From the May 2011 issue of American Agent & Broker • Subscribe!

Care, Custody or Control, part 2

Besides specific claims, learn about overall context

Welcome back, CGL fans, to part 2 of our discussion on care, custody or control (c,c,c). If this was television, you would now hear the announcer intoning "Previously on Policy Issues..." Or in the movies a simple text would appear: "A long time ago, in an article far, far away..."

Not that last month was that far. But if you can believe numerous consumer studies, most of you not only won’t remember as far back as April’s issue, but have already forgotten why you started reading this one. So I had best press on quickly.

This "c,c,c" focus began with a single question to a LinkedIn forum: "The exclusion says ‘care, custody and control.’ Why three words, if they were not individually important? So what do they each mean?"

I suggested that the answer needed to be considered from two viewpoints. First, the direct answer to how the exclusion applies to a specific claims scenario. And second, how to put "c,c,c" into an overall context that not only helps us answer one question but also to recognize future applicability and opportunities. Last month we answered the specific. This month, on to the context.

Whenever the issue of "c,c,c" is raised in a CGL context, invariably the entire discussion seems to assume we are only talking personal property bailments, such as our specific claim in last month’s article. What often seems lost in the mists of history is that the original exclusion for the old CGL, manufacturers and contractors (M&C) and owners, landlords and tenants (OL&T) also applied to buildings.

Related: Read "Insureds Without Cyber Policies Risk Falling into CGL Coverage Holes."

Using the "tented house" example from last month, what if the claim had been for damage to the structure as opposed to just the personal property? Or to cite one of the classic examples, what about damage to built-in fixtures, like the plumber who damages the sink or tub while replacing a faucet? Both of these were considered excluded under the old liability forms "c,c,c" exclusion.

If that exclusionary wording was considered too broad, a "buy-back" of much of the real property excluded under "c,c,c" was available as "broad form property damage," one of the multiple liability coverage modifications included within the old broad form CGL endorsement.

When ISO retired the M&C and OL&T forms in favor of a single CGL in the early ‘80s as part of what was then euphemistically known as "simplification," the broad form endorsement was also put out to pasture, its key provisions all "built in" to the new CGL forms. Those seeking the old "broad form property damage" coverage were advised that the result of that provision was now essentially reflected in three exclusions of the new CGL:

CGL, Exclusion j. Damage to Property - there is no coverage for "property damage" to:

(4) Personal property in the care, custody or control of the insured;

(5) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the "property damage" arises out of those operations; or

(6) That particular part of any property that must be restored, repaired or replaced because "your work" was incorrectly performed on it.

Recalling the intent of the old broad form property damage was to remove the blanket exclusion of real property in favor of a strictly defined exclusion, you can see the current CGL form language accomplishes just that: j.(4) retains the blanket exclusion for personal property, while j.(5) and j.(6) provide a more limited exclusion applicable to real property.

Go back to our plumber. Let’s say he is standing in a tub, repairing a leaky shower-head. He accidentally drops his wrench, knocking a hole through the tub. Is the damage to the tub excluded by his CGL?

Under the old forms, without the broad form endorsement, the blanket exclusion of all property, real or personal, in the plumber’s "c,c,c" means the answer is clearly yes. Using any interpretation of what the terms "care", "custody" or "control" mean, the shower-head and tub clearly meets those criteria and thus no coverage.

Related: Read "Controversial S.C. Bill Defining 'Occurence' in CGL Policies Advances."

Now let’s walk through the current CGL form exclusions:

• j.(4) does not apply, as the tub is real, not personal, property.

• j.(5) does not apply, since it only excludes damage to "that particular part on which" he was working; he was only working on the shower-head, not the tub.

• j.(6) does not apply, for the same reason as j.(5) - he wasn’t working on the tub.

By in essence breaking the former single "c,c,c" exclusion into three, a great deal of real property coverage is now provided, while still retaining the blanket applicability of the exclusion for personal property.

Yet the mere existence of the exclusions indicates there is still a great deal of possible damages remaining potentially uncovered by the CGL. Whither thou goest if you want even broader coverage?

Ah, grasshopper, now we come to the crux of the context. Looking at all three exclusions as a unit, it becomes clear there are two major intentions reflected, each of which leads to a different set of possible solutions.

1. Bailment situations. The blanket exclusion for personal property has been long interpreted as belonging to the vast plethora of what I scientifically categorize as the "someplace else" exclusions. Namely, the entire reason for the exclusion is, "we don’t cover it here because we want to cover it someplace else."

For example, within this plethora one finds the near universal existence of liability exclusions applicable to autos and workers’ compensation. You want coverage for those, get thee hence and buy an auto or work comp policy. You can almost hear the CGL singing Tom Petty: "Don’t come around here no more." If bailment be your focus, inland marine be your game.

Similarly, if the real property exists in a bailment situation, the intent is to look to direct property coverage, whether that be in the commercial property forms or inland marine. Since we are focused on exclusions j.(4-6) for our "c,c,c" scenario, I won’t include the additional policy language here, but this intent is reinforced by CGL exclusions j.(1-2) and Who Is An Insured provision 2.a.(2).

Note if the insured has a contractual obligation, such as a triple-net lease, to be totally responsible for insurance coverage for real property or personal property, then direct coverage is the answer. If, however, the insured is only responsible for damages to real or personal property of others for which the insured is found legally liable, then the CP 00 40 - Legal Liability Coverage Form (note the "CP" in the form number indicates it is written as a property form, with Basic, Broad or Special Causes of Loss forms attached to provide coverage).

2.  Workmanship situations. While forms drafters have historically struggled with how to exclude what is considered the liability equivalent of "wear, tear, deterioration and inherent vice," the intent to do so is clear in j.(5) and j.(6) above, as well as in several other CGL exclusions.

Considered to be basically a moral/morale hazard, given its druthers, ISO would never pay for workmanship. The struggle to get the proper form wording to separate pure laziness or lack of quality control from possible significant exposure to loss for victims, however, has never been easy or clear. As a result, much of what could or should be excluded as workmanship issues is, in fact, covered. The key is to keep in mind that any attempt to fully eliminate the exclusions intended to apply to "workmanship" will likely prove as frustrating as the Moody Blues search for the lost chord. At best, a carrier may be found that will allow some blanket "c,c,c" buyback for a limited amount. Risk management, employee training and quality control are the ticket for addressing "workmanship" issues.

As more and more insurance training moves to shorter presentation windows focused upon specific claims, context is often the victim. Yet therein lie the opportunities. If you can recognize the patterns beyond the specific, and thus realize there are solutions beyond the obvious, a whole world of potential added value to your clients and prospects appears.

With homage to another longstanding May institution: Gentle-persons, start your contexts!

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