Ask Mike
#2012-10
Subject: Contractual Liability vs. Exclusions – CGL/HO
Q.
One of my large commercial insureds has approached me with an unusual situation.
Jack is the CEO and principle stockholder of a local engineering company
I’ll call
Smithco, Inc. Sometime in January, he plans on renting a 53-ft. houseboat, and wants to know what coverage he has under his company’s CGL, and/or his Homeowners
Policy, both of which we write (along with most of his other business and personal insurance).
His branch office is located near Nashville, where he has a second home. After Katrina, he moved most of his back-office operations to Tennessee. He expects to close on a contract with a large commercial real estate developer in January, and plans on taking some key employees from his company, and theirs, on a daylong river cruise on the houseboat. Jack is a long-time boat owner, and will be driving the houseboat himself.
I’m assuming he will sign a rental contract, and that it will have the usual contractual requirements for hold harmless, as well as responsibility for damage to the houseboat.
Would CGL contractual apply? In case the houseboat catches fire (they will be cooking on board), would Fire Legal apply? And what about coverage under his Homeowners
Policy? Any possibility there might be some coverage there?
A.
Wow! This is the kind of question that gets an Insurance Nerd’s blood pumping!
Here is how I see the issues in his CGL and Homeowners Policy.
CGL
Issue #1: Watercraft exclusion . Here are excerpts from the CGL exclusion for watercraft:
SECTION I – COVERAGES
2. Exclusions g. Aircraft, Auto Or Watercraft
"Bodily injury" or "property damage" arising out of the ownership, maintenance, use or entrustment to others of any aircraft, "auto" or watercraft owned or operated by or rented or loaned to any insured. Use includes operation and
"loading or unloading".
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This exclusion does not apply to:
(2) A watercraft you do not own that is:
(a) Less than 26 feet long; and
(b) Not being used to carry persons or property for a charge;
(4) Liability assumed under any "insured contract" for the ownership, maintenance or use of aircraft or watercraft;
Comments: Under 2.g.(2) , there is no coverage for BI/PD arising from the use of the rented houseboat, since it is longer than 26 feet. However, endorsement CG 24 12 11
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– Boats, amends the Aircraft, Auto or Watercraft exclusion (above) to provide watercraft liability for scheduled watercraft the insured owns, rents or uses. Excerpt:
Exclusion g. of COVERAGE A (Section I) does not apply to any watercraft owned or used by or rented to the insured shown in the Schedule.
Since your insured anticipates only a one-day cruise, the CGL insurer may attach the endorsement for a nominal charge, or require that an additional premium apply for the balance of the policy term. But the additional premium would be cheaper than the uninsured alternative.
Under 2.g.(4) , there could be certain coverages under the “insured contract” provision.
First, however, we need to examine the scope of contractual coverage in the CGL.
Issue #2: Contractual liability .
Excerpt:
SECTION I – COVERAGES
2. Exclusions b. Contractual Liability
"Bodily injury" or "property damage" for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.
This exclusion does not apply to liability for damages:
(1) That the insured would have in the absence of the contract or agreement; or
(2) Assumed in a contract or agreement that is an "insured contract", provided the "bodily injury" or "property damage" occurs subsequent to the execution of the contract or agreement.
Comments: The CGL excludes contractual liability, but does provide some coverage through exception 2.b.(2 ), so long as the contract Jack signs with the houseboat rental company qualifies as an “insured contract.”
Issue #3: Insured contract.
Excerpt:
Section V – Definitions
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9.
"Insured contract" means: f.
That part of any other contract or agreement pertaining to your business
(including an indemnification of a municipality in connection with work performed for a municipality) under which you assume the tort liability of another party to pay for "bodily injury" or "property damage" to a third person or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement .
Comments:
A key provision of “insured contract”
9.f.
is that the only contracts which qualify are those where Smithco will “ assume the tort liability of another party to pay for
"bodily injury" or "property damage" to a third person or organization.
”
To illustrate, reread the provision above, where the houseboat rental company is HRC.
Smithco’s CGL would consider the rental agreement as an “insured contract” if it has wording similar to this:
“Smithco, Inc. assumes the tort liability of another party [HRC] to pay for "bodily injury" or "property damage" to a third person [Bill Bystander] or organization
[Maria’s Marina].”
Said another way , the basis for Smithco’s contractual liability coverage is to cover the vicarious liability the houseboat rental company might owe to third parties, arising from
Smithco ’s use of the houseboat. In contract and insurance language, Smithco has entered in to a “hold harmless” agreement with HRC. This is a textbook example of how
Smithco’s CGL contractual coverage works.
However, not every contractual obligation Smithco agrees to in the rental agreement with HRC is covered under Smithco’s CGL contractual liability coverage. A prime example would be damage to the houseboat caused by Smithco. While Smithco could be “contractually liable” for damage to the houseboat, this is not within the scope of the
CGL’s “insured contract” provisions. First, this does not deal with Smithco’s duty to hold
HRC harmless under tort liability for BI/PD to third parties, for actions done by Smithco.
Liability for damage to the houseboat is strictly between Smithco and HRC.
Secondly, damage to the houseboat is excluded under Smithco’s CGL, as follows:
SECTION I – COVERAGES
2. Exclusions j. Damage To Property
"Property damage" to:
(1) Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement,
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enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another's property;
(4) Personal property in the care, custody or control of the insured;
This is a fundamentally important point in understanding CGL contractual coverage: it does not override any other CGL exclusion – 2.j.(1) and (4) in this case. Despite a contractual obligation to be responsible for damage to the houseboat, no such contract can force the insurer to pay a claim where the loss is excluded elsewhere in its CGL.
One option would be to rent from a company that offered a Damage Waiver, similar to those for rented autos.
For comparison, if Smithco had rented a luxury motor coach, instead of a houseboat, there would be no coverage for damage to the motor coach under 2.j.(1) and (4) above.
Nor would there be any contractual liability coverage, even if Smithco was assuming the tort liability of the motor coach rental company, since the Auto, Aircraft or Watercraft exclusion in Smithc o’s CGL applies to “ownership, maintenance, use or entrustment to others of any aircraft, "auto" or watercraft owned or operated by or rented or loaned to any insured.” [See complete exclusionary wording in “Issue #1” above.]
The only reason Smithco’s CGL contractual liability coverage applies to the rented houseboat is because of the exception (see (4) below) , in the Aircraft, Auto or
Watercraft exclusion for contractual liability, as follows:
This exclusion does not apply to:
(2) A watercraft you do not own that is:
(a) Less than 26 feet long; and
(b) Not being used to carry persons or property for a charge;
(4) Liability assumed under any "insured contract" for the ownership, maintenance or use of aircraft or watercraft;
The Aircraft, Auto, or Watercr aft exclusion has no similar exception for auto “insured contracts,” only those for aircraft or watercraft. Insurance texts often state that one reason the CGL provides contractual liability only for aircraft and watercraft (and not auto), is that some aviation and marine policies do not include contractual coverage.
Issue #4: Fire Legal coverage for damage to the houseboat .
Us Old Timers will probably always refer to this provision as “Fire Legal,” although the proper name for the coverage is “
Damage To Premises Rented To You
.”
And, as the title implies, coverage only applies for damage to a “ premises, including the contents of
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such premises, rented to you...
” and would therefore not apply for damage to the houseboat or its contents. Black’s Law (9 th
E dition) defines “premises” as: “2 . The part of a deed that describes the land being conveyed. 3. A house or building, along with its grounds .”
HOMEOWNERS
The Homeowners Policy provides worldwide coverage for personal property (Coverage
C) and liabil ity/medical payments (Coverages E&F). Here is how I believe Jack’s
Homeowners Policy would respond to certain losses arising from the rented houseboat.
Issue # 1: Coverage C for damage to the houseboat .
While Jack’s Coverage C provides coverage for personal property “owned or used,” it would provide only a small amount of coverage for damage to the houseboat.
Depending on the edition of the coverage form, the amount is limited to between $1,000 and $1,500, and is subject to Coverage C perils.
Issue #2: Liability arising out of the houseboat .
Section II – Liability Coverage provides coverage for BI/PD for which Jack becomes legally liable, except as excluded. Two exclusions could apply. First, there is no coverage for watercraft liability which arises out of a rented watercraft with more than 50 horsepower inboard or inboard-outdrive engine power. If the rented houseboat is powered by outboards of any horsepower, the exclusion does not apply.
Second, Section II excludes “business” activities “ arising out of or in connection with a
"business" conducted from an "insured location" or engaged in by an "insured", whether or not the "business" is owned or operated by an "insured" or employs an "insured ".”
However, a gray area exists where there are social activities related to business, such as playing golf, going to dinner, etc. The ISO language above does not really address this issue clearly. Case law on this language is mixed. In contrast, a widely used non-
ISO Homeowners form provides more latitude in coverage. This form makes an exception to the “business” exclusion as follows: “ Business” does not include activities that are related to “business,” but are not usually viewed as “business” in nature .”
There fore, whether Jack’s Homeowners Policy is ISO or non-ISO, in the event of a claim, it would be important to report the claim to Jack’s Homeowners insurer (in addition to Smithco’s CGL insurer). A general rule of E&O is that agents should avoid
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making determinations of coverage on their own, but instead should submit every claim to the appropriate insurer(s).
Issue #3: Contractual coverage . Like the CGL, a Homeowners Policy provides certain specified contractual liability coverage.
Section II excludes coverage “ under any contract or agreement entered into by an "insured, " but includes an exception for written contracts:
(1) That directly relate to the ownership, maintenance or use of an "insured location"; or
(2) Where the liability of others is assumed by you prior to an "occurrence"; unless excluded in a. above or elsewhere in this policy ;
Comments: Since the definitions of “insured location” are all premises-related, contractual liability described in (1) above would not apply to the houseboat. Under part
(2) above, contractual liability would apply to the degree that Jack has assumed the liability of others, such as the houseboat rental company (HRC). However, if the rental contract also holds Jack contractually liable for damage to the houseboat, this would not be covered, since this does not involve Jack assuming the “ liability of others .
”
In addition, one other reason contractual liability coverage would not apply for damage to the houseboat is the last condition of the exception above: “unless excluded in a. above or elsewhere in this policy .” In other words, the Homeowners contractual coverage is governed by the same principle found in CGL contractual coverage: the contractual coverage does not override any other exclusion in the coverage form. In the
Homeowners policy, Section II excludes the following:
3. "Property damage" to property rented to, occupied or used by or in the care of an "insured". This exclusion does not apply to "property damage" caused by fire, smoke or explosion;
Whether Jack is liable under tort or contract, the only damage to the houseboat which is covered in Section II is that by “ fire, smoke or explosion .
” Note that the scope of coverage applies to “ property
,” which could be real or personal property.
Commercial/Personal Umbrellas/Excess Policies
Umbrella policies are like snowflakes – no two are exactly alike. And excess policies, while typically more restrictive than true umbrella policies, are not uniform. Therefore, any claim arising out of the rental of the houseboat should be submitted to all insurers who could possibly provide any type of coverage.
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