—a separate aggregate limit (the products-completed operations aggregate limit) applies to payment of damages arising out of products or completed operations claims.
In other words, the general aggregate limit applies to all damages paid under insuring agreement Coverage A (except damages arising out of products-completed operations), all damages paid under insuring agreement Coverage B—Personal and Advertising injury, and all expenses paid under insuring agreement Coverage C—Medical Payments.
Products-Completed Operations Aggregate Limit
This aggregate limit is the most the insurer will pay during the policy period for damages because of bodily injury or property damage and arising out of the products-completed operations hazard. Stated differently, the products-completed operations aggregate limit only applies to the payment of damages because of bodily injury and property damage and then only for claims arising out of the products-completed operations hazard.
As more fully described by its CGL policy definition, products-completed operations apply only to the following bodily injury or property damage.
- Occurs away from the named insured's premises and
- Arises out of the named insured's products ("your product") that are no longer in the named insured's possession or
- Arises out of the named insured's work ("your work") that has been completed
While understanding the CGL policy definitions of "your product" and "your work" and a grasp of when "your work" is complete is essential to identify the types of claims that fall within the products-completed operations hazard, the above provides some foundation.
The products-completed operations aggregate limit applies independently of the general aggregate limit. Damages paid under the general aggregate limit do not reduce the products-completed operations aggregate limit and vice versa. Consequently, under the CGL policy, an insurer's total liability or exposure in a policy period is the sum of the two aggregate limits.
A Metaphor
Some have suggested that the aggregate limits may be thought of as two separate large tanks of water. Piping from each tank flows into smaller tanks, each of which represents one of the other four CGL policy limits. Presume the aggregate tanks are completely full at policy inception with the other four tanks (limits) completely empty.
Any time a claim is paid, the smaller tank from which the claim is paid must first draw the water from the larger aggregate tank, reducing the water in the aggregate tank. Damages are paid on the policy until the aggregate tank is empty—in which case the aggregate is exhausted as nothing is left. Any further attempt to draw from that aggregate tank during the policy period will come up dry—the aggregate limit is exhausted.
Personal and Advertising Injury Limit
For the offenses that fall within the definition of personal and advertising injury (and subject to the Coverage B exclusions), a limit is listed on the declarations as the personal and advertising injury limit. If the insurer is legally obligated to pay damages because of personal and advertising injury offenses, the most that the insurer is required to pay is established by this personal and advertising injury limit.
The personal and advertising limit is independent of the each occurrence limit applicable to Coverage A—Bodily Injury or Property Damage. Hence, during a policy year, depending on the circumstances, an insurer may be required to pay both the personal and advertising injury limit and the each occurrence limit. 2
The personal and advertising injury limit applies not to each offense, but separately to each person or organization that sustains damages because of a covered offense or offenses. However, regardless of the number of persons or organizations claiming damages from a covered offense, or regardless of the number of offenses claimed during the policy period, the insurer is obligated to pay no more than the general aggregate limit for personal and advertising injury offenses.
Each Occurrence Limit
The each occurrence limit is the most the insurer will be obligated to pay for all damages paid within Coverage A—Bodily Injury and Property Damage, including all expenses paid within Coverage C—Medical Payments. Although a separate products completed operations aggregate limit applies to the payment of damages because of bodily injury and property damage that arise out of the products-completed operations hazard, all damages paid under Coverage A and all expenses paid under Coverage C are nonetheless subject to the each occurrence limit.
An Occurrence
Exactly what constitutes an occurrence has been the subject of colossal amounts of litigation and even greater debate. Most of the dispute is related to fortuity and how it relates to insuring agreement of Coverage A—Bodily Injury or Property Damage. 3 However, the "occurrence" definition (an accident, including continuous or repeated exposure to substantially the same general harmful conditions) also has a role that is separate from fortuity—a role that must be understood to grasp how the each occurrence limit is to apply.
An Example
A food processor improperly prepares a shipment of seafood. As a result, the food processor sells contaminated food to the public. Twenty-five people become seriously ill as a direct result of the food contamination, all of whom sue the food processor. Is each illness (bodily injury) suffered a separate occurrence? Alternatively, is the faulty preparation of the seafood, the underlying cause of the illness, the occurrence? In other words, are these 25 occurrences or 1 occurrence?
Case Law
There is a split of legal authority on this issue. Further, slight variations in the facts of the case may result in different outcomes. The general trend, however, is for the courts to take one of two views. The first view is that cause of the liability is the occurrence ("cause" test). Thus, as the cause of the liability is the faulty food preparation, this would be one occurrence under the "cause" test. The second view focuses on the effect or the resulting injury or damage, finding each injury or damage to be a separate occurrence ("effect" test). In the above example, the second view or the "effect" test would find 25 separate occurrences, requiring the food processor's CGL insurer to pay up to the each occurrence limit 25 times for each person who became ill, subject to the products-completed operations aggregate limit
Damage to Premises Rented to You Limit
Coverage for damage to premises rented to you is not provided by a specific coverage grant but rather by exceptions to certain exclusions found in Coverage A—Bodily Injury and Property Damage. The first exception provides coverage for property damage to premises, including the contents of the premises, rented to the named insured for 7 or fewer consecutive days if an insured is legally obligated to pay for such property damage due to any cause except fire.
The second exception, formerly known as fire damage legal liability, provides coverage for damage only to the premises (not to the contents of the premises) if an insured is legally obligated to pay for the property damage but only if fire caused the property damage.
Neither exception provides coverage if the insured is obligated to pay solely because the insured has assumed liability for damage in a contract or agreement. For example, the CGL policy provides no coverage if the insured agreed in a lease of premises contract to indemnify the owner of the building for any damage to the premises caused by fire. 4
The coverage granted by the exceptions noted above is subject to the damage to premises rented to you limit listed on the declarations. The limit applies to any one premises and is a sublimit of the each occurrence limit. Therefore, any damages paid because of property damage under the damage to premises rented to you limit will reduce the each occurrence limit for that same occurrence and will also reduce the general aggregate limit.
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Medical Expense Limit
Coverage C—Medical Payments is a separate insuring agreement that obligates the insurer to pay reasonable medical expenses (subject to the CGL policy's terms and conditions) for bodily injury, caused by an accident, without regard to fault. Coverage C is subject to the medical expense limit listed on the declarations. The medical expense limit applies separately to each person but is a sublimit of the each occurrence limit. As with the damage to premises rented to you limit, payments made as medical payments will reduce the each occurrence limit for that same occurrence and will also reduce the general aggregate limit.
The Water Tank Metaphor
To continue the water tank metaphor, again picture the two aggregate limits (general aggregate limit and products-completed operations aggregate) as tanks completely full of water at policy inception. Connected by piping to the general aggregate limit is a separate, empty water tank that is the each occurrence limit. We will call this connection valve #1. The each occurrence limit tank also has a separate pipe connecting it to the products-completed operations aggregate limit tank via valve #2.
While the each occurrence tank limit is refilled to capacity for each occurrence, damages payments will never exceed what is left after using either valve #1 or valve #2 to drain from the appropriate aggregate limit tank. In either case, the insurer will never pay more in any one occurrence than the full capacity of the each occurrence limit water tank, subject to appropriate aggregate limit water tank.
If damages paid under Coverage A do not arise out of the products-completed operations hazard, the each occurrence limit tank is filled by using valve #1 and drawing down the general aggregate limit via valve #1. If the damages paid arise out of the products-completed operations hazard, the each occurrence limit tank is filled by using valve #2 and drawing down the products-completed operations aggregate limit tank.
As a sublimit of the each occurrence limit, the damage to premises rented to you limit water tank is connected only to the each occurrence limit water tank via valve #4. Likewise, the medical expense limit water tank is connected to the each occurrence limit water tank via valve #5.
To pay damages under damage to premises rented to you limit or expenses under the medical expense limit, water must first be drawn down from the general aggregate limit tank via valve #1 into the each occurrence limit water tank.
The damage to premises rented to you limit tank is refilled for each premises, but for the same occurrence, draws down the each occurrence limit tank via valve #4 as well as the general aggregate limit via valve #1.
The medical expense limit tank is refilled for each person, but for the same occurrence, draws down the each occurrence limit tank via valve #5 as well as the general aggregate limit via valve #1. Any claims paid under either coverage reduce the water left in the each occurrence limit water tank available to pay claims for that same occurrence.
The personal and advertising injury limit tank piping is connected only to the general aggregate limit water tank via valve #3 and draws down only the general aggregate limit for any damages paid. While the personal and advertising injury limit tank is refilled to capacity by drawing down from the general aggregate limit via valve #3 each time damages are paid to any one person or organization, the insurer will never pay more than what is left in the general aggregate limit tank.
In any event, the insurer will never pay more to any one person or organization than the full capacity of the personal and advertising injury limit water tank, subject only to the general aggregate limit water tank.
The personal and advertising injury tank is neither connected to the each occurrence limit tank nor connected to the products-completed operations aggregate limit tank. Therefore, payment of damages for personal and advertising injury offenses affects neither tank limit.
Aggregate Limit Endorsements
The general aggregate limits can be amended to apply separately to designated locations or to designated projects. Depending on the number of locations or projects designated, these endorsements can greatly reduce the likelihood that a policyholder's general aggregate limit will be exhausted during the policy period. 5
An Illustration of CGL Limits of Liability—Nick's Casino, Inc.
The following is a hypothetical illustration of applying the CGL policy limits to various claims. The illustration starts with a fairly typical limit structure for a policyholder, Nick's Casino, Inc., and demonstrates how the limits apply to the various claims scenarios presented in the illustration.
| Nick's Casino, Inc., CGL Policy—Limits of Liability | |
|---|---|
| $2,000,000 | General Aggregate Limit (Other Than Products-Completed Operations) |
| $2,000,000 | Products-Completed Operations Aggregate Limit |
| $1,000,000 | Personal and Advertising Injury Limit—Any One Person or Organization |
| $1,000,000 | Each Occurrence Limit |
| $100,000 | Coverage for Damage to Premises Rented to You Limit—Any One Premises |
| $5,000 | Medical Expense Limit —Any One Person |
Assume the above limits and CGL policy dates of January 1 to January 1.
1. Nick's Casino, Inc., has recently purchased and opened a new casino in Iowa. Unfortunately, the roof of the Nick's building collapsed during a high-stakes blackjack tournament on January 15, injuring 15 patrons.
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a. Ten patrons are willing to settle for having their medical expenses paid. What is the most Nick's insurer will pay for the 10 patrons' medical expenses?
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$50,000 (10 persons times $5,000 each person)
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b. After settling with the 10 patrons for the maximum medical expense payable under the policy, 2 other patrons file complaints, seeking damages of $5 million each. What is the most Nick's insurer will pay to defend these two claims?
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Defense expense is unlimited under CGL policy (until settlement or judgment).
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c. What is the most the insurer will pay in total for the injuries to these two patrons who have filed the complaint, assuming Nick's is legally obligated to pay their demands?
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$950,000–$1,000,000 each occurrence limit is reduced by the $50,000 medical expense payment (10 persons times $5,000 each person)
2. Nick's Casino, Inc., moves his casino to Seattle, Washington, and rents an entire aircraft hangar for 2 months while searching for a new building. While serving a flaming Baked Alaska on March 15, the casino's waitstaff accidentally causes a fire that does $150,000 of damage to the hangar.
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Assuming Nick is found legally obligated (in tort) to pay for the damage, what is the most that Nick's insurer will pay for the damage to the hangar?
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$100,000—the damage to premises rented to you limit
3. The fire quickly spreads to a nearby restaurant, injuring two patrons and damaging the restaurant building.
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Nick's Casino is liable for $100,000 of damage to the restaurant building and $50,000 each for the injuries to the two restaurant patrons. What is the most that Nick's insurer will pay for damage to the building and the injuries to the patrons?
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$200,000–$100,000 for the restaurant building (the building is not in Nick's custody) and $100,000 total ($50,000 each) for the bodily injury to the patrons. This payment is still within Each Occurrence limit.
4. Nick's Casino evicts a high roller from her room at the casino hotel on July 20. On July 23, the hotel guest files a complaint against Nick for wrongful eviction, a personal and advertising injury offense.
- The guest obtains a judgment against Nick for $100,000 in damages. What is the most the insurer will pay for this claim?
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$100,000—this is a personal and advertising injury claim that is subject to a $1,000,000 limit for any one person or organization.
5. To improve foot traffic in the casino, Nick decides to print and distribute to anyone that enters his casino playing cards with pictures of his casinos. On August 23, a playing card was so sharp that it cut a buyer's hand, requiring 15 stitches and causing the buyer, a world-renowned surgeon, to miss 3 months of work.
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After a trial, the court enters judgment in favor of the surgeon, as the card was deemed his product and was defective when it left his possession. The award of the jury was $1,200,000 in damages. What is the most the insurer will pay for this claim?
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$1,000,000—the each occurrence limit applies.
6. Nick opens another casino in Worcester, Massachusetts, and sets up his tent for a welcome cocktail party. Unfortunately, on September 25, the tent collapses, injuring six guests.
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Assuming Nick is legally obligated to pay for their injuries, what is the most that Nick's insurer will pay in total for the injuries to the six patrons?
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$600,000 is available for this claim.
The general aggregate limit has been reduced, as shown in the following chart.
| Date | Amount | Type | Reduction of General |
|---|---|---|---|
| 1/15 | $50,000 | Medical Expense | $50,000 |
| 1/15 | $950,000 | Bodily Injury Payment | $950,000 |
| 3/15 | $100,000 | Damage to Premises Rented to You | $100,000 |
| 3/15 | $100,000 | Property Damage to Restaurant | $100,000 |
| 3/15 | $100,000 | Bodily Injury—$50,000 to Each Patron of Restaurant | $100,000 |
| 7/23 | $100,000 | Personal and Advertising Injury | $100,000 |
| 8/23 | $1,000,000 | Products-Completed Operations Bodily Injury | No Reduction (Only Products-Completed Operations Aggregate Is Reduced) |
| TOTAL | $2,400,000 | $1,400,000 | |
| 9/25 | $600,000 | Bodily Injury to Patrons | General Aggregate Exhausted after Payment of $600,000 |
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
Footnotes
