Designated Premises Exclusion NYTimes On Homeowners Deductibles & Damage to a Tenant’s Apartment Updates on C of I and TNCs
Designated Premises Exclusion—Score One for the Home Team.
I hate the designated premises exclusion endorsement. It links coverage to a specific location rather than providing broad coverage throughout the coverage territory. While it’s probably needed in certain situations (e.g. the insured operates multiple locations and the policy is intended to cover just one), it is being added indiscriminately to all policies by too many insurers.
At first glance it might seem that if the insured lists all its locations, there won’t be a problem. And if the insured didn’t list a location, it should be responsible for its failure. But it’s not that simple. Look at what the exclusion says:
This insurance applies only to “bodily injury,” “property damage,” “personal injury,” “advertising injury” and medical expenses arising out of:
- The ownership, maintenance or use of the premises shown in the Schedule and operations necessary or incidental to those premises (emphasis added)…
A simple situation that’s trapped several clients over the years involves an insured being sued for an occurrence at a location to which it never had any connection. It occurs because the client’s name is similar to the actual owner or because the plaintiff ’s attorney just plain made a mistake. It would seem that such an error could be quickly resolved, but frequently the plaintiff ’s attorney wants to wait until the matter comes before a judge before he or she lets anyone out of the suit. The client’s insurer declines to defend, stating that the policy includes a designated premises endorsement and the occurrence on which the claim is based didn’t arise out of the designated premises or operations necessary or incidental to the premises. The client is forced to retain its own counsel to get out of the lawsuit. Even if the final expense is small, the result is an irate client. The CGL policy without the designated premises endorsement easily takes care of such a claim.
Trader Ed’s, a restaurant in Hyannis, MA, found out the hard way that there can be more extensive problems when a policy contains the designated premises endorsement. John Shea, Trader Ed’s owner, organized a trip from Hyannis to a Jimmy Buffet concert. He rented a bus to transport people, including customers of Trader Ed’s. Trader Ed’s supplied a gas grill, food and drinks and three employees to operate the grill for a tailgate party before the concert. The purpose of Trader Ed’s involvement, according to Shea’s deposition testimony, was to promote its business and its employees’ morale.
The trip ended badly. A Trader Ed’s employee had trouble lighting the grill and so resorted to pouring gasoline on the charcoal to start the fire. When he struck a match, the gas can exploded severely injuring one of Trader Ed’s customers. She sued for damages.
Trader Ed’s liability insurance company, US Liability (USLIC), denied coverage. When Trader Ed’s sued for coverage, the insurer argued that the “claim arises from a purely social event, entirely unconnected to Trader Ed’s business, and that even if the event was connected to the business, it did not involve ownership, maintenance or use of the premises, or activities necessary or incidental to the premises.”1 The court ruled against USLIC on its first argument—it felt the event was connected to Trader Ed’s business. But it ruled against the insured on the second count, holding that, while the event may have been connected to Trader Ed’s business, it was not connected to the premises insured by the policy as required by the endorsement. Trader Ed’s lost coverage.
This exclusion can also make coverage illusory for some insureds. For example, many of the activities of a real estate office, such as rental, showing, and selling of homes and apartments take place away from the designated premises. It’s not clear how a policy with a designated premises endorsement will respond to claims arising from away-from-the-office activities. They are clearly part of the insured’s business, but are they necessary or incidental to the insured’s premises?
A recent court decision took a more pro-policyholder approach. On March 14, 2006, a large portion of the Kaloko Dam in Kīlauea, Kauai collapsed, releasing over three million gallons of water, resulting in the loss of seven lives and extensive property damage. At the time of the collapse, the dam was owned by James Pflueger. Pflueger had purchased the property from C. Brewer & Co, Ltd. Pflueger sued Brewer claiming that Brewer was aware of the dam’s structural instability.
Brewer sought coverage from its insurance carriers. James River Insurance Company, Brewer’s insurance carrier when the loss occurred, denied liability because the policy contained a designated premises endorsement and the dam location was not listed in its policy. The circuit court ruled in favor of James River. The Intermediate Court of Appeals wanted to remand the case to the lower court to resolve ambiguities. Both parties appealed to the Hawaiian Supreme Court.
The Supreme Court noted that “the injury and damage arguably relate to C. Brewer’s ‘use’ of its corporate headquarters to make negligent business decisions.”2 The court pointed out that “All major business decisions concerning the System, including… the entrance into various agreements to maintain the (Dam) System, and the eventual sale of the land underlying the Reservoir, were apparently made at C. Brewer’s corporate headquarters. Therefore, a causal connection could possibly be found between C. Brewer and its… operation of the designated premises and the injuries….”3
The court further pointed out that “James River seeks to rewrite the term ‘arising out of ’ to limit liability to injury and damage occurring on designated premises. Such a construction of the endorsement would effectively convert the James River policy from a CGL policy to a premises liability policy that limits coverage to certain premises.”
The court also agreed with Brewer’s contention that the advertising coverage included in the personal and advertising injury section of the policy would be meaningless if the insurer’s argument was accepted because, although decisions regarding advertising would be made at the designated premises, the injury would occur at other locations. The Supreme Court ruled in favor of the insured.
Practice Tip: If possible, have the designated premises endorsement removed from your clients’ policies. If that’s not possible, let the insureds know that policies contain a designated premises endorsement, point out its shortcomings, and remind them to notify you if they are involved with any other locations in any way.
Homeowners Deductibles and Water Damage to Tenant’s Apartment—The NY Times Weighs In
Last week in the NY Times, two columnists wrote about personal insurance issues. I’m tempted to respond with a letter to the editor, but I’ll give you my thoughts first.
In “Your Money Adviser,” Ann Carrns wrote about HO deductibles.4 Her article was based on a report by Quadrant Information Systems that, among other points, noted that “switching from a $500 deductible to a $1,000 deductible results in an average savings of 6% nationally (from a high of 25% in North Carolina to a low of 1% in Kentucky).”5 She advised considering the savings for a higher homeowners deductible. She was right, but she didn’t take it far enough. She should have discussed other coverage, particularly auto physical damage deductibles. While homeowners and auto physical damage are two different animals for insurance purposes, when considering deductibles that doesn’t matter; a retained loss is a retained loss. Just as it may make sense to save premium on a homeowners policy with an increased deductible, it may pay to increase auto physical damage deductibles.
To evaluate whether a deductible makes economic sense, you have to answer two questions. First, can you afford to pay the higher deductible? If you can’t, don’t increase the deductible. (You probably need to increase your savings, but that’s another topic.)
The second question is: How long will it take for the reduction in premium to reimburse you for the higher deductible if you have a loss, and what’s the likelihood that you’ll have more than one loss during that period? Most of us want that to be a relatively short period—five to ten years at the most. Projecting out further than that involves too many unknowns.
To answer the second question, we need to call upon a topic you probably last heard about in Insurance 101: the law of large numbers. It applies to deductibles just as it does to all other insurance probabilities.6 Most of us can’t get the advantage of the law of large numbers in determining what deductible to purchase for homeowners insurance—even a lifetime of homeowners insurance exposure won’t generate enough losses to get a truly reliable answer. Fortunately with personal insurance we’re dealing with low deductibles, so a conservative guesstimate will suit our needs. (Although an actuary would probably shudder, I broaden my supply of incidents by regarding the extended warranties I don’t buy as a form of insurance deductible. I may sometimes guess wrong, but over the years I’m way ahead. Making the decision not to buy extended warranties a part of my general approach to risk retention makes me more comfortable with higher deductibles when a loss does occur.)
The next step is to calculate how long it would take for the savings to equal the increase in deductible and to see if that sounds reasonable. If I can save $150 a year by increasing the collision deductible on my cars from $500 to $1,000, it will take me less than four years to recoup the increased deductible. I’d take that bet. Our collision frequency is far less than one claim every four years. If you don’t have any young drivers on your policy, yours probably is too.
Another advantage of increasing your deductible is that you wind up with a cleaner insurance record. A friend of mine called as I was writing this to say that her homeowners insurance was being nonrenewed due to claims history. The nonrenewal notice listed three windstorm losses— she lives on the south shore of Long Island—but what triggered the non-renewal was a $1,000 theft claim she recently reported. A higher deductible would have discouraged her from submitting the claim and protected her insurability.
We all need insurance, but use it wisely. If my home burns down, I can’t write a check to rebuild it. But if I scrape my fender and it’ll cost $600 to repair it, I can handle it. Your insureds probably can also. It doesn’t make economic sense to insure losses you can retain.
In the second article in the Sunday real estate section, Rhonda Kasysen answered a question from a tenant without renter’s insurance whose apartment was damaged by water from another apartment.7 She pointed out that the landlord must fix whatever caused the leak and repair the damage to the structure. If the leak was caused by the other tenant, the other tenant would be responsible for the damage to the letter-writer’s property. If it was the building owner’s fault, the landlord would be responsible. She recommended suing both of them, if it comes to that.
She then recommended that the letterwriter carry renter’s insurance for the next time. Good advice, but again she should have gone further. Even more important than protection for possible damage to the tenant’s property is the liability exposure gap that will be closed by a renter’s policy. Typical tenants may have $50,000 in property that they could lose, but we all have absolutely unlimited liability exposure. She should also have recommended a personal umbrella. A client’s son was sued by his building owner’s insurance company under its subrogation rights for $250,000 to cover the cost to repair the damages to the building where he lived that were caused by a fire originating in his defective toaster oven. Like the letter-writer, the son didn’t have insurance. He was lucky, though. It could have been a $2,500,000 subro claim.
Certificate of Insurance Update
The new NY certificate of insurance law takes effect on July 28, 2015. I’ve written about the new law several times,8 but here’s a brief summary written by Cassandra A. Kazukenus, an insurance defense attorney with Hurwitz & Fine in Buffalo: “(The new law)…prohibits a governmental entity or person from requiring, in a certificate of insurance, ‘the inclusion of terms, conditions or language of any kind, including warranties or guarantees, that the insurance policy provides coverage’ that is not included or found in the policy….(It) also prohibits a certificate of insurance in New York from ‘amending, extending, or altering the coverage provided by the policy to which the certificate of insurance refers,’ and prohibits a governmental entity or person in New York from making the issuance of a certificate of insurance a condition of the contract unless it is on a form promulgated by the insurer or is a standard certificate of insurance….” 9
Forms that deviate from standard forms are permitted only if they are approved by the NY Department of Financial Services. The DFS is currently accepting filings of individual forms; requests for approval can be emailed to inscert@dfs.ny.gov. The department plans to post a list of approved forms on its website prior to July 28.
Practice Tip: If you’re asked to complete a non-standard certificate form, check the DFS website to see if it’s approved. If the form isn’t listed, don’t use it. Starting July 28th, it’s against the law.
Uber/Lyft/TNC Update
Farmers Insurance, a major independent- agency carrier, has introduced seamless coverage for Uber, Lyft and other transportation network company (TNC) drivers in California. It’s good to see independent- agency carriers entering the field. TNCs are a huge market. Uber expects to hit $10 billion in sales this year; Lyft $1.2 billion.10 Let’s hope some carriers in our area make coverage available through independent agents. There are lots of drivers who need the coverage.11
