The standard Comprehensive General Liability policy covers all sums an insured “becomes legally obligated to pay.” Most state Supreme Courts that have considered the issue have decided that this does not mean the insured must be sued and adjudged liable as a prerequisite to indemnification under the policy. Would it make a difference if the policy replaces the word “becomes” to “held?” It does, according to the Georgia Supreme Court.
The question ordinarily comes up in cases where the policyholder must pay a claim because of liability arising from a contract, as opposed to a tort (personal injury or property damage caused by the insured’s alleged breach of some duty of care). A simple but common example would be where a construction contractor damages property adjacent to a work site by, say, accidentally dropping a roof-top air conditioning unit from a crane. Ordinarily, the contractor would be liable to pay for the resulting damage under the construction contract. To obtain coverage under its Commercial General Liability policy, may the contractor simply pay for the damage as a matter of complying with its contractual obligations or must it wait to be sued and lose a judgment to the property owner? Insurers sometimes argue that, in the absence of a lawsuit and a judgment, the insured has not become “legally obligated to pay” the damages to the third party, which is a prerequisite to coverage.
The idea of distinguishing between tort and contract liability for insurance purposes is that tort liability protects victims as a matter of social or public policy while contract damages lie for the breach of duties that arise from mutual agreement — that holding insurance companies liable for contract damages makes the insurer something of a silent partner to the contract. At least this is how one court has expressed the reason for the distinction. Redevelopment Auth. of Cambria County v. Int’l Ins. Co. , 685 A.2d 581, 589 (Pa.Super. 1996). The problem, of course, is that the coverage grant in the CGL policy makes no such distinction. It simply provides that the insurer will pay “all sums the insured becomes legally obligated to pay as damages on account of bodily injury or property damage caused by an occurrence.”
What does it mean to be “held legally obligated to pay?”
Fifteen years ago, an influential decision of the California Supreme Court seemed to put (mostly) to rest the defense insurers often raise to indemnification under a CGL policy that the insured must be sued and adjudged liable as a condition of coverage. The case is Vandenberg v. Superior Court, 12 Cal. 4th 815, 88 Cal. Rptr. 2d 366, 982 P.2d 229 (1999). The Court held that it is not the nature of the cause of action — tort or contract — that determines whether the policy provides coverage, it is whether the bodily injury or property damage was caused by an “occurrence.” The phrase “legally obligated to pay” means, according to the Vandenberg decision, any binding and enforceable obligation under the law, whether arising under contract or tort. No lawsuit required. After the Vandenberg decision, numerous Supreme Courts considered this issue and ruled that the question is not about the nature of the claim but about the nature of the damage and whether it resulted from an “occurrence.” This includes the Supreme Courts of Wisconsin (Am. Family Mut. Ins. Co. v. American Girl, Inc., 673 N.W.2d 65 (Wis. 2004)), New York (Hotel des Artistes, Inc. v. Gen. Accident Ins.Co. of Am., 775 N.Y.S.2d 262 (N.Y.App. Div. 2004)), and North Dakota (Acuity v. Burd & Smith Constr., 721 N.W.2d 33 (N.D. 2006), overruled on other grounds, K&L Homes, Inc. v. American Family Mut. Ins. Co., 829 N.W.2d 724 (N.D. Apr. 5, 2013)).
On Monday, March 17, 2014, the Georgia Supreme Court decided this issue, but under policy language that differed as to a single word from the standard language of the coverage grant in most CGL policies. The case is Lloyd’s Syndicate No. 5820 v. AGCO Corp., No. S13G0582 (Ga. Mar. 17, 2014). (Get a copy here.) The facts presented the classic distinction between obligations arising under contract versus those arising under tort. AGCO Corporation manufactured a self-propelled agricultural spray applicator called the “RoGator.” Under an “Extended Protection Plan,” AGCO offered a warranty to its RoGator customers. A Lloyd’s Syndicate provided a liability insurance policy for the EPP program. In 2008, a number of customers began presenting claims under the EPP based on the failure of wheel motors on the RoGator. In September 2008, after it had paid about 25 claims related to this failure, Lloyd’s refused to pay for any more. AGCO continued to pay the claims and then sued Lloyd’s for those the carrier had refused to cover.
One of the coverage questions the Georgia Supreme Court resolved was whether payment under the EPP triggered the policy requirement that there must be a legal obligation to pay. Lloyd’s argued that the policy language required a lawsuit and a finding of liability. AGCO argued, in the vein of Vandenberg and its progeny, that the policy simply required a finding that liability could be recognized if the issue were brought before a court.
The Court took a glancing look at the cases that analyzed coverage under the standard phrase “becomes legally obligated to pay.” In the process, it mentioned a 2011 decision by the federal court for the Eastern District of Virginia that had made the dubious observation that “the majority of courts to have considered the question have held that in order for an insured to be `legally obligated,’ there must have been either a final judgment or a settlement as the result of a suit.” In fact, the majority of Supreme Courts to have considered the issue have found that a lawsuit is not a prerequisite to coverage. But the AGCO court did not resolve the question on the basis of what other courts have done. Instead, it looked at the language of the policy at issue and concluded that it was decisively different from the language in other policies.
Is there really a meaningful difference between becoming legally obligated and being held legally obligated?
The Lloyd’s policy provided that the insurer would pay all sums the insured has been “held legally obligated to pay,” rather than all sums the insured “becomes legally obligated to pay.” To the Georgia Supreme Court, this change made all the difference. Under the Lloyd’s policy, according to the Court, the carrier “is required to indemnify AGCO only when there has been an actual holding of legal liability by a court, not merely the possibility of such a holding or the prediction of such a holding by the insured.” So the question this raises is: Does this change in wording justify the conclusion the Court reached?
Most courts, including those in Georgia, apply the rule of insurance policy interpretation that requires giving the words their common and ordinary meaning, as long as the insurer has not seen fit to give the words a special definition. Is there really a meaningful difference between becoming legally obligated and being held legally obligated? Both states of liability denote a fait accompli. There must be an existing, binding, and enforceable obligation under the law.
Take the circumstance, common enough, where a policyholder accidentally spills a contaminating liquid into the groundwater. Most states require, by operation of statute, that such a spill be reported to environmental regulators. Likewise, once the spill has been reported and investigated, the state environmental agency can issue a directive to the responsible party to clean up the spill. No one is at liberty to ignore such directives. They are compulsory and, if violated, usually result in heavy daily penalties and the risk that the state will conduct the cleanup and send the responsible party the bill.
If ABC Chemical Co. receives such a directive, has it been “held” liable for the cleanup? Most laypeople (that is, people who don’t attribute special legal meaning to ordinary words) would say, “Yes” to that question. Yet, to a lawyer, the words “hold,” and “holding” and “held” have had a special meaning since the first week of law school — a meaning that is not necessarily the one that jumps readily to the mind of a non-lawyer. Among the first questions a law professor asks the first-year law student is, “What was the holding of this case?” That question gets repeated at least a million times (it seems) throughout a law student’s time in law school. The special meaning of the word “held” or “holding” becomes second nature to the lawyer. For a lawyer, only a court can issue a “holding.” And the “holding” of a decision is not just any old utterance in the opinion that appears authoritative. It is the single and discreet nugget of the case — the expression of the rule of law for which that case stands. Most first-year law students, who were so recently lay people, have no earthly idea what they are looking for when their professors ask them for the very first time, “What was the holding of this case?”
When lawyers become judges, the words “holding” and “held” do not lose their special legal-jargon meaning. On the contrary, the words likely become much more firmly associated with that special meaning. Which may explain why the Justices of the Georgia Supreme Court would decide that the word “held” must mean — indeed, that it can only mean — “an actual holding of legal liability by a court.” That is a conclusion the ordinary lay person would be most unlikely to reach.
In the AGCO case, the policyholder gave a written extended warranty to the purchasers of its product. When the product failed, the customers did not simply ignore AGCO’s promises. They made a demand on AGCO to pay up as promised. Would a layperson — one who, like the first-year law student, does not necessarily know that judicial decisions have very special attributes called “holdings” — would a lay person think that the customers have, by demanding payment under the warranty, “held” AGCO liable for the payment? Isn’t the written promise AGCO made, that it would stand behind its product, a “legal obligation?” Wouldn’t AGCO’s ordinary customer think that, when he made a demand for AGCO to honor its legal obligation under the warranty, he was “holding” AGCO to that legal obligation?
Lawyers spend enormous amounts of time, energy, and money learning how to “think like a lawyer.” It is very hard for us to forget that we work in a jargon-saturated world and that our training has imbued certain ordinary words with special meaning. And we think, because it has become so obvious to us from our education and experience, that of course everyone knows that the simple, ordinary, everyday meaning of the word “held” is “an actual holding by a court of law.”
But they don’t and it isn’t.