Topics Covered:

Covered Autos Liability Coverage

Insured definition

Coverage extensions

Liability exclusions

Liability limits

Covered Autos Liability Coverage

 1.Coverage

a.We will pay all sums an "insured" legally must pay as damages because of "bodily injury" or "property damage" to which this insurance applies caused by an "accident" and resulting from the ownership, maintenance, or use of covered "autos".

We will also pay all sums an "insured" legally must pay as a "covered pollution cost or expense" to which this insurance applies, caused by an "accident" and resulting from the ownership, maintenance, or use of covered "autos". However, we will only pay for the "covered pollution cost or expense" if there is either "bodily injury" or "property damage" to which this insurance applies that is caused by the same "accident".

     We have the right and duty to defend any "insured" against a "suit" asking for such damages or a "covered pollution cost or expense". However, we have no duty to defend any "insured" against a "suit" seeking damages for "bodily injury" or "property damage" or a "covered pollution cost or expense" to which this insurance does not apply. We may investigate and settle any claim or "suit" as we consider appropriate. Our duty to defend or settle ends when the Covered "Autos" Liability Coverage Limit of Insurance has been exhausted by payment of judgments or settlements.

Analysis

The central liability insurance agreement of the auto dealers coverage form is basically the same as other liability policies. The insurance company promises to pay up to policy limits in response to the legal liability of the insured because of bodily injury or property damage occurring while the policy is in force.

The insurance company expressly has "the right and the duty" to defend the insured against liability claims but, also expressly, the defense obligation does not extend to a lawsuit seeking damages for bodily injury (BI) or property damage (PD) to which the insurance does not apply. For example, a claim for damages arising out of the use of a covered auto in an organized race does not activate the promise to defend because coverage for such an incident is specifically excluded. Refusal to defend, does however, put the insurer in some legal jeopardy and such refusal is not lightly undertaken.

As an example, in Davis v. United Fire & Casualty Co., 400 N.E.2d 984 (Ill. App. 1981) for example, the policy applied to the use of nonowned automobiles in the operation of a garage and the claim concerned a garage-owned wrecker in a collision with the claimant. The insurance company denied coverage and the insured subsequently defended the suit himself, and lost. The case before an Illinois appellate court centered on the obvious fact that the insurance company had not offered its insured a defense and the case was remanded for still more litigation on whether the insurer owed a defense. To all appearances, the claim was outside the coverage of the policy, but that did not save the insurance company from costly legal expense.

The insurance company has complete authority to investigate—and to settle—any covered claim without consultation with the insured. And payment of the limit of insurance noted in the policy ends the insurer's defense obligation.

Note that this section of the auto dealers coverage form does not contain clauses about prior knowledge on the part of an insured about bodily injury or property damage that occurred before the policy inception. The prior notice paragraphs are in reaction to the Montrose Chemical Corporation decision from California, and such clauses are now an integral part of the liability policies furnished by ISO. The clauses in CA 00 25 can be found in the general liability coverage section.

Another of the auto dealers form's liability insuring agreements is the insurers promise to pay all sums that an insured legally must pay as a covered pollution cost or expense. The cause must be accidental and result from garage operations involving the ownership, maintenance, or use of covered autos. Basically, this insuring agreement deals with certain clean up costs that the insured has to pay in response to the accidental release or dispersal of pollutants from a vehicle's operating systems or by an off premises auto accident. See Business Auto Definitions for more detail on covered pollution costs.

Insured Definition

 2.Who Is An Insured

a.The following are "insureds" for covered "autos":

(1)You for any covered "auto".

(2)Anyone else while using with your permission a covered "auto" you own, hire or borrow except:

(a)The owner or anyone else from whom you hire or borrow a covered "auto". This exception does not apply if the covered "auto" is a "trailer" connected to a covered "auto" you own.

(b)Your "employee" if the covered "auto" is owned by that "employee" or a member of his or her household.

(c)Someone using a covered "auto" while he or she is working in a business of selling, servicing, or repairing "autos" unless that business is yours.

(d)Your customers. However, if a customer of yours:

     (i) Has no other available insurance (whether primary, excess or contingent), they are an "insured" but only up to the compulsory or financial responsibility law limits where the covered "auto" is principally garaged.

     (ii) Has other available insurance (whether primary, excess or contingent) less than the compulsory or financial responsibility law limits where the covered "auto" is principally garaged, they are an "insured" only for the amount by which the compulsory or financial responsibility law limits exceed the limit of their other insurance.

(e)A partner (if you are a partnership) or a member (if you are a limited liability company) for a covered "auto" owned by him or her or a member of his or her household.

(3)Anyone liable for the conduct of an "insured" described above but only to the extent of that liability.

(4)Your "employee" while using a covered "auto" you do not own, hire or borrow in your business or your personal affairs.

Analysis

The "who is an insured" status can become a complicated question when the automobile exposure is examined. The first consideration, of course, is whether the automobile in question has the status of a "covered auto." These comments assume that the appropriate symbols have been entered on the declarations page to confer "covered auto" status in each case.

The named insured is covered for whatever exposure is indicated by the covered auto symbol. Anyone permitted by the named insured to use or drive a covered auto that is owned, hired, or borrowed by the named insured is also an insured, with the exceptions noted.

Customers of the named insured are limited insureds. If the customers have no other available insurance, the garage policy protects them up to the financial responsibility limits required under the law of the state or territory where the covered auto is principally garaged. If they have other available insurance but the limits are inadequate to meet statutory requirements, the garage policy will make up the difference.

Note that the dealer insured can elect to purchase liability coverage for customers. The intent is declared in the supplementary schedule and an added premium equal to 25 percent of the liability insurance premium is charged. Dealers are often encouraged to avoid buying protection for customers since the insured has very little control over the customers' expertise—or lack of expertise — behind the wheel. A few careless customers can ruin a dealer's experience in quick order. However, the coverage limitation with respect to customers in earlier versions of the contract has had mixed reception in the courts. In some jurisdictions, the limitation has been seen as just another form of excess clause comparable to the excess clause in the customer's own policy. Excess clauses in opposing policies are traditionally seen as canceling each other and the two insurers end by prorating on the basis of policy limits. The Iowa and Nevada supreme courts came to such conclusions, respectively, in Union Ins. Co. v. Iowa Hardware Mut. Ins. Co., 175 N.W.2d 413 (Iowa, 1970) and Yosemite Ins. Co. v. State Farm Mut. Auto. Ins. Co., 653 P.2d 149 (Nev. 1982). There is potential conflict, too, in some jurisdictions between the customer limitation and motor vehicle laws requiring that insurance pertaining to a particular vehicle apply to permissive users as well as to owners.

No person is an insured under the form's covered automobile liability coverage while that person is working in the automobile business for anybody except the named insured. An insured might contract with the operator of a body shop to handle some repair work and employees of the body shop might pick up and deliver the automobiles involved in the work. The owner and employees of the body shop must look to their own garage policy for their protection while operating these autos.

The owners of automobiles that the named insured has hired or borrowed are not considered as insureds. If the owner of the hired or borrowed automobile is an employee of the insured, that owner is not a covered person. If the owner of the automobile is a member of the household of the permissive user-employee, the result is the same. In other words, an employee of the insured must look to his or her own coverage for automobile liability protection when using a personally owned auto in the business of the insured. Partners or members of a limited liability company also are not considered insureds with respect to covered autos owned by the partners or members or by members of their respective households. (A partner who borrows the auto of another partner for use in a business related activity is insured, if borrowed autos are included as covered autos.)

The employees of the named insured are considered insureds while using a covered auto that the named insured does not own, hire, or borrow in the business of the named insured or his personal affairs. This clause coincides with the use of symbol 29, nonowned autos. Symbol 29 makes any auto that is not owned leased, hired, rented, or borrowed by the named insured but is used in connection with the auto dealership business of the named insured a covered auto. Since that symbol includes autos owned by the employees of the named insured, it is fitting that the owner-employee be an insured under the named insured's policy, especially since that auto is being used for the business purposes of the named insured.

Of course, it must be noted that previously, if the named insured does own, hire, or borrow a covered auto, the policy does not consider the employee-owner of such an auto to be an insured. This can lead to some confusion as to the status of the employee. The key point to note in order to understand the distinction here is this: if the named insured owns, hires, or borrows a covered auto, and the employee owns such an auto, the employee is not considered an insured; if, on the other hand, the employee or someone other than the named insured owns, hires, or borrows an auto for use on the named insured's business, that person is considered an insured.

Lastly, anyone who is legally liable for the actions of one who qualifies as an insured under the policy is also insured, to the extent of that liability. Parents of a minor employee in a state where parents have legal liability for the actions of minors provide an example. Of course, the parents—or anyone else—cannot claim coverage under this provision if they themselves are disqualified for some reason as covered persons.

 Coverage Extensions

 3.Coverage Extensions

a.Supplementary Payments

 We will pay for the "insured":

(1)All expenses we incur.

(2)Up to $2,000 for the cost of bail bonds (including bonds for related traffic law violations) required because of an "accident" we cover. We do not have to furnish these bonds.

(3)The cost of bonds to release attachments in any "suit" against the "insured" we defend, but only for bond amounts within our Limit of Insurance.

(4)All reasonable expenses incurred by the "insured" at our request, including actual loss of earnings up to $250 a day because of time off from work.

(5)All court costs taxed against the "insured" in any "suit" against the "insured" we defend. However, these payments do not include attorneys' fees or attorneys' expenses taxed against the "insured".

(6)All interest on the full amount of any judgment that accrues after entry of the judgment in any "suit" against the "insured" we defend; but our duty to pay interest ends when 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 Limit of Insurance.

b.Out-of-State Coverage Extensions

While a covered "auto" is away from the state where it is licensed we will:

(1)Increase the Limit of Insurance for Covered Auto Liability Coverage to meet the limits specified by a compulsory or financial responsibility law of the jurisdiction where the covered "auto" is being used. This extension does not apply to the limit or limits specified by any law governing motor carriers of passengers or property.

(2)Provide the minimum amounts and types of other coverages, such as no-fault, required of out-of-state vehicles by the jurisdiction where the covered "auto" is being used.

We will not pay anyone more than once for the same elements of loss because of these extensions.

Analysis

The insurance company's promise to pay "all expenses we incur," and this in addition to the limits of the policy, is one of great significance. If the insurer is required to fulfill that promise in defense of the insured, it is litigation expenses, quite possibly sizable ones, that the insurer will be paying and payment stops in any particular incident only when the insurer calls a halt by agreeing to pay policy limits to the claimant. Then, as regards any other potential claims incident throughout the policy term, the limits and insurer's defense cost obligations are fully restored.

The other expenses undertakings of the insurer pale in comparison. There will be coverage of certain of the insured's expenses, some cost of bail bonds, cost of release of attachment bonds, court costs in defending a suit, interest on any adverse judgment until paid.

And, whenever a covered auto is out of state, policy limits and coverages will be automatically modified as needed to meet minimum requirements of that other state.

Liability Exclusions

 This insurance does not apply to any of the following:

1.Expected or Intended Injury

"Bodily injury" or "property damage" expected or intended from the standpoint of the "insured".

Analysis

Injury or damage is most often the unintended result of an intentional act. The exclusion is rightly focused on the result rather than the act; if injury or damage can be proved to be the intended result of the insured's act, no coverage is owed.

 2.Contractual

Liability assumed under any contract or agreement. But this exclusion does not apply to liability for damages:

a.Assumed in a contract or agreement that is an "insured contract" provided the "bodily injury" or "property damage" occurs subsequent to the execution of the contract or agreement; or

b.That the "insured" would have in the absence of the contract or agreement.

Analysis

Contractual liability insurance under the auto dealers coverage form is for exposures common to businesses in general. Entrepreneurs are routinely required to assume the liability exposures of landlords or other owners in leases and of other parties in agreements covering easements, sidetrack arrangements with railroads, and in elevator maintenance contracts. Contractual liability insurance (see Contractual Liability Exposure) responds to agreements made by the insured to assume the exposure of the other party to third-party liability suits. (It has nothing to do with an insured's contractual obligation to perform a service for the other party to the contract.) The coverage of this basic exposure is introduced, as in other general liability contracts, by way of an exclusion of liability assumed by the insured and an exception to the exclusion that covers assumed liability in "insured contracts."

The contractual exclusion on CA 00 25 states that the insurance does not apply to liability assumed under any contract or agreement. But there are exceptions. Liability assumed in an "insured contract," is one, and liability that the insured would have in the absence of the contract or agreement is the other. An example of the latter is the insured's own conduct, negligently causing an accident. The insured may well have an assumption of liability under contract with the owner of the damaged property but that is not relevant in face of the insured's negligence.

Insured contract as defined means a lease of premises; a sidetrack agreement; any easement or license agreement (except in connection with construction or demolition operations on or within fifty feet of a railroad); an obligation, as required by ordinance, to indemnify a municipality (except in connection with work for a municipality); that part of any other contract or agreement pertaining to the named insured's auto dealership business under which the named insured assumes the tort liability of another to pay for injuries to a third party; an elevator maintenance agreement; and that part of any contract or agreement entered into, as part of the named insured's auto dealership business, pertaining to the rental or lease, by the named insured or any of his employees, of any auto. This final part of the definition does not extend to any obligation that the named insured or employees accept to pay property damage to any auto so rented or leased. This definition is similar to the one found on the business auto coverage form; see Business Auto Definitions for a discussion of the insured contract definition.

An insured contract does not apply to agreements relating to the work of architects, engineers, or surveyors, or to those agreements covering indemnification for fire damage to rental premises. Contracts pertaining to the rental or loan of an auto to the named insured or any employee are not considered insured contracts if that auto is loaned or rented with a driver. In addition, contracts indemnifying an authorized motor carrier who agrees to have the named insured operate a covered auto over the authorized route are not considered to be insured contracts.

There are some other points to remember concerning contractual liability under CA 00 25. The coverage form's exclusion relating to employee indemnification and employer's liability is modified so that the exclusion does not apply to liability assumed by the insured under an insured contract. And, the care, custody, or control exclusion is modified so as not to apply to liability assumed under a sidetrack agreement.

 3.Workers Compensation

Any obligation for which the "insured" or the "insured's" insurer may be held liable under any workers' compensation, disability benefits or unemployment compensation law or any similar law.

4.Employee Indemnification and Employer's Liability

"Bodily injury" to:

a.An "employee" of the "insured" arising out of and in the course of:

(1)Employment by the "insured"; or

(2)Performing the duties related to the conduct of the "insured's business; or

b.The spouse, child, parent, brother or sister of that "employee" as a consequence of paragraph a. above;

This exclusion applies:

(1)Whether the "insured" may be liable as an employer or in any other capacity; and

(2)To any obligation to share damages with or repay someone else who must pay damages because of the injury.

But this exclusion does not apply to "bodily injury" to domestic "employees" not entitled to workers' compensation benefits or to liability assumed by the "insured" under an "insured contract". For the purposes of Covered Autos Liability Coverage, a domestic "employee" is a person engaged in household or domestic work performed principally in connection with a residence premises.

5.Fellow Employee

"Bodily injury" to:

a.Any fellow "employee" of the "insured" arising out of and in the course of the fellow "employee's" employment or while performing duties related to the conduct of your business; or

b.The spouse, child, parent, brother or sister of that fellow "employee" as a consequence of Paragraph a. above.

Analysis

These three exclusions are concerned with employment relationships and while an insured needs to be aware of their presence in the auto dealers liability coverage, they probably do not require a great deal of explanation. There is no coverage for any obligation of an insured (or insurance company) under a workers compensation, disability benefits, or similar law. Other contracts are available to address the insured's needs in those areas.

Excluded also is bodily injury to the spouse, child, parent, brother, or sister of the employee as a consequence of the injury. Workers compensation insurance is the appropriate vehicle for covering accidental injury to the employee; whether spouses, children, and so on, can recover under workers compensation depends on the relevant state WC statute.

No employee is covered for bodily injury to any fellow employee of the insured arising out of and in the course of both being employees of the named insured. This exclusion blocks an end run around exclusion 3 or exclusion 4.

 6.Care, Custody, or Control

"Property damage" to or "covered pollution cost or expense" involving:

a.Property owned, rented or occupied by the "insured";

b.Property loaned to the "insured";

c.Property held for sale or being transported by the "insured"; or

d.Property in the "insured's" care, custody or control.

But this exclusion does not apply to liability assumed under a sidetrack agreement.

Analysis

The "care, custody, or control exclusion" is undoubtedly one of the first exclusions that comes to the policy insured's attention. It leaves gaps in the insured's liability protection that most buyers would like to fill. There is no property damage liability coverage for property that is owned by the insured, that is held for sale by the insured, that is being transported by the insured, or that is in the care, custody, or control of the insured.

Garagekeepers coverage—providing coverage for legal liability, direct-excess, or direct-primary—is the device for covering the insured's exposure with respect to customers' autos while they are in the insured's care, custody, or control. As to nonowned autos that the insured has on consignment for sale, it is important for the insured to understand that the covered auto liability portion of the policy excludes property damage coverage to them. And garagekeepers' specified application only to autos that the insured is "attending, servicing, repairing, parking, or storing" can leave coverage with respect to consigned autos in question—"attending" (except during demonstrations) or "storing" within the context of the garagekeepers provision are terms not necessarily applicable to autos that are held on consignment. The purchase of direct coverage under the physical damage portion of the policy using symbol 31 leaves no room for argument.

Application of the exclusion to other property that is on the insured premises can be in question. It is clear that its mere presence does not suffice to make of it property that is in the insured's care, custody, or control. Employees' tools and property left in customers' autos are most often the focus for the question. Numerous cases revolving around the exclusion—it is common in some variation of language to all liability contracts—are reviewed elsewhere in this volume (see Care, Custody, or Control Exclusion).

One case not included in those pages relates directly to the liability coverage of the auto dealers policy. It is Arrigo's Fleet Service, Inc. v. Aetna Life & Cas. Co., 221 N.W.2d 206 (Mich. App. 1974). The contents of a customer's van were consumed in a fire set off by a welder's torch in the insured shop. A Michigan court of appeals ruled the exclusion inapplicable to the property in the van. The court stated that "we feel that distinguishing whether the damaged property is necessary to the insured work or merely incidental thereto is the most valuable criterion (in deciding when the exclusion is applicable) . . . so that if the property is essential to the work being performed, it is within the care, custody, or control of the insured and is excluded; if the property is not essential to the work, it is not within the exclusion's reach". Following this court's logic, cargo in a van, personal property in a car's trunk, etc., left with the auto dealership incidental to a repair order does not put the property in the "care, custody, or control" of the insured for purposes of this exclusion. There seems to be a considerable variance on this point among adjusters however and the property values are normally insufficient to lead to a court determination.

As to employees' tools, if the form's insured requires employees to provide them and operates under the assumption that they will be kept on the premises, it is reasonable for the insured to consider that they are under his control and the insured can arrange direct coverage under property forms that cover the insured's own machinery and equipment. If they are treated as the personal possessions of employees that may be brought to work at the employees' options, it would be extreme to state that these are ever in the care, custody, or control of the insured, even if the insured provides storage for their safekeeping.

 7.Leased Autos

Any covered "auto" while leased or rented to others. But this exclusion does not apply to a covered "auto" you rent to one of your customers while their "auto" is left with you for service or repair.

Analysis

The leased autos exclusion puts the insured on notice that the policy limits its exposure in this area to covered autos that the auto dealership provides shop customers.

Note that there may be a problem between this exclusion affecting autos rented to other than shop customers and the liability coverage for the completed operations exposure. For example, an insured might rent autos and also do service work on the same vehicles. If the insured is subsequently involved in a claim because of alleged faulty work on the rented vehicle, the fact that "this insurance does not apply to . . . any covered auto while leased or rented to others" may defeat coverage as regards the insured's responsibility for faulty garage operations. This particular exclusion makes no exception for the insured in its capacity as the negligent servicer of the particular leased automobile.

 8.Pollution

a."Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of "pollutants":

(1)That are, or that are contained in any property that is being transported or towed by, handled, or handled for movement into, onto or from, the covered "auto";

(2)Otherwise in the course of transit by or on behalf of the "insured"; or

(3)Being stored, disposed of, treated or processed in or upon the covered "auto";

b.Before the "pollutants" or any property in which the "pollutants" are contained are moved from the place where they are accepted by the "insured" for movement into or onto the covered "auto"; or

c.After the "pollutants" or any property in which the "pollutants"         are contained are moved from the covered "auto" to the place where they are finally delivered, disposed of or abandoned by the "insured".

Paragraph a. above does not apply to fuels, lubricants, fluids, exhaust gases or other similar "pollutants" that are needed for or result from the normal electrical, hydraulic or mechanical functioning of the covered "auto" or its parts, if the "pollutants" escape, seep, migrate, or are discharged, dispersed or released directly from an "auto" part designed by its manufacturer to hold, store, receive or dispose of such "pollutants".

Paragraphs b. and c. above of this exclusion do not apply to "accidents" that occur away from premises owned by or rented to an "insured" with respect to "pollutants" not in or upon a covered "auto" if:

(1)The "pollutants" or any property in which the "pollutants" are contained are upset, overturned or damaged as a result of the maintenance or use of a covered "auto"; and

(2)The discharge, dispersal, seepage, migration, release or escape of the "pollutants" is caused directly by such upset, overturn or damage.

Analysis

In brief, the same general exclusion of coverage for virtually any pollution exposure that presently exists on the business auto policy (BAP) applies as well to the auto dealers policy. The gist of the pollution exclusions is this: an incident of pollution that arises out of loading, unloading, or transporting pollutants on covered vehicles is excluded. However, the exclusion does not apply to off premises accidents between covered vehicles and other transporters or handlers or containers of pollutants. Also, the exclusion does not apply to pollution or contamination caused by accidental spill or leakage from within the mechanisms of the covered auto of fuels and lubricants needed in the operation of the auto. If the car's gas tank ruptures in a collision, the spillage of gasoline is not an instance of excluded pollution.

 9.Racing

Covered "autos" while used in any professional or organized racing or demolition contest or stunting activity, or while practicing for such contest or activity. This insurance also does not apply while that covered "auto" is being prepared for such a contest or activity.

Analysis

The auto dealers policy does not include protection on any covered auto while it is used in any professional or organized racing or demolition contest or stunting activity, or while practicing for such contest or activity. This exclusion is of broader consequence than it might at first seem because vehicles can be "used in" one of the aforementioned events without being an actual participant in the contest. In a case appealed to the United States court of appeals for the sixth circuit, this exclusion had been invoked to deny coverage in a death claim against the insured even though the insured's vehicle was on the scene in a capacity of support rather than direct involvement in the contest. Promoters of a truck pull contest at the state fairground had approached the insured, a dealer in new and used tractors and semitrailers, with the suggestion that the insured lend a tractor and driver to the event for the purpose of retrieving and repositioning the weighted sled that the contestants pulled. The insured's benefit was the free advertising that was to have been derived from having its product and name on prominent display among the truck and tractor enthusiasts.

During the course of the event, as the insured's driver was backing his tractor after the retreating sled in anticipation of taking it back to the starting line for the next contestant, one of the contestants was run down and killed by the insured's tractor. The insurance company denied coverage under the garage policy because the truck was being "used in a stunting activity" at the time of the accident. The Federal Court for the Western District of Kentucky agreed with the insurer and, after examining the terms "stunting activity" and "used in," so also did the court of appeals. The insured was found to be without garage protection in United States Fire Ins. Co. v. Kentucky Truck Sales, Inc., 786 F.2d 736 (6th Cir. 1986).

Another aspect of the same exclusion should be noted. A second part of the exclusion says that "this insurance also does not apply while that covered auto is being prepared for such a contest or activity."

 10.Handling of Property

"Bodily injury" or "property damage" resulting from the handling of property:

(a) Before it is moved from the place where it is accepted by the "insured" for movement into or onto the covered "auto"; or

(b) After it is moved from the covered "auto" to the place where it is finally delivered by the "insured".

11.Movement of Property by Mechanical Device

"Bodily injury" or "property damage" resulting from the movement of property by a mechanical device (other than a hand truck) unless the device is attached to the covered "auto".

Analysis

Although the words "loading and unloading" are not used here, these two exclusions define the scope of coverage for loading and unloading of covered autos, in terms of "handling of property" and "movement of property."

To illustrate exclusion 10, the insured has agreed to pick up a vehicle at a residence and deliver it to the repair shop. If the residence is the place where the vehicle is accepted by the insured's employees, the insured's auto dealers form will cover liability arising out of the employees' handling of the property from the time they pick it up at the loading dock until they deliver it to the customer's apartment. Say that after bringing the vehicle as far as the closest restaurant, the employees decide to go to lunch before moving the vehicle the rest of the way to the insured's premises. If leaving the vehicle in a certain place creates an obstruction that causes injury for which the insured becomes liable, the auto dealers form will apply to the claim, because at the time of the loss the vehicle would not have been finally delivered by the insured.

Exclusion 11, relating to loading and unloading, eliminates coverage for bodily injury or property damage resulting from the movement of property by a mechanical device—other than a hand truck—not attached to the covered auto. For example, injury resulting from the use of an attached hoist on a flatbed truck to load or unload an item from the truck is not subject to the exclusion, since the hoist is attached to the truck. However, the use of a conveyor belt not attached to the truck, even though being used to load or unload the truck, is excluded. The only exception to the exclusion, as noted previously, is the use of a hand truck. The use of a hand truck would be covered under the policy, but of course, the use of a fork lift would not be covered under the policy.

It should be noted here that these exclusions have no effect on the care, custody, or control exclusion. If the insured damages property that he is transporting or loading onto a truck for transporting, the liability for that property damage is not covered by the auto dealers coverage form. The care, custody, or control exclusion would apply to that incident.

 12.Defective Products

"Property damage" to any of your "products," if caused by a defect existing in your "products" or any part of your "products", at the time it was transferred to another.

Analysis

The promise to pay claims for bodily injury or property damage caused by the insured's products or work is implicit in the promise to pay all sums the insured legally owes as damages for bodily injury or property damage when there is an accident "to which the insurance applies."

In theory, the coverage is easy to perceive and to explain to insureds; the insured is protected against claims for injury to others and damage to their property caused by poor products or faulty work. But the insurance is not meant to serve as a guarantee that the products themselves are worthy or suitable to the intended purpose or that the insured's work is always up to par. Accidents that grow out of real or alleged defects in automobiles, gasoline, parts, batteries, and any other products made or sold in the business of the insured or out of negligent or defective work performed by the insured garage operation are covered. Claims that the work or the product is defective are not covered.

The auto dealers form does not cover claims for property damage to any of "your products" (defined as including goods or products that the named insured made or sold in an auto dealership business) if the damage was caused by a defect existing in the products or any part of "your products" at the time such products were sold or transferred to another. Suppose the insured sells a pair of tires and one tire has a hidden defect. Later there is a blowout of the defective tire and the customer's auto is damaged in the collision that results. The exclusion eliminates coverage for the defective tire — excluding "property damage to any of your products" that was defective when sold. The claim for damage to the customer's car is covered.

If the insured sells an auto with a defective tire and the same situation occurs, it has been questioned if the exclusion applies to damage to the auto or only to damage to the tire. Traditional interpretation would apply the exclusion to the entire claim: "This insurance does not apply to…property damage to any of your products…if caused by a defect existing in…products (etc.)." That tradition stems from earlier forms in which the exclusion applied to "any of the named insured's products" if the damage was the result of a "condition existing in such products or any part thereof." The present wording may suggest to some that the exclusion may be applied either to "any of your products" or to "any part of your products." The problem with that interpretation is when would an insured settle for application of the exclusion to the entire product if the option were always open to have it applicable to a single defective part? In the example at the beginning of this paragraph, it would be very much to the insured's advantage to have the exclusion apply only to the defective tire and not to the entire car that was sold. However, such a reading would render the portion applying to "any of your products" virtually meaningless, and rules of interpretation require that the entire phrasing of the exclusion be examined for a reasonable meaning of the whole exclusion. It may be only a matter of time until an insured convinces a high court that this exclusion rules out only liability coverage for damage to a defective part (a gas line, for example) but leaves coverage for the nondefective elements of a product (as in coverage for the rest of the automobile consumed in the fire originating with the gas line). In the meantime, however, most claims departments can be expected to apply the exclusion along traditional lines.

Though there is no time limit expressed in the policy for application of the products exclusion, it is broadly accepted that a claim stemming from a second transaction between customer and insured is covered. If some months after the sale of an auto, the customer returns for maintenance work or repairs and because that work is defective the auto is damaged in an accident, the products exclusion is of no bearing because the auto, i.e., the insured's product, was not damaged as the result of a defect that existed when the auto was sold. However, if the reason for the customer's return was to repair a defect that was in existence when the car was sold and the same accident occurs, the products exclusion could be invoked by the insurance company. Whether or not a repair attempt had been made and whether or not that attempt was successful, if the damage can be laid to a defect that existed when the car was sold, then the damage to the product (the car) is excluded.

 13.Work You Performed

"Property damage" to "work you performed" if the "property damage" results from any part of the work itself or from the parts, materials or equipment used in connection with the work.

Analysis

The auto dealers coverage form does not extend its property damage liability protection to guarantee the quality of the insured's work. There is no coverage for property damage to "work you performed" (including, by definition, work performed by others on behalf of the named insured) if the property damage results "from any part of the work itself" or that arises out of parts, materials, or equipment used in connection with the work.

Like its counterpart in general liability forms, this exclusion is responsible for much confusion and hard feelings. The following sampling of coverage denials submitted by subscribers over a short period shows the range of potential problem areas and illustrates the sort of "judgment calls" that the exclusion requires.

A mechanic's failure to tighten one or more rod nuts in the process of an engine overhaul resulted in total destruction of the engine.

Following a transmission repair, the mechanic improperly secured the oil line and the transmission was damaged when fluid escaped. (Editors' opinion: the mechanics of supplying lubricants is a separate operation—excluded—from the transmission repair—covered.)

Garage attendant improperly closed the hood of an auto after an oil check. The hood flew up and damaged roof, windshield, and itself. (Editors' opinion: opening and closing the hood is sufficiently separated from the "work" of checking oil so that the exclusion does not apply.)

The insured replaced a gasket on a valve cover. Because it was the wrong gasket for the job, the engine was ruined. (Editors' opinion: though the valve was part of the engine, the valve was the only part on which the insured worked and damage to engine should be covered.)

A cylinder head was not properly tightened during the process of an engine overhaul and so the engine block had to be replaced at twice the cost of the original repair.

The insured installed a dump stake body on a customer's truck frame. Because the installation was faulty, the truck overturned in the middle of a dumping procedure and the frame and dump stake body were both damaged. (Editors' opinion: faulty installation is excluded as that constitutes "work you performed," but the frame and body are covered as customer's property (frame) and insured's product (body) that are damaged by faulty work.

Metal grindings generated by an engine repair were left in an engine block.

The insured ran an air conditioner check for a customer and determined that added freon was needed. The customer returned with a malfunctioning air conditioner and the charge that the insured damaged the unit by "adding too much freon." (Editors' opinion: the inspection of the air conditioner can be seen as a separate "work" from the addition of freon and the damage to the unit did not result from the inspection. The "work" of adding freon is excluded.)

There is also a pertinent court decision to consider, the Texas case of Travelers Ins. Co. v. Volentine, 578 S.W.2d 501 (Tex. App. 1979). The claim was for damage to an engine following a defective valve job. The insurance company denied on the basis that engine repair was the "work performed' and damage to the engine was thus excluded. The court said that a "valve job" was the work that was performed and that damage to the rest of the engine was covered: ". . . it has been uniformly held that a liability policy containing such an exclusion does not insure the policyholder against liability to repair or replace his own defective work or product, but it does provide coverage for the insured's liability for damages to other property resulting from the defective condition of the work." Unfortunately, distinctions such as the one between "valve job" and "engine repair" are not always to be had.

Producer groups have called for a buy-back provision, believing that a deductible would offer a more palatable way of declining coverage on most such incidents and that the additional premium for the buy-back would be available to compensate insurers for claims exceeding the deductible. An auto dealers policy insured's "products," however, are ordinarily manufactured by another and the insured has neither control of the manufacturing nor sole responsibility (usually) in face of a claim. But, the insured's work is within the insured's direct control and there is much less likelihood of shared responsibility. In any case, ISO has not authorized a work performed buy-back at this time.

 14. Damage to Impaired Property or Property not Physically Damaged

"Property damage" to "impaired property" or other property not physically damaged if caused by:

(a) A delay or failure by you or anyone acting on your behalf to perform a contract or agreement in accordance with its terms.

(b) A defect, deficiency, inadequacy or dangerous condition in your "products" or "work you performed". But this exclusion does not apply if the loss of use was caused by sudden and accidental damage to or destruction of your "products" or "work you performed" after they have been put to their intended use.

Analysis

A claim for loss of use of property not physically damaged caused by the named insured's delay or failure to perform ("Your car will not be ready until after the weekend.") is not covered. Similarly, there is no coverage for a loss of use claim based on a defect, deficiency, inadequacy, or dangerous condition in the named insured's products or work performed; however, this particular exclusion does not apply if the loss of use was caused by sudden and accidental damage to or destruction of the named insured's products or work after they have been put to their intended use. Suppose, for example, that an auto dealer owner negligently repairs the transmission on a customer's auto and the very next day the transmission chews itself to pieces. In this instance, the loss of use of the auto during the time of the new repairs is a covered item under this form.

 15.Products Recall

Damages claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of your "products" or "work you performed" or other property of which they form a part, if such product, work or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.

Analysis

This exclusion related to products or work has to do with the recall of either when there is a known or suspected defect. Damages claimed by a customer for loss of use of the property during the recall period or for other costs associated with the recall are not covered by CA 00 25.

Though liability for loss of use of tangible property is included in the auto dealers coverage form's definition of property damage, this exclusion is one other instance in which a specific loss of use claim will be denied.

To distinguish between this exclusion and the one that precedes it, products recall addresses all damages charged to an insured whereas the previous exclusion deals only with loss of use.

 16.War

"Bodily injury" or "property damage" arising directly or indirectly out of:

a.War, including undeclared or civil war;

b.Warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign or other authority using military personnel or other agents; or

c.Insurrection, rebellion, usurped power, or action taken by governmental authority in hindering or defending against any of these.

Analysis

It is difficult to imagine an auto dealer insured being held legally liable for injury or damage due to war. Nevertheless, the exclusion has been a feature of standard liability forms for many years, and it currently is worded to reflect the post-terrorist attack thinking and language that most war exclusions now contain.

 17.Acts, Errors or Omissions

"Bodily injury" or "property damage" arising out of "acts, errors, or omissions".

Analysis

The phrase "acts, errors, or omissions" is a defined term in CA 00 25. It means any actual or alleged negligent act, error, or omission committed by an insured in the course of the named insured's auto dealer operations. This deals mainly with the insured's failure to comply with any local, state, or federal law or regulation concerning the disclosure of credit or lease terms to consumers in connection with the sale or lease of an auto. Such coverage is afforded in another section of CA 00 25 and is discussed in another article.

Liability Limits

 Limit of Insurance—Covered Autos Liability

For "accidents" resulting from the ownership, maintenance, or use of covered "autos", the following applies:

Regardless of the number of covered "autos", "insureds", premiums paid, claims made or vehicles involved in the "accident", the most we will pay for the total of all damages and "covered pollution cost or expense" combined, resulting from any one "accident" involving a covered "auto" is the Limit of Insurance for Covered "Autos" Liability Coverage shown in the Declarations.

Damages and "covered pollution cost or expense" payable under the Limit of Insurance for Covered "Autos" Liability Coverage are not payable under any applicable Limits of Insurance under Section II—General Liability Coverage or Section III—Acts, Errors, or Omissions Liability Coverage.

All "bodily injury", "property damage" and "covered pollution cost or expense" resulting from continuous or repeated exposure to substantially the same conditions will be considered as resulting from one "accident".

No one will be entitled to duplicate payments for the same elements of "loss" under this Coverage Form and any Auto Medical Payments Coverage endorsement, Uninsured Motorists Coverage endorsement or Underinsured Motorists Coverage endorsement attached this Coverage Part.

Analysis

These paragraphs spell out the liability limits that the insurer will pay for accidents arising from covered autos. The most that will be paid for damages and covered pollution cost or expense resulting from any one accident is limited to the amount shown for covered auto liability coverage in the declarations. The paragraphs pertaining to general liability coverage and acts, errors, or omissions liability coverage are noted because those coverages under CA 00 25 are separate from the covered auto liability coverage, and the insurer wants to make sure the limits of insurance for those coverages are not "stacked" onto a claim based on covered auto liability.

Just like an occurrence, all BI, PD, and covered pollution cost or expense resulting from continuous or repeated exposure to substantially the same conditions will be considered as resulting from one accident.

Payments for any auto med pay or uninsured/underinsured motorists coverages will not be allowed as duplicate payments under the covered auto liability coverage.