Logic & Language, Forms & Facts: The Case of the ‘Holey’ Insurance

For a number of years, I’ve done a workshop called “The Adventures of Ace Insura, Claims Detective.” Participants assist Ace in solving a variety of coverage and claims mysteries. Each case has one or more learning points that cumulatively lay a foundation for resolving virtually any coverage or claim dilemma. This month’s article is based on one of those cases and everything in it, other than the fictitious names, is absolutely true.

Lester Green was a member of the Hornlake Mississippi Missionary Baptist Church. Every Sunday morning, Lester would drive his mini van and transport several elderly church members to and from church services. Lester had an ISO Personal Auto Policy (PAP) with RTFP Insurance Company. The church had no auto insurance. Since they didn’t own any autos, they figured they didn’t need any. The church, though, did have an ISO Commercial General Liability (CGL) policy with, coincidentally, the same insurance company.

The pastor of the church was concerned about a lawsuit against the church if Lester had an accident that injured one of his church member passengers or a third party. He had Lester ask his agent if Lester’s PAP would cover an accident under these circumstances and, if so, if it would also protect the church. The pastor also contacted the church’s agent and asked if their ISO CGL policy would cover such a lawsuit.

Lester’s agent contacted a personal lines underwriter at the insurance company and was told that the ISO PAP would not cover the use of his auto because it was being used as “public or livery conveyance” and it wasn’t rated for business use. The underwriter went on to say that, even if there was coverage for the accident, the church was not a family member or permissive user of the auto and, therefore, not covered as an insured.

The church’s agent contacted a commercial lines underwriter at the insurance company and was told that, with a couple of exceptions like valet parking, the ISO CGL policy did not cover the use of autos.

So, what do you think? If you have the current ISO PAP and/or CGL policy handy, examine the policy in the context of this potential claim scenario and see if you agree with the underwriters’ opinions. When you’re ready, keep reading.

Coverage

First of all, with regard to coverage under the PAP, in addition to resident family members and permissive users, any person or organization legally responsible for Lester’s acts or omissions involving his auto is an insured. As for the “business rating” comment, there is nothing in the policy that excludes coverage if the risk is not properly rated. Coverage and rating are two different issues. Besides, Lester was not being compensated in any way for transporting church members, so there was no “business” use.

With regard to the “public or livery conveyance” exclusion, a “public” conveyance is one held out to the general public for hire. Some insurers use the “carrying persons or property for a fee” language which also would not apply here since no compensation of any kind was involved.

So, the ISO PAP would cover both Lester and the church, pastor, or anyone else being held vicariously liable for an otherwise covered accident involving his auto.

For coverage for the church under the ISO CGL policy, it gets more complicated. While the CGL excludes most auto exposures, that doesn’t mean it’s an absolute exclusion. Specifically, what is excluded is bodily injury or property damage “arising out of the ownership, maintenance, use, or entrustment to others of any…’auto’…owned or operated by or rented or loaned to any insured.”

‘First, pose coverage questions to an insurer’s claims department, not the underwriting department.’

For the exclusion to apply, two general conditions must both be met. First, the claim must arise from the “ownership, maintenance, use, or entrustment to others” of an auto. As for coverage for the church for a traffic accident, the church does not own Lester’s auto, it wasn’t maintaining it, it arguably wasn’t using it (though there is some legal premise for vicarious use), nor did it entrust the auto to Lester.

Second, the claim must arise from an auto “owned or operated by” or “rented or loaned to” any insured. Lester’s auto was not owned or operated by the church, nor was it rented or loaned to the church. However, this is where it gets complicated.

The exclusion applies to the ownership or operation of an auto by ANY insured under the policy. Lester owns and operates the auto, but is he an insured? According to the ISO Commercial Lines Manual rule in effect at this time, the endorsement CG 20 22 – Additional Insured – Church Member, Officers and Volunteer Workers was mandatory for this class of risk. This endorsement adds as an insured, “Any of your church members, but only with respect to their liability for your activities or activities they perform on your behalf.”

With that attachment of this endorsement, Lester likely becomes an insured under the CGL policy, triggering the exclusion.

However, here is yet another complication…this mandatory endorsement was never attached to the policy. No one knew why since it was expected to be added by automated process, but it wasn’t. So, Lester was not an insured and the exclusion would not apply if there was an auto accident.

Of course, the insurer now wants to add the endorsement, but can it make that modification to the insurance contract mid-term? Normally, this endorsement is considered a coverage enhancement, but in this case for this particular claim scenario, it would be a significant reduction in coverage. What to do? Well, that discussion will have to come in another article.

Ace Insura Moral

So, what are some Ace Insura-like morals for this case?

First, pose coverage questions to an insurer’s claims department, not the underwriting department.

Second, don’t accept folklore (e.g., “CGL policies don’t cover auto accidents”) as fact. RTFP!

Third, always get the answers to coverage questions in writing that cite the policy language that applies.

Fourth, just about every organization needs auto liability coverage, even if just hired and nonowned, in order to ensure that coverage exists. Don’t rely on tenuous coverage that may or may not apply depending on the unique facts and circumstances of a claim scenario.

Tune in next month when we examine a common and potentially catastrophic homeowners coverage gap that almost certainly exists in every personal lines book of business.

Wilson, CPCU, ARM, AIM is the founder and CEO of InsuranceCommentary.com and the author of the book “When Words Collide: Resolving Insurance Coverage and Claims Disputes.”