The issue before the Southern District of Texas in Pac-Van, Inc. v. CHS, Inc., No. 12-341 (S.D. Tex. Mar. 31, 2014) -- just what is a commercial general liability insurance policy anyway -- isn’t likely to arise too often. Since this may be a rare chance to see this issue, and with the opinion including a good quote, I selected it for discussion.

The facts at issue are simple. Pac–Van Inc. is a company that leases and sells portable buildings for nonresidential use. It leased a work trailer to CHS, Inc. One of CHS’s businesses is the importation and shipment of fertilizers to consumers. The leased Pac–Van trailer was used as a temporary office building at CHS’s Galveston location. One of CHS’s employees fell through a soft spot on the floor of the trailer and injured himself. The employee sued Pac–Van for his injuries.

Pac–Van and its insurer gave CHS notice of the lawsuit and demanded that CHS defend Pac–Van pursuant to the parties’ Master Services Agreement. CHS and its insurer refused. It is worth setting out the Agreement’s insurance requirement verbatim: “INSURANCE: [CHS], at its own expense, shall insure for risks of loss or damage. [CHS] must carry commercial general liability insurance insuring both [Pac–Van] and [CHS] against loss. The general liability insurance amounts must not be less than $1,000,000 bodily injury per person, $1,000,000 bodily injury per occurrence, $1,000,000 property damage per occurrence, and [Pac–Van] must be named as an additional insured.”

CHS purchased a policy from Liberty Mutual that named Pac–Van as an additional insured and had a per-occurrence limit of $1 million. That’s what the Agreement called for – a $1,000,000 limit. So no problem, right? No, not right. The Liberty policy CHS purchased contained a $2 million self-insured retention. As the court put it: “Pac–Van was required to cover the first $2 million relating to any occurrence, and then Liberty would be on the hook for any liability in the $2–3 million dollar range.” CHS declined Pac–Van’s tender to provide a defense. Pac–Van settled the lawsuit for $172,500.00 and then filed a breach of contract claim against CHS.

The issue before the court was whether CHS complied with the Master Services Agreement’s insurance requirement – namely, a “commercial general liability insurance” policy with a $1,000,000 occurrence limit -- when it purchased a policy that contained a $1,000,000 limit -- but subject to a $2,000,000 SIR?

The Pac-Van court put the question this way: Does “commercial general liability insurance” mean a primary policy?

CHS argued that “it complied with the Agreement because the Agreement did not explicitly require CHS to purchase a primary policy. In other words, absent contractual language stating that CHS must provide ‘primary commercial general liability insurance,’ CHS takes the position that it could have purchased a policy providing $1 million of coverage at any layer.”

The court examined a few cases presented to it, concluded that they were informative but not dispositive, and decided that the question turned on basic principles of contract interpretation. Looking at some Texas federal and state cases, the Pac-Van court observed that they commonly used the term “commercial liability policy” when referring to a primary policy and contrasted it with an “excess policy.”

The court concluded that, based on these judicial decisions, a “commercial general liability” policy is one providing primary coverage. Further, the court held that such conclusion “is consistent with the following basic test of ordinary meaning: if a business called an insurance broker and said ‘find me a general commercial liability policy,’ wouldn’t the broker look for policies providing primary coverage? The Court believes the answer is ‘yes,’ and therefore concludes that the general understanding of the unmodified term ‘commercial general liability insurance’ means primary coverage; the designation of ‘excess’ or ‘umbrella’ is expected to accompany a policy that provides coverage at higher layers.”

The court was further guided by CHS’s counsel’s concession at oral argument that CHS’s position “would have allowed it to obtain a policy that did not provide coverage until $5 million, $10 million, or even $50 million worth of liability was incurred. Courts are to construe contracts bearing in mind the particular business activity sought to be served and will avoid, when possible and proper a construction which is unreasonable, inequitable, and oppressive.”

Thus, the Pac-Van court held that CHS breached its contractual obligation when it purchased an excess policy that would not kick in until after Pac–Van had expended $2 million in its own defense. “[I]n contrast with the policy CHS actually purchased, CHS was obligated to purchase a primary commercial general liability policy that provided insurance up the first million dollars of liability.