Unintended Consequences

Sometimes, in responding to coverage requests or loss exposure identification, we make decisions that may result in unintended (often bad) consequences. Too often, these decisions involve what I refer to as “premium games.” More on this later.

To illustrate, one of the banes of commercial lines is requests for additional insured status. Needless to say, aside from business necessity, adding an insured you know nothing about to your policy isn’t generally a good idea. That underwriters readily do this has always amazed me.

By adding an additional insured to your commercial general liability (CGL) policy, you are potentially diluting your policy limits, extending unlimited defense coverage beyond the scope of any contractual liability assumed in an indemnity agreement, risking a favorable loss history, etc.

Beyond that, though, there can sometimes be unintended consequences. For example, in order to land a highly desirable tenant, a landlord had to add the tenant and its employees (and others) to the landlord’s CGL policy as an additional insured. When a customer of the tenant was run over in the parking lot by an employee of the tenant, the landlord was sued because a physical obstruction in the parking lot allegedly contributed to the accident.

Normally, the landlord would have coverage for this claim under its CGL policy because the CGL “auto” exclusion doesn’t apply to this claim. Here is the applicable part of the ISO CGL policy:

“This insurance does not apply to ‘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.” [emphasis added]

Normally, since the landlord didn’t own or operate the auto, nor was the auto rented or loaned to it, it would have coverage for the claim under its own CGL policy. However, because the tenant and its employees had been added to the landlord’s CGL policy as additional insureds, the “any insured” language in the exclusion is triggered and there is no coverage for the landlord (or the additional insureds for that matter) under its own CGL policy.

So, what about the landlord’s business auto policy? Assuming an ISO CA 00 01 written with Symbol 1 “any auto” liability coverage, the landlord should be OK. However, what if liability coverage is written with Symbols 2, 8, and 9? Symbols 2 and 8 don’t apply here, but what about Symbol 9? Symbol 9 covers:

“Only those ‘autos’ you do not own, lease, hire, rent or borrow that are used in connection with your business.” [emphasis added]

Was the tenant’s employee’s auto being used in connection with the landlord’s business? That’s highly debatable.

Coverage might even be more uncertain if the landlord had no auto coverage, but did have a proprietary hired and nonowned auto endorsement on its CGL policy.

In fact, whether the tenant’s employee was even a CGL additional insured within the facts and circumstances of this claim is also debatable. What additional insured endorsement was used and what restrictions in the form language might apply? If the tenant’s employee is not an additional insured, then we’re likely back to there being coverage under the CGL policy.

In this seemingly simple situation of granting additional insured status, depending on the nature of the claim, it’s possible that two, one, or no policies might respond. By the way, this was an actual claim.

The landlord had no business auto coverage, and the adjuster denied the claim under the CGL policy. The term “any insured” appears 25 times in the current ISO CGL policy, providing ample opportunities for uncovered claim issues involving additional insureds.

So, while a customer may understand that adding another party as an additional insured on their CGL policy could dilute their limits, taint their loss history, etc., who would think that adding an additional insured might result in the named insured having no coverage for a claim because of one or more “any insured” exclusions in the policy?

Another source of unintended consequences involves splitting accounts between insurers, for example CGL with one carrier and auto with another. I can’t begin to tell you how many times I’ve seen a loading or unloading claim denied by both the CGL and auto carriers, most often when one or both policies were non-ISO.

If both policies are ISO, coverage is usually clear or, if there is an initial incorrect denial by one of the insurers, it’s relatively easy to resolve. But often the auto is not ISO and whether it picks up the same exposures the ISO auto form does is debatable. As a result, coverage gaps or at least claim resolution controversies can arise.

Finally, as I mentioned earlier, sometimes unintended consequences arise from what I refer to as “premium games.” Let me give you a couple of examples.

A vehicle in an auto fleet couldn’t pass a vehicle inspection test required for relicensing in the county where the business was located and the vehicle was garaged. So, the business transferred the title of the auto to a corporate officer who lived in a neighboring county that did not require vehicle testing. Then the business thought to ask their insurance agent if they needed to do anything about the auto insurance.

‘Needless to say, aside from business necessity, adding an insured you know nothing about to your policy isn’t generally a good idea. That underwriters readily do this has always amazed me.’

The agent suggested that the business lease the auto back from the officer for $1 a year and continue to insure it on their business auto policy. The agent was able to provide a lease agreement he found on the internet. (I’ll save the potential adverse E&O implications for another article.)

I got involved after a CSR contacted me, concerned that the agent had requested the wrong endorsement. She was correct and, as it turned out, the policy needed at least two endorsements to perhaps fill the gaps this arrangement had created.

Was there a better solution? How about just repairing or replacing the auto that couldn’t pass the inspection?!

Finally, we have the business owner in Alabama who bought an auto for use by his daughter’s new boyfriend who was working in Atlanta that summer and wanted to insure it on the business auto policy because that appeared to be the cheapest way to go.

You can’t make this stuff up. I’ll leave the potential coverage and claim issues to your imagination.

That’s it for this month. Tune in next time for part two of unintended consequences when we see what trouble people can get into when a church member picks up elderly members of the congregation on Sunday mornings to take them to a church that has no auto coverage.