The named insured, a roofing company, employs salespeople to inspect the roof when a homeowner calls with a potential issue. One of these, a fulltime employee, began damaging customers' roofs intentionally so the repair job would be bigger—and therefore the commission would be higher.

Multiple insurance companies caught on to what was happening and subrogated back against the named insured for the damages. The named insured fired the employee immediately. The employee was later tried criminally.

The named insured's insurance carrier denied coverage, citing several policy provisions from the ISO commercial general liability coverage form, CG 00 01 12 07. The carrier says that the definition of an occurrence "means an accident" and this was not an accident. The employee is considered an insured and the claim is not covered due to the Expected or Intended Injury exclusion.

This means the named insured is legally liable for something which our named insured did not expect or intend, yet they are not afforded coverage by their CGL insurer.

Q: Can we apply the separation of insureds clause? It clearly was not expected or intended from the standpoint of the named insured to damage roofs, but could it be argued that this damage by an employee was an accident from the standpoint of the named insured?

Response 1: An argument could be made on both sides, which allows for coverage to exist. As pointed out in your question, the first place to look is the separation of insureds wording:

7. Separation Of Insureds

Except with respect to the Limits of Insurance, and any rights or duties specifically assigned in this Coverage Part to the first Named Insured, this insurance applies:

a. As if each Named Insured were the only Named Insured; and

b. Separately to each insured against whom claim is made or "suit" is brought.

Let's look at each of the exclusions asserted. As to “expected or intended injury," that means "bodily injury" or "property damage" expected or intended from the standpoint of the insured, not an insured. This exclusion applies to only the insured that expected or intended the injury or damage, which leads us back to the separation of insureds. If an exclusion applies to one insured, it does not apply to all insureds.

Yes, the employee is an insured, so all applicable exclusions apply to them. But the entity is the named insured and, based on this wording, should not be subject to the same exclusions. If they condoned it, that's one thing—but since they appear innocent in the actions, the entity should have coverage for its vicarious liability for the actions of the automatic insured: the employee.

As to the carrier's assertion that it wasn't an accident, the CGL isn't conditioned on an “accident," it is triggered by an “occurrence." Yes, the definition of “occurrence" includes an accident, but it fully states, “…an accident, including continuous or repeated exposure to substantially the same general harmful conditions."

Because the term “accident" is not defined in the policy—only “occurrence" is defined—we must look to the dictionary meaning of the term. One definition is: “an unfortunate incident that happens unexpectedly and unintentionally, typically resulting in damage or injury." From the named insured's perspective, this is an unexpected and unintentional event that caused damage. If nothing else, the carrier appears to at least owe a defense.

Response 2: I think the named insured, the employer, is entitled to coverage under the separation of insureds provision as long as the damage was not done with the knowledge or encouragement of the employer. The damage is unintended and accidental under those circumstances, making it fit the definition of "occurrence." 

Bear in mind, though, that the CGL insurer is under no obligation to make a voluntary payment to the owner of the damaged property. Assuming all the conditions for coverage are met, the insurer can wait for the lawsuit and then decide whether it fits the scope of coverage.

Response 3: The exclusion applies to the insured who caused the damage, who is the employee, not the employer. The separation of insureds clause provides coverage separately for each insured. There should be coverage.

Response 4: From the viewpoint of the named insured, it was not intentional and was accidental from their perspective. Yes, the separation of insureds clause would apply. If I were you, I would get an insurance lawyer to write a rebuttal to the denial.

This question was originally submitted by an agent through the Big “I" Virtual University's (VU) Ask an Expert service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.

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