Although it sounds like a television drama in which a powerful lawyer from a massive city law firm fights for truth and justice by day and is a heroic firefighter by night, fire legal is a reference to a slightly less exciting insurance coverage buried within the guts of the commercial general liability (CGL) policy.
Struggling for its identity and rightful place among other insurance coverage,
fire legal has taken the path of many a struggling actor—including changing names.
Formerly known as "fire legal liability coverage—real property" (as included within the
Broad Form Comprehensive General Liability Endorsement GL 04 04), the 1986 commercial
general liability policy shortened its moniker to fire damage. A rather substantial
makeover was undertaken and unveiled in the July 1998 CGL: a new name—"damage to
premises rented to you"—and a new look (complete with enhancements).
Contributing to its obscurity is the fact that, unlike other coverage, such as
personal and advertising injury or medical payments coverage, there is no express
coverage grant for "damage to premises rented to you." Except for being displayed with a
limit on the declarations page, "damage to premises rented to you" is mentioned only
twice in passing in the April 2013 CGL form—once as an exception to certain property
damage exclusions and once under the limits section. In other words, something you might
not notice unless you were looking for it.
Despite its journeyman status, "damage to premises rented to you" coverage may
be important, particularly if you or your client need it. Immediately after a loss, it
is usually too late, so let's take a look at this.
Girl Power
Your client, Girl Power Equipment Repair, Inc., has built a
successful power equipment maintenance and repair business which they have operated
out of their garage for the past several years. Since demand continues to rise for
their services (from people like me who can't find the oil plug on their lawnmower),
they decide to rent one of four service bays from a service garage on Main Street.
The landlord has them sign the "boilerplate" 3-year lease (more on that later). They
then move in, lock, stock, and barrel (at least stock).
After a close call with some spilled gasoline, they ask if their
insurance will cover them if they damage the landlord's property. You immediately
think "fire legal." But what do you tell them? The best answer at this point is,
"I'll call you right back."
Damage to Property—Exclusions
This is what you dreaded—now you have to read their policy. Girl
Power Equipment Repair, Inc., has purchased an April 2013 CGL policy from you with
no endorsements. A quick look at the declarations page causes a mild panic—you can't
even find fire legal.
Then, you thumb through the CGL policy form and come across
exclusion j. (1.), which eliminates coverage for damage to property Girl Power
Equipment owns, rents, or occupies. Seemingly, they have no coverage for damage to
the landlord's property because they definitely rent and occupy the bay in which
they are repairing equipment.
But wait! You read on and find a paragraph that looks to be stuck
in as an afterthought. The paragraph is at the end of Coverage A—Exclusions and says
exclusions c. through n. (you're pretty sure exclusion j. falls between c. and n.)
does NOT apply to damage by fire to premises while rented to or temporarily occupied
by the named insured with the permission of the owner. Also, a reference is made in
the paragraph to an application of a separate limit.
And then you remember the reference to a separate limit is a
reference to the "damage to premises rented to you limit," which for Girl Power is
shown on the declarations page as $50,000—any one premises. This is what used to be
called "fire legal" (or something like that).
Damage to Premises Rented to You
Back to Girl Power's question: Does their insurance cover damage
to their landlord's property? Nothing fosters confidence like the answer you are
about to give them—it depends!
Damage by Fire
You see that the "damage to premises rented to you" coverage provided by the
exception is very limited—coverage applies only if the damage is caused by fire. So, if the gasoline spill resulted in
fire, they would be covered for damage caused by the fire to the landlord's
premises (up to $50,000). But what about water damage to the walls and floors
that resulted when a faucet was left running all night? They would have no
coverage for the water damage. As the damage is not by fire, the "damage to
premises rented to you" exception does not
apply—and thus exclusion j. eliminates coverage (even though Girl Power is
likely liable).
Damage to Premises
The building in which Girl Power is a tenant is a large, relatively new building with a value of about $400,000. The other tenants also have significant amounts of contents, mostly inventory, stored in their portions of the premises, with total values of about $500,000.
When you discover this, you begin to wonder if $50,000 is enough "fire legal" coverage. What if the fire spreads beyond Girl Powers' premises and causes damage to other portions of the building and the inventory of the other tenants?
Should you recommend Girl Power increase the "damage to premises rented to
you" limit to $400,000 (the value of the building)? Or maybe even $900,000 (the
total value of the building and the other tenants' inventory)? What about the
possible loss of use claim on top of direct damage? Maybe you should recommend a
limit for "damage to premises rented to you" of $1 million or more!
While it is important to periodically reconsider the reasonableness of limits
purchased by your client, here you are missing an important point. In our
situation, "damage to premises rented to you" coverage applies only to damage to the premises. In other words, coverage
applies only to that portion of the real
estate owned by the landlord and
rented by Girl Power—which is about one-quarter of the building (one of four
bays).
Each Occurrence Limit
If a fire does spread to other portions of the building or damages the
property of other tenants, "damage to premises rented to you" coverage does not
apply. Does that mean Girl Power has no insurance for such damage? No!
Since the other portions of the building are not rented to or occupied by Girl
Power, exclusion j. does not apply. Nor does exclusion j. apply to the contents
of the other tenants (presuming the contents are not in Girl Power's custody or
control). In either case, each occurrence limit (less any amounts paid under
"damage to premises rented to you" for the same occurrence) is available to pay
the damages for which Girl Power is legally liable.
New Limit
Now that you know what is and what is not covered by "damage to premises
rented to you" coverage, you can make a better recommendation as to a limit.
Considering the building value is $400,000, and we occupy about one-quarter of
the building, a limit of $100,000 for "damage to premises rented to you"
coverage seems reasonable. Armed with your new knowledge, you now meet with Girl
Power and dazzle them with your expertise, culminating in your well-reasoned
recommendation to increase the "damage to premises rented to you" limit from
$50,000 to $100,000.
Damage Other Than by Fire
When you deftly explain all of this to Girl Power, they are duly impressed,
increase their "damage to premises rented to you" limit as you have recommended
but remain concerned—what if they are liable for damage to the landlord's
property but the cause is not fire? Some
eyebrows were raised when you used the faucet/water damage example. Can they get
insurance for damage other than fire?
You get back to the office and leaf through your handy-dandy forms book but
can't seem to find a CGL endorsement that fits. And that's because, although it
is actually a liability form, the endorsement you are looking for is found
within the commercial property forms—the Legal Liability Coverage Form (CP 00 40
10 12).
Legal Liability Coverage Form
This form provides coverage for damage to the tangible property of
others (including loss of use of the damaged property) that is in Girl Power's care,
custody, or control and described in the declarations. A separate limit, which
applies on a per-accident basis, applies in the commercial property policy to the
legal liability coverage form. This form must be combined with other commercial
property forms, such as a causes of loss form, to provide complete coverage terms.
Expressly eliminated is coverage for damage to electronic data.
The Trigger
To trigger the legal liability coverage form, Girl Power must, because of an
accident, be legally obligated to pay for the damages to the property, and the
cause of the damage must be included in the cause of loss form attached. If the
Causes of Loss—Special Form (CP 10 30 09 17) is selected, Girl Power would have
coverage for damage to the landlord's property for a wide array of causes IF
they are legally liable for the damage. Now, water damage to the landlord's
property caused by Girl Power's forgetting to shut off the faucet is
covered.
Recommendation Accepted
Girl Power understands your recommendation and agrees to purchase the legal
liability coverage form, describing the property to which this coverage applies
as the building located on Main Street and listing the limit as $100,000. Girl
Power purchases the legal liability coverage form as an endorsement to their
commercial property policy. This coverage is in addition to the CGL's "damage to
premises rented to you" limit of $100,000.
The Seminar
Girl Powers' business is going swimmingly. In fact, because of the growth of
the business, Girl Power takes over the entire building on Main Street (all four
bays) and is the only tenant (the landlord rewrites the lease for Girl Power).
Dutifully, you keep abreast of these changes and increase the legal liability
coverage form limit from $100,000 to $400,000 (the full value of the building)
to reflect the increased space now rented to Girl Power.
Girl Power services are so popular that they have begun offering full-day
seminars at local hotels, attracting over 100 prospects and customers to each
session. The typical arrangement is for Girl Power to rent the hotel room for 1
day, with the rental including the use of the hotel's audio-visual equipment
(projector, screen, microphone, etc.) as well as tables (including table linens)
and chairs for the seminar.
Sprinkler Discharge
At one seminar, the projector is not properly handled by Girl Power, resulting
in the equipment overheating, which in turn sets off the sprinkler system within
the room rented by Girl Power. The water from the sprinkler discharge damages
the hotel's wall coverings, carpeting, chandelier, tables, chairs, and
screen—total damage is estimated at $15,000.
The hotel sends a bill to Girl Power for $15,000, asserting Girl Power's
negligence in handling the equipment is the direct cause of the damage, and
therefore, Girl Power is legally liable to pay the $15,000. Girl Power sends
along the claim to you, including the bill, and requests coverage under their
legal liability coverage form.
Bad News and Good News
The insurance company providing Girl Power with their commercial property
policy and the legal liability coverage form, in particular, denies coverage for
this accident. The reason is that the only property described on the legal
liability coverage form is the building located on Main Street. As the hotel was
not listed on the declarations, no coverage applies to that location. Does Girl
Power have an uninsured loss?
Damage to Premises Rented to You
Recall that you have continued coverage under Girl Power's CGL for "damage to
premises rented to you" with a limit of $100,000. But wasn't that coverage for
damage by fire only?
July 1998 Enhancement
In addition to the paragraph you found at the end of the Coverage A—Exclusions
that granted an exception for damage to premises by fire, beginning in July of
1998, the commercial general liability policy grants a second exception to
exclusion j., damage to property.
Immediately following exclusion j. (6) is an exception that provides coverage
for the very loss Girl Power has just suffered. The exception specifically
states that paragraphs (1), (3), and (4) of exclusion j. do not apply to
property damage to premises, including the
contents of the premises, rented to a named insured (Girl Power) for a
period of 7 or fewer consecutive days, for any
cause of damage other than fire. Of course, an
insured must be legally obligated to pay for such damage to trigger this
coverage exception, and any payments made under this exception are subject to
the "damage to premises rented to you" limit.
Since the $15,000 loss to Girl Power is the result of their negligence, the
rental of the premises was for only 1 day (7 or fewer consecutive days), and the
cause of the damage was water (not fire), coverage does apply to the entire
loss—both the real property (wall coverings, carpet, chandelier, etc.) and the
personal property (screen, tables, chairs, etc.) that has been damaged. As the
loss falls squarely within the coverage exception, Girl Power has coverage for
their $15,000 property damage loss.
But what if the above loss was the result of a fire and not a sprinkler
discharge, you ask? Excellent question! The answer is coverage would still
apply—but only to damage to the premises itself (wall coverings, carpet, and
chandelier) and not to damaged personal property (screen, tables, chairs, etc.).
Of course, a solution is to amend the legal liability coverage form to describe
the hotel seminar operations and locations in the declarations, thereby
providing broader coverage for Girl Power for their seminars.
The Risk Management Consultant
After the sprinkler discharge loss at the hotel (and the insurance company's denial of coverage), Girl Power engages an independent risk management consultant to analyze and evaluate the risks confronting Girl Power with respect to their potential for liability for the property of others. Among other things, the risk management consultant obtains a copy of Girl Power's real estate lease on Main Street.
The real estate lease has one sentence that you just know is going to cause a problem.
Tenant agrees to pay for any damage to the demised premises, regardless of cause.
Contractual Liability Exclusions
Surely, your exemplary handling of Girl Power's insurance, including their
purchase of the legal liability coverage form with a $400,000 limit, should take
care of this situation. But, unfortunately, it may not.
A special exclusion is added to the causes of loss—special form that applies
when the legal liability coverage form is attached. Exclusion (2)(a) is entitled
"Contractual Liability" and states, in part, the following.
We will not defend any claim or 'suit,' or pay damages that you are legally liable to pay, solely by reason of your assumption of liability in a contract or agreement.
Where does this leave us? Coverage will still apply if Girl Power would be liable for damages absent their agreement to be responsible. For
example, the faucet running all night that causes water damage would likely be
negligence of Girl Power, who would be liable for the resulting damage even if
no lease wording existed. However, what if the building is destroyed by
lightning? Girl Power is liable, but their liability is solely because of the lease agreement.
The contractual liability exclusion would most likely eliminate coverage for
damage that is beyond the control of Girl Power (yet they have agreed to pay for
such damage).
Commercial General Liability—Contractual Liability
What about the contractual liability coverage in the CGL policy? Doesn't the
definition of an "insured contract" include a contract for a lease of premises?
It most certainly does, but it also contains a very important limitation.
Explicitly eliminated from "insured contract" is any portion of a contract for lease of premises that indemnifies any person or organization for damage by fire to the premises while rented to or temporarily occupied by the named insured. In short, the CGL does little to help Girl Power for damage to the premises for which they would not otherwise have liability.
If the lease is already in place, the landlord may not be willing
to amend the lease to remove Girl Power's responsibility to pay for any damage to
the building. Given the situation, you probably should be thinking about
recommending to Girl Power that they remove the legal liability coverage form
applicable to their Main Street location and to purchase the Building and Personal
Property Coverage Form (CP 00 10 10 12), listing building coverage for Main Street
reflecting the value of the building ($400,000) and attaching the causes of
loss—special form.
Insurable Interest
It is possible for the insurance company to resist providing this property
coverage for Girl Power, the tenant, for a building Girl Power does not own. The
objection may be based on a lack of "insurable interest" grounds.
As Girl Power has agreed to be responsible and will suffer financial loss if the building is damaged or destroyed, it is generally undisputed that Girl Power, despite not having an ownership interest, does have an insurable interest in the building. An alternative, however, may be to write the policy for Girl Power and add the landlord as a loss payee.
Amending the Lease
It is possible (maybe even likely) that the landlord already has purchased property insurance that protects the building if damaged by certain causes of loss. For the tenant to also purchase coverage on the same building may be redundant and certainly appears to be a poor use of assets. When this issue is brought to the landlord's attention, the landlord may be willing to amend the lease and remove the portion which holds the tenant (Girl Power) completely responsible for all damage to the building.
The independent risk management consultant has asked the landlord to consider
the following.
It is agreed that the tenant is not responsible for any damage to the
premises.
The above would have the effect of relieving the tenant of liability for
damage to the building, no matter how caused, obviating the need for Girl Power
to purchase commercial property coverage and a legal liability coverage form, at
least for their premises on Main Street.
An alternative being considered by the risk management consultant may be a mutual waiver of recovery rights, which may
read as follows.
It is agreed that the tenant and landlord waive all rights of recovery against the other for damage to property and neither is responsible to the other for damage to property.
A third alternative may be wording in which the release is tied to insurance
recovery. The phrase suggested by the risk management consultant is as
follows.
To the extent the landlord can collect the proceeds of landlord's insurance,
it is agreed that the landlord waives rights of recovery against the tenant for
damage to the landlord's property.
For all of the above, it is important for you to know that such waivers or releases of liability are allowed under the standard Commercial Property Conditions (CP 00 90 07 88) provided the releases or waivers are in writing and executed prior to a loss.
Conclusion
Those policyholders who lease or rent space are presented with
exposures that may not be properly handled by standard "fire legal" or "damage to
premises rented to you" coverage found in the CGL policy. The policyholder's
attorney, in conjunction with the risk management consultant, should review the real
estate lease terms to properly identify and manage the risk, whether treatment of
risk is by insurance, noninsurance risk transfer (the lease agreement), or a
combination of both techniques. In any event, your policyholder's understanding of
the limitations of insurance, such as the contractual exclusion in the legal
liability coverage form, is a must in managing their real estate risks.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
Although it sounds like a television drama in which a powerful lawyer from a massive city law firm fights for truth and justice by day and is a heroic firefighter by night, fire legal is a reference to a slightly less exciting insurance coverage buried within the guts of the commercial general liability (CGL) policy.
Struggling for its identity and rightful place among other insurance coverage, fire legal has taken the path of many a struggling actor—including changing names. Formerly known as "fire legal liability coverage—real property" (as included within the Broad Form Comprehensive General Liability Endorsement GL 04 04), the 1986 commercial general liability policy shortened its moniker to fire damage. A rather substantial makeover was undertaken and unveiled in the July 1998 CGL: a new name—"damage to premises rented to you"—and a new look (complete with enhancements).
Contributing to its obscurity is the fact that, unlike other coverage, such as personal and advertising injury or medical payments coverage, there is no express coverage grant for "damage to premises rented to you." Except for being displayed with a limit on the declarations page, "damage to premises rented to you" is mentioned only twice in passing in the April 2013 CGL form—once as an exception to certain property damage exclusions and once under the limits section. In other words, something you might not notice unless you were looking for it.
Despite its journeyman status, "damage to premises rented to you" coverage may be important, particularly if you or your client need it. Immediately after a loss, it is usually too late, so let's take a look at this.
Girl Power
Your client, Girl Power Equipment Repair, Inc., has built a successful power equipment maintenance and repair business which they have operated out of their garage for the past several years. Since demand continues to rise for their services (from people like me who can't find the oil plug on their lawnmower), they decide to rent one of four service bays from a service garage on Main Street. The landlord has them sign the "boilerplate" 3-year lease (more on that later). They then move in, lock, stock, and barrel (at least stock).
After a close call with some spilled gasoline, they ask if their insurance will cover them if they damage the landlord's property. You immediately think "fire legal." But what do you tell them? The best answer at this point is, "I'll call you right back."
Damage to Property—Exclusions
This is what you dreaded—now you have to read their policy. Girl Power Equipment Repair, Inc., has purchased an April 2013 CGL policy from you with no endorsements. A quick look at the declarations page causes a mild panic—you can't even find fire legal.
Then, you thumb through the CGL policy form and come across exclusion j. (1.), which eliminates coverage for damage to property Girl Power Equipment owns, rents, or occupies. Seemingly, they have no coverage for damage to the landlord's property because they definitely rent and occupy the bay in which they are repairing equipment.
But wait! You read on and find a paragraph that looks to be stuck in as an afterthought. The paragraph is at the end of Coverage A—Exclusions and says exclusions c. through n. (you're pretty sure exclusion j. falls between c. and n.) does NOT apply to damage by fire to premises while rented to or temporarily occupied by the named insured with the permission of the owner. Also, a reference is made in the paragraph to an application of a separate limit.
And then you remember the reference to a separate limit is a reference to the "damage to premises rented to you limit," which for Girl Power is shown on the declarations page as $50,000—any one premises. This is what used to be called "fire legal" (or something like that).
Damage to Premises Rented to You
Back to Girl Power's question: Does their insurance cover damage to their landlord's property? Nothing fosters confidence like the answer you are about to give them—it depends!
Damage by Fire
You see that the "damage to premises rented to you" coverage provided by the exception is very limited—coverage applies only if the damage is caused by fire. So, if the gasoline spill resulted in fire, they would be covered for damage caused by the fire to the landlord's premises (up to $50,000). But what about water damage to the walls and floors that resulted when a faucet was left running all night? They would have no coverage for the water damage. As the damage is not by fire, the "damage to premises rented to you" exception does not apply—and thus exclusion j. eliminates coverage (even though Girl Power is likely liable).
Damage to Premises
The building in which Girl Power is a tenant is a large, relatively new building with a value of about $400,000. The other tenants also have significant amounts of contents, mostly inventory, stored in their portions of the premises, with total values of about $500,000.
When you discover this, you begin to wonder if $50,000 is enough "fire legal" coverage. What if the fire spreads beyond Girl Powers' premises and causes damage to other portions of the building and the inventory of the other tenants?
Should you recommend Girl Power increase the "damage to premises rented to you" limit to $400,000 (the value of the building)? Or maybe even $900,000 (the total value of the building and the other tenants' inventory)? What about the possible loss of use claim on top of direct damage? Maybe you should recommend a limit for "damage to premises rented to you" of $1 million or more!
While it is important to periodically reconsider the reasonableness of limits purchased by your client, here you are missing an important point. In our situation, "damage to premises rented to you" coverage applies only to damage to the premises. In other words, coverage applies only to that portion of the real estate owned by the landlord and rented by Girl Power—which is about one-quarter of the building (one of four bays).
Each Occurrence Limit
If a fire does spread to other portions of the building or damages the property of other tenants, "damage to premises rented to you" coverage does not apply. Does that mean Girl Power has no insurance for such damage? No!
Since the other portions of the building are not rented to or occupied by Girl Power, exclusion j. does not apply. Nor does exclusion j. apply to the contents of the other tenants (presuming the contents are not in Girl Power's custody or control). In either case, each occurrence limit (less any amounts paid under "damage to premises rented to you" for the same occurrence) is available to pay the damages for which Girl Power is legally liable.
New Limit
Now that you know what is and what is not covered by "damage to premises rented to you" coverage, you can make a better recommendation as to a limit. Considering the building value is $400,000, and we occupy about one-quarter of the building, a limit of $100,000 for "damage to premises rented to you" coverage seems reasonable. Armed with your new knowledge, you now meet with Girl Power and dazzle them with your expertise, culminating in your well-reasoned recommendation to increase the "damage to premises rented to you" limit from $50,000 to $100,000.
Damage Other Than by Fire
When you deftly explain all of this to Girl Power, they are duly impressed, increase their "damage to premises rented to you" limit as you have recommended but remain concerned—what if they are liable for damage to the landlord's property but the cause is not fire? Some eyebrows were raised when you used the faucet/water damage example. Can they get insurance for damage other than fire?
You get back to the office and leaf through your handy-dandy forms book but can't seem to find a CGL endorsement that fits. And that's because, although it is actually a liability form, the endorsement you are looking for is found within the commercial property forms—the Legal Liability Coverage Form (CP 00 40 10 12).
Legal Liability Coverage Form
This form provides coverage for damage to the tangible property of others (including loss of use of the damaged property) that is in Girl Power's care, custody, or control and described in the declarations. A separate limit, which applies on a per-accident basis, applies in the commercial property policy to the legal liability coverage form. This form must be combined with other commercial property forms, such as a causes of loss form, to provide complete coverage terms. Expressly eliminated is coverage for damage to electronic data.
The Trigger
To trigger the legal liability coverage form, Girl Power must, because of an accident, be legally obligated to pay for the damages to the property, and the cause of the damage must be included in the cause of loss form attached. If the Causes of Loss—Special Form (CP 10 30 09 17) is selected, Girl Power would have coverage for damage to the landlord's property for a wide array of causes IF they are legally liable for the damage. Now, water damage to the landlord's property caused by Girl Power's forgetting to shut off the faucet is covered.
Recommendation Accepted
Girl Power understands your recommendation and agrees to purchase the legal liability coverage form, describing the property to which this coverage applies as the building located on Main Street and listing the limit as $100,000. Girl Power purchases the legal liability coverage form as an endorsement to their commercial property policy. This coverage is in addition to the CGL's "damage to premises rented to you" limit of $100,000.
The Seminar
Girl Powers' business is going swimmingly. In fact, because of the growth of the business, Girl Power takes over the entire building on Main Street (all four bays) and is the only tenant (the landlord rewrites the lease for Girl Power). Dutifully, you keep abreast of these changes and increase the legal liability coverage form limit from $100,000 to $400,000 (the full value of the building) to reflect the increased space now rented to Girl Power.
Girl Power services are so popular that they have begun offering full-day seminars at local hotels, attracting over 100 prospects and customers to each session. The typical arrangement is for Girl Power to rent the hotel room for 1 day, with the rental including the use of the hotel's audio-visual equipment (projector, screen, microphone, etc.) as well as tables (including table linens) and chairs for the seminar.
Sprinkler Discharge
At one seminar, the projector is not properly handled by Girl Power, resulting in the equipment overheating, which in turn sets off the sprinkler system within the room rented by Girl Power. The water from the sprinkler discharge damages the hotel's wall coverings, carpeting, chandelier, tables, chairs, and screen—total damage is estimated at $15,000.
The hotel sends a bill to Girl Power for $15,000, asserting Girl Power's negligence in handling the equipment is the direct cause of the damage, and therefore, Girl Power is legally liable to pay the $15,000. Girl Power sends along the claim to you, including the bill, and requests coverage under their legal liability coverage form.
Bad News and Good News
The insurance company providing Girl Power with their commercial property policy and the legal liability coverage form, in particular, denies coverage for this accident. The reason is that the only property described on the legal liability coverage form is the building located on Main Street. As the hotel was not listed on the declarations, no coverage applies to that location. Does Girl Power have an uninsured loss?
Damage to Premises Rented to You
Recall that you have continued coverage under Girl Power's CGL for "damage to premises rented to you" with a limit of $100,000. But wasn't that coverage for damage by fire only?
July 1998 Enhancement
In addition to the paragraph you found at the end of the Coverage A—Exclusions that granted an exception for damage to premises by fire, beginning in July of 1998, the commercial general liability policy grants a second exception to exclusion j., damage to property.
Immediately following exclusion j. (6) is an exception that provides coverage for the very loss Girl Power has just suffered. The exception specifically states that paragraphs (1), (3), and (4) of exclusion j. do not apply to property damage to premises, including the contents of the premises, rented to a named insured (Girl Power) for a period of 7 or fewer consecutive days, for any cause of damage other than fire. Of course, an insured must be legally obligated to pay for such damage to trigger this coverage exception, and any payments made under this exception are subject to the "damage to premises rented to you" limit.
Since the $15,000 loss to Girl Power is the result of their negligence, the rental of the premises was for only 1 day (7 or fewer consecutive days), and the cause of the damage was water (not fire), coverage does apply to the entire loss—both the real property (wall coverings, carpet, chandelier, etc.) and the personal property (screen, tables, chairs, etc.) that has been damaged. As the loss falls squarely within the coverage exception, Girl Power has coverage for their $15,000 property damage loss.
But what if the above loss was the result of a fire and not a sprinkler discharge, you ask? Excellent question! The answer is coverage would still apply—but only to damage to the premises itself (wall coverings, carpet, and chandelier) and not to damaged personal property (screen, tables, chairs, etc.). Of course, a solution is to amend the legal liability coverage form to describe the hotel seminar operations and locations in the declarations, thereby providing broader coverage for Girl Power for their seminars.
The Risk Management Consultant
After the sprinkler discharge loss at the hotel (and the insurance company's denial of coverage), Girl Power engages an independent risk management consultant to analyze and evaluate the risks confronting Girl Power with respect to their potential for liability for the property of others. Among other things, the risk management consultant obtains a copy of Girl Power's real estate lease on Main Street.
The real estate lease has one sentence that you just know is going to cause a problem.
Contractual Liability Exclusions
Surely, your exemplary handling of Girl Power's insurance, including their purchase of the legal liability coverage form with a $400,000 limit, should take care of this situation. But, unfortunately, it may not.
A special exclusion is added to the causes of loss—special form that applies when the legal liability coverage form is attached. Exclusion (2)(a) is entitled "Contractual Liability" and states, in part, the following.
Where does this leave us? Coverage will still apply if Girl Power would be liable for damages absent their agreement to be responsible. For example, the faucet running all night that causes water damage would likely be negligence of Girl Power, who would be liable for the resulting damage even if no lease wording existed. However, what if the building is destroyed by lightning? Girl Power is liable, but their liability is solely because of the lease agreement.
The contractual liability exclusion would most likely eliminate coverage for damage that is beyond the control of Girl Power (yet they have agreed to pay for such damage).
Commercial General Liability—Contractual Liability
What about the contractual liability coverage in the CGL policy? Doesn't the definition of an "insured contract" include a contract for a lease of premises? It most certainly does, but it also contains a very important limitation.
Explicitly eliminated from "insured contract" is any portion of a contract for lease of premises that indemnifies any person or organization for damage by fire to the premises while rented to or temporarily occupied by the named insured. In short, the CGL does little to help Girl Power for damage to the premises for which they would not otherwise have liability.
Commercial Property Insurance: Suggested Solutions
If the lease is already in place, the landlord may not be willing to amend the lease to remove Girl Power's responsibility to pay for any damage to the building. Given the situation, you probably should be thinking about recommending to Girl Power that they remove the legal liability coverage form applicable to their Main Street location and to purchase the Building and Personal Property Coverage Form (CP 00 10 10 12), listing building coverage for Main Street reflecting the value of the building ($400,000) and attaching the causes of loss—special form.
Insurable Interest
It is possible for the insurance company to resist providing this property coverage for Girl Power, the tenant, for a building Girl Power does not own. The objection may be based on a lack of "insurable interest" grounds.
As Girl Power has agreed to be responsible and will suffer financial loss if the building is damaged or destroyed, it is generally undisputed that Girl Power, despite not having an ownership interest, does have an insurable interest in the building. An alternative, however, may be to write the policy for Girl Power and add the landlord as a loss payee.
Amending the Lease
It is possible (maybe even likely) that the landlord already has purchased property insurance that protects the building if damaged by certain causes of loss. For the tenant to also purchase coverage on the same building may be redundant and certainly appears to be a poor use of assets. When this issue is brought to the landlord's attention, the landlord may be willing to amend the lease and remove the portion which holds the tenant (Girl Power) completely responsible for all damage to the building.
The independent risk management consultant has asked the landlord to consider the following.
The above would have the effect of relieving the tenant of liability for damage to the building, no matter how caused, obviating the need for Girl Power to purchase commercial property coverage and a legal liability coverage form, at least for their premises on Main Street.
An alternative being considered by the risk management consultant may be a mutual waiver of recovery rights, which may read as follows.
A third alternative may be wording in which the release is tied to insurance recovery. The phrase suggested by the risk management consultant is as follows.
For all of the above, it is important for you to know that such waivers or releases of liability are allowed under the standard Commercial Property Conditions (CP 00 90 07 88) provided the releases or waivers are in writing and executed prior to a loss.
Conclusion
Those policyholders who lease or rent space are presented with exposures that may not be properly handled by standard "fire legal" or "damage to premises rented to you" coverage found in the CGL policy. The policyholder's attorney, in conjunction with the risk management consultant, should review the real estate lease terms to properly identify and manage the risk, whether treatment of risk is by insurance, noninsurance risk transfer (the lease agreement), or a combination of both techniques. In any event, your policyholder's understanding of the limitations of insurance, such as the contractual exclusion in the legal liability coverage form, is a must in managing their real estate risks.
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