CGL Only Insures Against Tort Liability


The First Circuit Court of Appeal was called upon, applying the law of Puerto Rico, whether a CGL policy provided coverage to an insured for claims that sounded in contract rather than in tort. The issue had never been brought to the First Circuit before with regard to contract damages and it made its decision as a decision of first impression. The First Circuit reached its decision in Lopez & Medina Corp., D/B/A Emmanuel Travel & Tours v. Marsh Usa, Inc., As Agent For Certain Subscribing and/Or Participating, No. 10-1702 (1st Cir. 01/26/2012).


Plaintiff-appellant Lopez & Medina Corp. (“L&M”) appealed the district court’s order denying its cross-motion for summary judgment. The cross-motion was denied on the grounds that the insurance policy, pursuant to which L&M sought coverage, issued by defendant-appellee United States Aviation Underwriters, Inc. (“USAUI”), did not cover L&M’s losses arising from an alleged breach of contract.

In addressing whether USAUI’s policy covered L&M’s contractually based claim the First Circuit noted that it was treading on virgin ground in its circuit because it had not had the opportunity to address whether the phrase “legally obligated to pay as damages” in a commercial general liability (“CGL”) policy, which usually covers only tort claims, also provides coverage for claims in an underlying action arising out of and related to a contract between the parties.

On September 1, 2001, USAUI and other defendant co-insurers issued Airline Insurance Form PA-01, Policy #SIHL1-200A (the “Policy”) to Pace Airlines, Inc. (“Pace”). Pace was the “Named Insured” under the Policy, and two Boeing 737-200 aircraft were listed as the insured subjects. The Policy covered certain risks assumed by its insured, Pace, in its contractual arrangements with other companies, which generally consisted of charter programs.

Patriot and L&M prepared for their business venture, titled “Dream Air operated by Pace Airlines,” to take off. On June 22, 2002, the first chartered flight left Luis Munoz Marin International Airport, departing from San Juan, Puerto Rico to the Dominican Republic. The First Circuit, analyzing the factual situation with a plethora of puns stated the facts, including that “[b]usiness seemingly continued to soar into early July, with additional flights occurring on July 3, 4, 7, 8, 11, 12, and 14 of 2002. However, it was not long before L&M and Patriot’s business arrangement began to experience turbulence. As of mid-July, L&M and Patriot’s Dream Air operation had become a business venture nightmare. By July 18, 2002, Patriot had taken action and terminated the Passenger Agreement. Two months later, Patriot filed for voluntary bankruptcy under Chapter 11 in the United States Bankruptcy Court for the Northern District of Texas.

L&M alleged three causes of action in its complaint:

  1. the named defendants were liable under Puerto Rico’s Direct Action Statute, P.R. Laws Ann. tit. 26, § 2003, for risks insured under the Policy;
  2. declaratory judgment, establishing that one or more of defendants’ insurance policies provided coverage for those risks associated with the breach of the Passenger Agreement, Charter Agreement, or any other agreements concerning Patriot and Pace’s charter operations; and
  3. a determination that the Policy insured against a breach of contract risk, and therefore, defendant-insurers were directly liable to L&M within the maximum limit of their combined policies for losses arising from the alleged breach, which L&M contended amounted to ten million dollars.

Specifically, defendants requested, and the trial court agreed, that the district court dismiss the case with prejudice because the undisputed facts (namely, the plain language of the Policy) showed that the Policy did not cover L&M’s alleged breach of contract claim, regardless of whether a breach of contract ultimately was or was not established. The district court rejected L&M’s motion, concluding that the Policy “clearly and unambiguously does not provide coverage for a breach of contract claim.”


Insurance Policy Construction Under Puerto Rico Law

Puerto Rico law governs this diversity case. Article 1233 of the Puerto Rico Civil Code provides that when the terms of a contract are clear and leave no doubt as to the intentions of the contracting parties, the literal sense of its stipulations shall be observed. On the other hand, where a policy’s language is unclear, we must construe the provisions against the insurer.

The First Circuit was aware, however, that where a contract’s wording is explicit and its language unambiguous, the parties are bound by its clearly stated terms and conditions, with no room for further debate. The court cannot dwell on the “alleged” intent of the parties at the time they entered into the contract.

Whether the Policy Extends Coverage to L&M’s Claims

L&M’s argument on appeal was that the Policy – in contrast to the district court’s finding – is not limited solely to tort claims, but instead covers both contract and tort actions. Thus, L&M’s claims also must be covered under the Policy. Because the analysis centers on the Policy’s language, which serves as the best evidence of the parties’ intentions, the First Circuit addressed the relevant terms of the CGL provision.

L&M’s Claims

A careful review of L&M’s pleadings, motions, and arguments on appeal establishes that L&M’s allegations against USAUI – based on L&M’s asserted damages for Patriot’s alleged failure to provide chartered air transport via Pace – sound in contract. For example, in its complaint, L&M repeatedly alleges that indirect air carrier Patriot (which leased aircraft from direct air carrier Pace) breached its written Passenger Agreement with L&M. L&M similarly argues in its cross-motion for summary judgment that Patriot breached its Passenger Agreement with L&M and therefore coverage for L&M’s resulting losses should extend to L&M under the Policy.

L&M’s arguments on appeal – generally, that the district court improperly limited L&M’s allegations to a breach of contract claim, despite defendants’ tortious act of refusing or withholding of transportation – do little to persuade the First Circuit otherwise as to the contractual nature of its claim.  Without belaboring the point, L&M repeatedly asserts in its complaint that Patriot breached its contractual obligations to L&M, and that such breach and its resulting losses are covered under the Policy. At no point in the complaint does L&M ever clearly or expressly assert a tort violation. Thus, in order for L&M to receive coverage under the Policy, it must establish that the Policy’s coverage extends to contract-based claims.

Relevant Policy Terms

L&M directs us to specific provisions in the Policy which it alleges support its claim of coverage. The contested form of coverage is that provided under “Part I – Liability Coverage,” also referred to by the parties as the “CGL provision.” L&M based its claim on the following CGL language:

        1. COVERAGE

        The INSURER will pay on behalf of the INSURED all sums which the INSURED shall become legally obligated to pay as damages arising out of the Named Insured’s Airline Operations because of:

        B. PERSONAL INJURY arising out of one or more of the following offenses committed during the policy period;

        Group 3. Refusal or withholding of transportation or other public accommodation; but coverage hereunder shall not apply to payments made by the Insured under the provisions of its tariffs or contract of carriage, to persons holding confirmed reserved space on a flight and who are denied boarding on such flights whether such space is relinquished voluntarily or involuntarily.

Furthermore, L&M, throughout its various pleadings and motions, has relied on the following specific language within the CGL provision to support its position that L&M suffered damages due to Patriot’s allegedly bad faith failure to provide air transportation to L&M in violation of their contractual agreement, and that the Policy extends coverage to such damages:

The insurer will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages arising out of the Named Insured’s Airline Operations because of . . . personal injury arising out of . . . refusal or withholding of transportation or other public accommodation.

The First Circuit noted, with a detailed recitation of cases from other circuits, that the circuit courts of appeals that have ruled on the interpretation of the phrase, “legally obligated to pay as damages,” in a CGL provision have all held that it applies to tort and not contractual liability. Renowned insurance treatises and commentators also agree that the purpose of a CGL policy is to indemnify a party against tort and not contract-based liability.

The phrase, “legally obligated to pay as damages,” refers exclusively “to the liability of the insured arising from the breach of a duty that exists independent of any contractual relationship between the insured and the injured party.”

L&M’s proposed interpretation of the Policy’s CGL language as applicable to contract claims asked the First Circuit to view well-settled insurance law through the looking glass. It is generally not an appellate court to contradict established, well-grounded law. Here, the well-beaten path does indeed make the right road, and the First Circuit refused to accept L&M’s invitation to wander from it. Indeed, the upshot of extending coverage to a breach of contract claim in this instance would be to turn the CGL policy into a performance bond. The First Circuit was unwilling change the policy wording and do what L&M asked.


Finding no ambiguity in the Policy’s clear language, the First Circuit decided to enforce the policy according to its express terms, which, as previously stated, provide no coverage for L&M’s contract-based claims.

In resolving this matter of first impression, the First Circuit  joined the majority of those circuit courts of appeals that have ruled on the issue. The First Circuit also concluded it need not address L&M’s other arguments, as they invite us to look outside the clearly delineated scope of the Policy to external documents and the parties’ alleged intent when entering the agreement.


The First Circuit followed a plethora of precedent that a CGL is a policy that only insures the person(s) insured against tort liability. It does not, nor can it ever, provide coverage for breach of contract. A CGL policy is not a performance bond nor does it promise, in any way, to guarantee that a person insured will fulfill the terms of a contract it makes with another.


Barry Zalma, Esq.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit,” “Insurance Fraud,” and others that are available at

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught.

About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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