By LeRoy Utschig, CPCU, CLU, ARM
While a commercial general liability policy (CGL) is not designed to and rarely does provide satisfactory coverage for the care, custody and control exposure, several other insurance contracts do. In fact, many of these other policies are designed specifically to provide care, custody and control coverage.
A generally accepted "working definition" of care, custody and control is that the exposure is created by a bailee having someone else's (bailor) property in its possession or by working on the bailor's property. Examples include the bodyshop (bailee) working on a customer's car, a business having leased office equipment and the cabinetmaker (bailee) installing a new set of kitchen cabinets.
For example, the garagekeepers section of a garage policy provides the necessary care, custody and control coverage for the bodyshop. Leased equipment is automatically covered when an insured is insuring his/her business personal property with a normal property insurance policy.
It is not clear cut if a commercial general liability policy will protect the cabinetmaker if the cabinetmaker damages the interior of a house while installing the new cabinets. Depending upon the facts of a loss and the interpretation of a given insurer's claim department, a given loss may or may not be covered. This article is not addressing all of the various nuances of commercial general liability care, custody and control court cases. Rather, it is the intent of this article to suggest ways to protect against care, custody and control loss exposure without using a commercial general liability contract.
This article will also refer to bailment laws to give a general concept of this branch of law. If you have any questions regarding how the bailment laws apply in your state, please check your state's law(s).
Prior to the enabling legislation that occurred in the 1950s, each insurance company was able to provide coverage for only one line of exposure. Property insurers could write only property insurance. Casualty insurance companies were, essentially, restricted to providing coverage for liability exposures. The regulatory agencies decided that care, custody and control exposures were of a property insurance nature; therefore, they could not be covered by a commercial general liability contract. This is the background for the care, custody and control exclusion that is still present in a commercial general liability policy. Numerous endorsements have been developed over many decades to alter the care, custody and control exclusion of a commercial general liability insurance contract. None of these endorsements totally removes the CGL's care, custody and control exclusion.
Several regional insurers have developed their own care, custody and control coverage endorsement that is attached to the CGL. These endorsements typically have a $5,000 limit on the care, custody and control coverage. For these insurers, the CGL's care, custody and control exclusion(s) would still apply to all losses larger than $5,000.
Warehouseman's legal liability
To illustrate a care, custody and control exposure and how to protect against the loss exposure created by it, I will use the following hypothetical scenario as an example.
Old Time Farms, LLC (OTF), ceased farming. This left the company with several large, empty buildings which it had not planned to use as warehouses. Old Time Farm's warehousing "business" started when a friend asked if she could store her 25-foot boat in one of the empty barns. While OTC was willing to let her store her boat for free, the boat owner insisted on paying a storage fee. She told someone else about how immaculately clean Old Time Farm's barn was. So, her friend asked OTF if he could store his boat there as well. In a relatively short period of time, Old Time Farms filled three empty buildings with boats.
While doing this, OTF started giving a receipt to each person who brought a boat in for storage. Part of the wording on the receipt stated that OTF was not responsible for any damages sustained by an item that was in storage.
An electrical short started a fire in the largest building. Due to the wind and the close proximity of the other buildings, the fire spread to the other two buildings. By the time the fire was extinguished, it had destroyed all three buildings and all of the boats in storage.
As Old Time Farms had given out receipts stating that it was not responsible for damage to the boats, the owner did not expect to pay for damage to any of the boats. When a boat owner asked for OTF to pay for his damaged boat, he told him that he was not responsible for damage to the boat due to the wording on the warehouse receipt. Accordingly, the owner of each boat presented a claim to his\her own insurer. After paying the policyholder(s) for their damaged boat(s), the boat insurers instigated subrogation proceedings against Old Time Farms. OTF stated that it did not owe anything due to the wording on the warehouse receipt that had been used. The owner was then informed that his receipt did not override that state's bailment laws. Despite the receipt, he learned that he was responsible for damage to all of the boats.
There was no coverage in Old Time Farms' insurance program for damage to the boats. His agent told him that the insurer should have paid for the damage, but there was a care, custody and control exclusion in the farmer's program. The insurance agent then went on to say that no coverage was available for the damaged boats.
While talking to another agent who was a friend of his, Old Time Farms' owner told him about the "no coverage" situation he had with the boats. This second agent replied that insurance was available to cover the warehousing exposure. In fact, there was not one but two insurance coverage forms designed to protect against damage to stored boats. One way of insuring the exposure would be as part of a boat dealer's program. As Old Time Farms was not a boat dealer, it was not eligible to use a boat dealer's insurance program to insure its warehousing exposure. The coverage form that was available to protect Old Time Farms' storage exposures was a warehouse operator's form (warehouseman's legal liability was the old name for this coverage).
Warehouse Operators Legal Liability Coverage, Form IM-7650 published by the American Association of Insurance Services (AAIS) gives a good example of this type of coverage. The pertinent coverage wording from Form IM-7650 is, "We cover your legal liability for loss to covered property while under your care, custody and control..."
This is a commonly used coverage for many firms in the storage business. There are several other "warehouse liability forms" that can be used for particular storage situations. Bailee customers, laundry and dry cleaners, boat dealers, garagekeepers, and building and business personal property are a partial list of other forms that can be used to cover care, custody and control storage exposures.
Be aware of "legal liability" limitations
Warehouse operators legal liability coverage responds only if damage was caused due to the insured's failure to exercise proper care. In the loss given, the fire was caused due to the insured's failure to have proper electrical wiring. The failure to use proper care made him legally liable for the damage. Under this type of circumstance, the Warehouse Operators Legal Liability policy would have responded for damage to the boats. By contrast, let's say that if the loss were caused by the neighbor's grass fire getting out of control and igniting Old Time Farms' building(s), the "legal liability" would not respond. As the neighbor caused the fire, there would be no negligence by Old Time Farms.
There are some inland marine forms, such as bailees customer's forms, that pay regardless of whether an insured is negligent.
In another scenario, Local Hardware Store, Inc. (LHS), began selling power lawn and garden equipment very slowly. The firm began by selling small, walk-behind lawnmowers. Next it offered snowblowers. It continued to expand that product line until it was handling riding lawnmowers from several manufacturers, walk-behind mowers and snowblowers. Customer demand required the firm also to get into the business of servicing these types of units. Because of Local Hardware's reputation for doing excellent service work, people began asking the firm to service power equipment that was not purchased from the hardware store. Depending upon the time of the year, Local Hardware would have $10,000 to $100,000 worth of customers' equipment on hand for the purpose of doing some form of service work.
All went fine until an uninsured wreck of a car careened off the major street in front of the hardware store, hit a corner of the building, then veered off and went through the area where all of the customers' power equipment was kept. Several tens of thousands of dollars worth of damage was done to the customers' power equipment. As the driver of the car had no assets and no insurance (it was the driver's third accident without insurance or having a valid driver's license), there was no point in trying to recover the amount of the damages from the driver.
As Local Hardware was not making a storage charge for any of the power equipment that was sitting in its repair/servicing area, it told its customers to submit their claim for damages to their own insurers. Local Hardware Store was quite surprised to receive the first subrogation claim from one of its customer's insurers. Based upon the law(s) in that state, the hardware store was part of a mutual benefit bailment situation. Local Hardware Store had the customers' power units in its possession with the intention of repairing/servicing them and then receiving money from the customer(s) for the work done. This is the same law that applies to other bailment situations such as dry cleaners.
Local Hardware Store submitted the first subrogation claim to its insurer. This was a claim for $7,000 damage to a large riding garden tractor. The insurer looked at the loss and then read Local Hardware Store's Insurance Services Office's (ISO) Building and Personal Property Coverage Form CP 00 10 06 95. In the "additional coverages" section of the form, the adjuster found a clause titled, "Personal Effects and Property of Others." There was a $2,500 limit in this extension of coverage. Of the $7,000 subrogation claim, $2,500 was paid. Local Hardware Store's insurance program had no other coverage for the balance of this $7,000 claim or for any of the several dozen other subrogation claims it received.
Local Hardware Store asked its agent if it could have had coverage for all of the subrogation claims from its customers whose property had been damaged. Upon checking with the insurance company's underwriter, the agent learned that coverage for the claims from all of the customers' insurers could have been provided by simply putting a limit on the declarations page next to "Coverage C" of ISO Form CP 00 10, Building and Personal Property Form. Hello, E&O carrier.
Computers Unlimited, Ltd., sold, serviced and installed computers, along with all of the related equipment. A customer wanted to upgrade a system without buying all new personal computers. In order not to shut down the customer while the upgrading was being done, Computers Unlimited took only 5 of the customer's 35 computers to its shop at a time. The firm expanded hard drives, put in chips to speed up processing, and installed several other items that enhanced the performance of the computers at a reasonable cost. After all 35 personal computers had been upgraded, Computers Unlimited went to the customer's location to do some other work that would upgrade the customer's local area network (LAN). With the LAN, all of the computers and support equipment were connected together. While working on the LAN, a Computers Unlimited employee made a mistake. The mistake caused a surge (surge protectors do not protect against surges coming from within the computer system) that blew out all 35 computers and the related equipment.
This loss was reported to Computers Unlimited's insurer. Coverage was denied. The adjuster quoted the following from Insurance Services Office's Commercial General Liability Form CG 0001 0196: "This insurance does not apply to... property damage to...personal property in the care, custody or control of the insured..."
Computers Unlimited was told by its insurance agent that there was no other way to insure its loss exposures. A second agent called on Computers Unlimited to solicit its insurance business. While talking, Computers Unlimited told this second agent about the uncovered loss that it had sustained.
Upon hearing this, the second agent told Computers Unlimited that coverage could have been provided by using American Association of Insurance Services' Form IM-7501, Miscellaneous Bailee - Processor Floater. Here is the key wording from Form IM-7501: "We cover direct physical loss caused by a covered peril to property of others described on the declarations and that is in your care, custody, and control for processing. Processing includes finishing, repairing, restoring, adjusting, or other work upon the property. We cover described property of others while: in premises described on the declarations; temporarily at a premises not described on the declarations; or in transit."
These are the main points of this article:
A commercial general liability policy does not provide care, custody and control coverage. For a pure storage risk, the Warehouse Operator's Legal Liability policy can provide care, custody and control protection. Property insurance forms can provide care, custody and control coverage. The Miscellaneous Bailee - Processor floater will provide care, custody and control coverage on the insured's premises, at the customer's premises and in transit. There are other coverage forms that can be used to provide care, custody and control coverage for various types of businesses. *
©COPYRIGHT: The Rough Notes Magazine, 1998