A Drive Through The Strange World Of The Garage Coverage Form

The standard garage coverage form is like other insurance policies–that is, a document offering vital insurance protection for risk exposures, but a document that is written in a sometimes difficult-to-understand format, containing words and phrases that can have different meanings to different people.

This article is meant to serve as a guide to understanding at least some of the problem areas found in the standard garage form.

As a first example, note that the garage form declares that, if liability coverage is provided by the policy, then trailers with a load capacity of 2,000 pounds or less designed primarily for travel on public roads are covered autos for liability coverage. What can be the purpose of this statement, when the garage coverage applies to an auto, which is defined to include trailers or semi-trailers?

Are trailers with a load capacity of 2,000 pounds or less the only type of trailers that the garage form covers?

Is a person who purchases “any auto” coverage insured for only “certain types” of trailers?

Since such an interpretation seems contradictory on its face, it follows then that the 2,000-pound load capacity limit applies only to trailers that would somehow fall through the cracks. For example, symbol 23 on the garage form describes owned private passenger autos. A trailer is clearly not a private passenger type auto. If the insured uses a trailer with this private passenger auto, he needs liability coverage for the trailer and the coverage extension described above would give the insured coverage for the trailer if it meets the load capacity limit.

As another example, symbol 27 is used to designate specifically described autos. If the insured forgets to specifically describe his trailer, and an at-fault accident happens because of the trailer, the insured would still have liability coverage if that trailer met the load capacity limit.

Another area of confusion is the definition of “garage operations,” or at least, one section of the definition. Garage operations include “all operations necessary or incidental to a garage business.” But, what operations are necessary or incidental to a garage business?

Is this a phrase that is subject to a broad interpretation so that anything a garage insured does is considered necessary or incidental to that garage business? And, if the phrase is to be broadly interpreted, could it include the use of autos so as to preclude the need for the insured to purchase covered auto coverage?

As an example, a garage has two tow trucks used in its business. These trucks are “necessary or incidental” to the overall business of the insured. Does the insured need to buy owned auto coverage or can the insured be allowed to cover the use of the trucks under the umbrella definition of “garage operations”?

Whether an operation is necessary or incidental to a garage business is something that has to be decided on a case-by-case basis. And as for the use of autos, it is doubtful that an insurer would allow an auto exposure to be covered without charging the proper premium. But, even if that happened, the existence of two insuring agreements on the garage form indicates that the policy is to apply to “garage operationsother than covered autos,” and “garage operationscovered autos” as two separate coverages.

Each coverage represents a different set of risk exposures, each has its own designated insureds and each has its own limit of insurance. So, if the insured garage has an auto exposure, it should be treated as a separate exposure, distinct from the on-premises risks that a garage business faces.

A third problematic area is the issue of the insureds customers as insureds.

The garage policy states that a customer is not considered an insured while using a covered auto owned, hired or borrowed by the named insured. But this can be a confusing exclusion.

This exclusion applies only if the named insured is an auto dealership. In other words, if the named insured is Joes Service Station and Joe lets a customer use one of his cars while the customers car is being repaired by Joe, that customer is an insured for the use of that covered auto.

And in reality, even if the named insured is an auto dealership, the garage form does give the customer insured status on a limited basis. If the customer of the dealership has no other available insurance, the dealers garage policy protects the customer up to the financial responsibility limits required under the law of the state or territory where the covered auto is principally garaged.

If the customer has other available insurance, but the limits are inadequate to meet statutory requirements, the garage policy will make up the difference.

Furthermore, the auto dealer can elect to purchase primary liability coverage for customers with the same limits of insurance as the named insured. The intent is declared in the supplementary schedule, and an additional premium is charged. Of course, this provides liability coverage to drivers over whom the insured has very little control and a few careless customers can ruin a dealers loss experience in quick order, but the option is part of the garage coverage if the insured so chooses.

Exclusions on an insurance policy are usually areas of dispute, and the garage form is no exception.

As an example, there is the “work you performed” exclusion that states there is no coverage for property damage to work the named insured performs if the property damage results from any part of the work. What does this mean?

If the insured negligently replaces a gasket on a valve cover and this results in the customers car engine being damaged, does the exclusion extend to the damage done to the entire engine?

Exclusions are meant to be interpreted and applied narrowly. In other words, if there is any reasonable question as to its applicability to a particular claim, the exclusion has to be interpreted in a light most favorable to the insured. In keeping with this view, the damage done to the engine would not be excluded.

This type of exclusion does not insure the policyholder against liability to repair or replace his own defective work (the gasket), but it does allow coverage for the insureds liability for damages to other property (the engine) resulting from the defective condition of the work.

As reinforcement for this interpretation, note that, later in the policy, the insurer declares that it will deduct $100 from the damages resulting from property damage to an auto as a result of work the named insured performed. If the insurer is going to apply a deductible to property damage that resulted due to the named insureds work, the insurer is, in effect, admitting that the “work you performed” exclusion is not considered so comprehensive as to prevent any coverage at all for damage due to the insureds faulty work.

Finally, there are the direct coverage options that the insured has when it comes to garagekeepers coverage. Garagekeepers coverage is based on the legal liability of the insured for loss to a customers car, but the insured can buy direct coverage to circumvent this requirement. However, when the insured buys the direct coverage, how does this work?

It depends on whether the insured chooses the direct-primary or the direct-excess option.

If the direct-primary option is selected, the premium charged for the garagekeepers coverage is increased and the coverage for damage to a customers car by a covered cause of loss is provided without regard to the legal liability of the named insured or any other insured. In other words, the garagekeepers coverage becomes primary for the loss to the customers car, whether or not the insured is legally liable for the damage. This is akin to physical damage coverage that an insured buys on his personal auto policy.

If the direct-excess option is selected, the insureds garagekeepers premium increases a bit less than under the direct-primary option, and the option keeps the garagekeepers coverage applicable on a legal liability basis, at least to a degree.

The coverage applies without regard to the legal liability of the named insured on an excess basis over any other collectible insurance. For example, the customer has physical damage coverage on his auto. He takes the car to the insureds garage for service and, through no fault of the insured, the car is damaged. The customer has his own auto policy pay for the damage but he has to pay a $500 deductible. If the garage has purchased direct-excess coverage, the insured can then pay the customer the $500.

So the garage coverage form has its share of problem areas. This is to be expected. But if the policy wording is explained so that the insured and the insurer understand what is covered and what is excluded, those problem areas are less likely to escalate into lawsuits.

David D. Thamann is managing editor

of the FC&S Bulletins, published by the National Underwriter Company in Erlanger, Ky. The FC&S editors welcome comment and questions and may be reached by fax at 859-692-2293 or via e-mail at FCS@NUCO.COM.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 11, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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A Drive Through The Strange World Of The Garage Coverage Form

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