August 1, 2014
Fire, Other Legal Liability for Commercial Risks
Summary: Under common law, anyone who negligently damages property of another is obliged to make restitution to the owner. General liability forms commonly exclude coverage for damage to personal property while it is in the care, custody, or control of the insured. Fire legal liability insurance is designed to provide coverage for both real and personal property in the insured's care, custody, or control. Situations that give rise to the need for this type of insurance are discussed in Fire Legal Liability Insurance.
Because of the manner in which legal liability insurance developed, this coverage was once restricted to the insured's legal obligation for damage caused by the fire peril only. As the coverage evolved, insurers permitted the addition of coverage for the insured's legal obligations for damage caused by extended coverage perils and eventually on an open perils basis.
In the 1986 commercial property program, Insurance Services Office (ISO) renamed the Fire Legal Liability Coverage form to reflect the expanded coverage scope. This coverage is now known as the Legal Liability Coverage form, CP 00 40 10 12.
The importance of legal liability coverage has grown in almost direct relation to the increased use by insurers of the subrogation clauses in their contracts. At one time there was reluctance on the part of insurers, after paying a landlord for a building fire loss for instance, to take up the matter of the tenant's possible responsibility for the loss and his common law obligation to make restitution. This is no longer the case. Insurers are increasingly alert to subrogation possibilities. Moreover, the courts and even the insurance buying public are generally sympathetic to the notion that the guilty should pay, even when the loss is covered by the property owner's insurer.
Topics covered:
Scope of the legal liability coverage form
Development
Fire legal liability insurance has not always been readily available. Prior to passage of the multiple line laws, a strict separation between fire and casualty insurers prevailed, and the development of fire legal liability coverage was impeded because neither side felt comfortable with the line. (See Fire Legal Liability Insurance for a discussion of protective options developed to fill the void created by the absence of such insurance.) Fire underwriters could measure burnability but not the negligence factor. Casualty underwriters, on the other hand, did not routinely write the high property damage liability limits that were often required. Fire underwriters eventually devised a rating method—a percentage of the fire rate—to reflect the reduced exposure between first and third party liability and gradually came to dominate the writing of the coverage. The rules for fire legal liability coverage as a form of property insurance are under the jurisdiction of ISO and are included in the Commercial Lines Manual (CLM), division five, Fire and Allied Lines.
But, coverage remains available under ISO rules in liability policies. Fire legal liability was a feature of the 1973 CGL broad form endorsement and is written directly into the Commercial General Liability policy. However, fire legal liability under the CGL covers only damage to premises caused by the fire peril and cannot be written to include other causes of damage. (See CGL Coverage Form—Coverage A for a review of fire damage liability coverage under the commercial general liability program.)
The remainder of this discussion is devoted to legal liability coverage as provided by the Legal Liability Coverage Form, CP 00 40.
Scope of the Legal Liability Coverage Form
The legal liability coverage form covers the insured's legal liability for loss or damage to real and personal property of others in the insured's care, custody, or control caused by a peril insured against, including coverage for loss of use and defense expenses. The loss to covered property must be "caused by accident," thus eliminating coverage for intentional damage brought about by the insured.
The coverage can be applied to commercial property—mercantile or manufacturing, building or contents—in the care, custody or control of the insured. However, form CP 00 40 cannot be used for a contractor while working on a building. Manual rules state that the declarations (or legal liability coverage schedule form CP DS 05) must include a definite description of the insured's business operation and location and a description of the property of others for which the insured may be legally liable. In actual practice, it is most often written for the tenant of a commercial building.
Buildings usually represent the largest single exposure of this type faced by the insured. For business personal property, there is another method of obtaining adequate protection against this exposure; the insured can buy optional direct insurance on personal property of others under form CP 00 10 10 12 (Building and Personal Property Coverage Form). The insurance is for the benefit of the owner of the property, not the named insured. Since this optional coverage is direct coverage and not liability coverage, the insured need not be legally liable for the loss before coverage applies. This is not to imply that this direct coverage is preferable to fire legal liability. In fact, the fire legal liability coverage may often be more suitable (economical) when values are substantial and legal liability protection encompasses all of the insured's coverage needs.
A. Coverage
We will pay those sums that you become legally obligated to pay as damages because of direct physical loss or damage, including loss of use, to Covered Property caused by accident and arising out of any Covered Cause of Loss. We will have the right and duty to defend any "suit" seeking those damages. However, we have no duty to defend you against a "suit" seeking damages for direct physical loss or damage to which this insurance does not apply. We may investigate and settle any claim or "suit" at our discretion. But:
(1) The amount we will pay for damages is limited as described in Section C. Limits of Insurance; and
(2) Our right and duty to defend end when we have used up the Limit of Insurance in the payment of judgments or settlements.
1. Covered Property And Limitations
Covered Property, as used in this Coverage Form, means tangible property of others in your care, custody or control that is described in the Declarations or on the Legal Liability Coverage Schedule.
Covered Property does not include electronic data. Electronic data means information, facts or computer programs stored as or on, created or used on, or transmitted to or from computer software (including systems and applications software), on hard or floppy disks, CD-ROMs, tapes, drives, cells, data processing devices or any other repositories of computer software which are used with electronically controlled equipment. The term computer programs, referred to in the foregoing description of electronic data, means a set of related electronic instructions which direct the operations and functions of a computer or device connected to it, which enable the computer or device to receive, process, store, retrieve or send data. This paragraph does not apply to electronic data which is integrated in and operates or controls the building's elevator, lighting, heating, ventilation, air conditioning or security system.
2. Covered Causes Of Loss
See applicable Causes of Loss form as shown in the Declarations.
3. Additional Coverage
SUPPLEMENTARY PAYMENTS.
We will pay, with respect to any claim or "suit" we defend:
a.All expenses we incur.
b.The cost of bonds to release attachments, but only for bond amounts within our Limit of Insurance. We do not have to furnish these bonds.
c.All reasonable expenses incurred by you at our request, including actual loss of earnings up to $250 a day because of time off from work.
d.All costs taxed against you in the "suit."
e.Prejudgment interest awarded against you on that part of the judgment we pay. If we make an offer to pay the Limit of Insurance, we will not pay any prejudgment interest based on that period of time after the offer.
f.All interest on the full amount of any judgment that accrues after entry of the judgment and before we have paid, offered to pay, or deposited in court the part of the judgment that is within our Limit of Insurance.
These payments will not reduce the applicable Limit of Insurance.
Analysis
The insuring agreement of form CP 00 40 binds the insurer to "pay those sums that the insured becomes legally obligated to pay as damages because of direct physical loss or damage, including loss of use, to covered property caused by accident and arising out of any covered cause of loss." Covered property is defined as "tangible property of others in your care, custody or control that is described in the Declarations or on the Legal Liability Coverage Schedule."
The 2002 edition of the form added electronic data as property not covered. The section explains what constitutes electronic data and clarifies what is meant by computer programs within the meaning of electronic data.
The phrase "legally obligated" is used to emphasize that the insurance is in no way direct coverage. The policy does not cover damage to the property; it covers the insured and his or her responsibility as imposed by law following the damage. Naturally, the insurer will use whatever legal defenses are available to the insured in resisting the assessment of responsibility. The policy reserves the insurer's right to investigate and settle any claim or suit.
This leads to the second—and often equally important—aspect of legal liability coverage. The insurer has "the right and duty" to defend any "suit" seeking damages and will bear the cost of defending a suit against the insured. A "suit" is defined as including an arbitration proceeding to which the insured must submit or to which the insured submits with the consent of the insurer. Payment of legal expenses is in addition to the limit set forth in the policy. The insurer agrees to pay the cost of defense attorneys and court costs. The amount payable for these expenses is limited by the provision that the insurer's obligation to defend ends when the insurer has expended the limit in payment of judgments or settlements. In other words, the insurer must pay whatever the insured's legal expenses are (even if they exceed the policy limit) until a judgment or settlement is reached and the amount of the limit has been paid out in the judgment or settlement.
In the 2012 revision, ISO added a statement that the exclusion of electronic data from covered property does not apply to loss or damage to electronic data that is integrated in and operates or controls the building's heating, lighting, security, air conditioning, ventilation, or elevator systems
Additional Insureds, Newly Acquired Organizations
4.Coverage Extensions
a.Additional Insureds.
If the Named Insured shown in the Declarations is a partnership, limited liability company or corporation, throughout this Coverage Form the words "you" and "your" include:
(1)partners, members, executive officers, trustees, directors and stockholders of such partnership, limited liability company or corporation, but only with respect to their duties as such; and
(2)Managers of a limited liability company, but only with respect to their duties as such.
b.Newly Acquired Organizations.
Throughout this Coverage Form, the words "you" and "your" also include any organization (other than a partnership or joint venture), or limited liability company you newly acquire or form and over which you maintain ownership or majority interest if there is no other similar insurance available to that organization.
This Coverage Extension ends:
(1)90 days after you acquire or form the organization; or
(2)At the end of the policy period shown in the Declarations;
whichever is earlier.
This Extension does not apply to direct physical loss or damage that occurred before you acquired or formed the organization.
Analysis
The legal liability form specifies that if the named insured is a partnership or corporation, partners, executive officers, trustees, directors and stockholders are additional insureds while acting within the scope of their duties. Other employees may be named as additional insureds by endorsement, subject to an additional premium charge equal to 25 percent of the policy premium. Coverage under this extension does not increase the limit of insurance.
If the policy is appropriately endorsed, it is permissible (with two exceptions) to include others as insureds. The exceptions: a policy issued to a tenant or lessee may not also cover the insurable interest of a contractor or subcontractor, and a policy issued to a general lessee (presumably, one who leases an entire premises and sublets to others) or manager may not include the interest of a tenant, concessionaire or exhibitor. But, the policy issued to the tenant, concessionaire or exhibitor may be endorsed to include the interest of the general lessee or manager—subject to an additional premium of 25 percent of the policy premium. In other words, a general lessee of a multitenant building cannot purchase a policy and include the interests of each of the tenants as additional insureds. However, each of the tenants can purchase a policy in which the interest of the general lessee is covered as an additional insured.
Newly acquired organizations are also covered, within the applicable limit of insurance, for legal liability arising out of direct physical loss that occurs after the insured acquires or forms the organization. The meaning of insured persons includes any organization (other than a partnership or joint venture) that the insured newly acquires or forms and over which the insured maintains ownership or majority interest, provided there is no other insurance available to that organization. This extension of coverage ends at the earlier of ninety days after the acquisition or formation of the organization or the end of the policy period.
c.Newly Acquired Property
(1)You may extend the insurance that applies to Covered Property, as used in this Coverage Form, to apply to your liability for tangible property of others that comes under your care, custody or control after the beginning of the current policy period.
This Extension is subject to the following:
(a)All terms and Conditions of this Coverage Form.
(b)Buildings must be intended for:
(i)Similar use as the building described in the Declarations or on the Legal Liability Coverage Schedule; or
(ii)Use as a warehouse.
The most we will pay as the result of any one accident for loss or damage to buildings covered under this Extension is $250,000 at each building.
(c)Personal property must be at a location:
(i)That you own; or
(ii)That is or comes under your care, custody or control;
other than at fairs or exhibitions.
The most we will pay as the result of any one accident for loss or damage to personal property covered under this Extension is $100,000 at each building.
(2)Insurance under this Extension for each item of property of others will end when any of the following first occurs:
(a)This policy expires;
(b)30 days expire after the property has come under your care, custody or control; or
(c)You report values to us.
We will charge you additional premium for values reported from the date the property comes under your care, custody or control.
This Extension does not apply to direct physical loss or damage that occurred before the property came under your care, custody or control.
Analysis
The current edition of form CP 00 40 allows limited automatic coverage for property (both building and personal) that comes under the insured's care, custody, or control during the policy period. Buildings covered by this provision must be intended for similar use to the one described in the declarations or on the legal liability schedule, or for warehouse use. Coverage under the extension ends at the earliest of policy expiration; thirty days after the insured is given care, custody, or control; or the insured reports values to the insurer. Additional premium is charged and payments under the newly acquired property extension are in addition to the limits of insurance.
Coverage for all newly acquired covered buildings arising out of one accident is limited to $250,000 at each building. The building limit can be increased by adding endorsement CP 04 25 10 90, Newly Acquired or Constructed Property – Increased Limit.
Newly acquired personal property must be at a location either owned by or in the care, custody, or control of the insured at the time of loss and is not covered while at fairs or exhibitions. The coverage limit for loss to this personal property resulting from one accident is $100,000 at each building. Endorsement CP 04 25 cannot be used to increase this limit.
B. Exclusions and Limitations
See applicable Causes of Loss form as shown in the Declarations.
Analysis
Under the Legal Liability Coverage Form, any of the three causes of loss forms used with the commercial property program may be employed: Basic, CP 10 10 10 12; Broad, CP 10 20 10 12; or Special, CP 10 30 10 12 (but CP 10 30 may not be attached when coverage is provided for personal property of others in the insured's care, custody, or control, or warehouse risks involving personal property).
Since extended coverage, vandalism and malicious mischief, or perils covered by special form CP 10 30 most often involve either "acts of God" or acts of others, insureds sometimes question the wisdom of including these perils in their fire legal liability protection. The likelihood of their becoming legally involved seems remote. Nevertheless, the chance is there—and it may be just as expensive to defend a groundless suit as any other kind. The cost of defense and coverage, contrasted with the normally very slight expense of adding these perils, is usually enough to persuade the insured to add them. And the extended coverage perils of smoke, vehicle damage, and explosion are valid items for inclusion in the fire legal liability contract.
As to vehicle damage, both the basic and broad coverage provisions exclude damage from a vehicle owned or operated by the named insured in the course of business. Employees are outside the scope of the exclusion except with respect to vehicles owned by the insured.
Exclusions in the legal liability form are those applicable to the selected causes of loss form.
In relation to legal liability coverage, all three causes of loss forms contain a contractual liability exclusion. This exclusion provides that the insurer will not defend any claim or suit or pay damages that the named insured is legally liable to pay, solely by reason of the named insured's assumption of liability in a contract or agreement.
Does this exclusion speak of the assumption of liability—that is, to hold someone harmless—for damage or injury to third parties? Yes, the exclusion does refer to such a course. The legal liability coverage is basically a property coverage form and assuming the legal liability of another is meant to be a contractual liability coverage. This exclusion is meant to prevent the legal liability form from providing assumption of liability coverage that should be covered under the CGL form. In other words, legal liability insurance does not apply in a situation where the insured has agreed, for example, to hold the landlord harmless for damage or injury to third parties. Contractual liability insurance is the proper vehicle for covering that exposure.
This exclusion also has another purpose: it can be applied to a situation where the insured has agreed in a lease agreement to accept liability for the good maintenance or safekeeping of the leased property. In other words, the insured has agreed to assume the responsibility for the upkeep of the building. This course of action is not to be covered under the legal liability form. But, there is an exception to this exclusion that should be noted.
The exception on the form says that the contractual liability exclusion does not apply to a written lease agreement in which the named insured has assumed liability for building damage resulting from an actual or attempted burglary or robbery. So, for example, if the insured is a retail jeweler and has agreed in his lease to pay for damages done to the building by someone trying to break into the building, that contractual assumption of liability will be covered under the legal liability form. The insured is not actually liable for the damage done to the building because he had no part in the attempted burglary, but he has assumed such liability in his lease agreement and the legal liability form will provide coverage for his assumption.
Certain exclusions in each of the causes of loss forms do not apply to the legal liability coverage form. The exclusions that do not apply are ordinance or law, governmental action, nuclear hazard, power failure, and war and military action. The nuclear hazard exclusion of the applicable causes of loss form is replaced by one that pertains only to the legal liability coverage form. Unlike the generally applicable nuclear exclusion, the exclusion used with the legal liability form does not provide coverage for resulting loss or damage by fire. For many insureds, a general liability policy can be purchased to cover this exposure. The reason for specifically stating that some of the other exclusions do not apply is less clear. For example, just as damage by war is beyond the insured's control, so are many causes of earth movement, yet the earth movement exclusion is left fully intact. However, the elimination of the ordinance or law exclusion and governmental action exclusions is more significant. If the insured negligently damages a building to such a degree that a building ordinance requires its complete demolition, the total liability would not be covered without the elimination of the ordinance or law exclusion. Similarly, if the insured accidentally causes an unsafe condition on the premises that results in seizure and destruction of the property by the city health department, the insured would not receive full liability coverage without the elimination of the governmental action exclusion.
Legal liability coverage may be written under a separate policy or included as a separate item in the same policy with property coverages. Either way, a definite description of the insured's business operation and location as well as a description of the property of others for which the insured may be legally liable must be included in the policy. Further, separate limits of liability must apply for this coverage on or in each building.
The amount of insurance is usually based on replacement cost of the property—though consideration can also be given to the fact that coverage contemplates protection for the insured's liability as respects loss of use as well as damage or destruction of the property itself. Thus, the lessee of a building that has a replacement cost of $100,000 and earns $2,000 per month in rental fees might purchase legal liability insurance with a limit of $112,000—replacement cost plus rent for a maximum of six months of reconstruction. Obviously, a good deal of speculation and investigation is involved in the final selection of the amount of coverage—what are the chances of the building being totally destroyed, what are the prospects for speedy reconstruction, what does the lease have to say about continuation of rent payments while the building is shut down?
Tenants of multi-occupant buildings purchase legal liability coverage on that part of the building in their "care, custody or control." Coverage for their liability as respects the remainder of the building is properly the subject of general liability insurance—with attention to the matter of adequate property damage limits.
Includes copyrighted material of Insurance Services Office, Inc., with its permission.