Interesting Insurance Puzzle - coverage question

[Rob]

Here is an interesting insurance conundrum and I'd like to get some expert opinions. This is a little long (not too bad) but it is one of those "makes you go hmmmm" situations I believe is a challenging insurance puzzle (at least for me). This is a commercial General Liability question and the question was posed to me by my customer:

The customer is a heavy equipment repair business (Husband and wife). They are incorporated and work out of their home. He travels to business sites to repair heavy equipment.

They have a detached structure where he may bring an engine back to rebuild or work on. The value of this detached structure is more than the "other structures" coverage amount on their homeowner's policy since they built it themselves and is about the same size as their primary dwelling. Their Allstate agent advised that it wouldn't be covered since it is used in business and which brings us to an obvious coverage deficiency should this structure burn down.

Now the question: If their corporation were to lease the structure from them (as individuals) and pay rent to them (as individuals) for the use of the detached structure, would said detached structure be covered under "Fire Legal liability" of their corporation's CGL policy? I was suspecting that since they have an interest in both the property and the corporation that there would most likely be a coverage problem. Would this type of question be more appropriate for an attorney to address?

If not, I could write a homeowners policy for them but the business use of the structure could pose an underwriting problem, so if not, could we write a commercial building policy, even though it is on their property and it is zoned as residential?

Any input or advice would be greatly appreciated. I won't take your advice and run with it (unless you are 100% confident), I'm just looking to get some input from others in the industry to see how you view this.

Thank you

Rob Winter

[InsAgentSF]

Hmm it's interesting. My guess is that you have to insure the property separately... I just don't think Fire Legal will fly in this case...

[Rob]

Yes I don't think it will either. I just want to be able to point to somewhere in the policy that says it won't fly. It makes sense that it wouldn't or else everybody would just insure their building under this sort of "arrangement".

Basically, I'd like to say "no it wouldn't be covered because...." and then "however the solution would be...." and then either discuss a HO3 policy or a commercial building policy.

[InsAgentSF]

Well Let's see. Fire Legal defines as "coverage protects isnured if isnured is found to be legally liable for damage caused by fire, lightning, or explosion to that portion of the premises isnured leases". In this case insured cannot lease a property that he owns to himself...

[CObroker]

Fire legal only covers the inside 4 walls of the rented/leased area and possibly the ceiling but not the roof (from what I remember in CIC). So the outside walls, roof etc wouldn't be covered. That is why you will see the coverage in such low limits. Usually 50,000 100,000 300,000 (higher options available with some carriers)

If the company is a seperate legal entity like a corporation they could put the structure in the companies name. or- They could lease the building to the company and require in the lease that the company is responsible for insuring the building.

I had a machine shop like this. I wrote the other structure seperately on a commercial property policy and covered the contents with the same. The building was on the same lot as the home and I wrote both with two different standard carriers.

[Rob]

Well Let's see. Fire Legal defines as "coverage protects isnured if isnured is found to be legally liable for damage caused by fire, lightning, or explosion to that portion of the premises isnured leases". In this case insured cannot lease a property that he owns to himself...

Their corporation (a separate entity) would be leasing the building from the individuals. Their corporation would actually be writing a check each month. So they aren't leasing to themselves however I see a conflict in that they have an interest in each.

[Rob]

Fire legal only covers the inside 4 walls of the rented/leased area and possibly the ceiling but not the roof (from what I remember in CIC). So the outside walls, roof etc wouldn't be covered. That is why you will see the coverage in such low limits. Usually 50,000 100,000 300,000 (higher options available with some carriers)

If the company is a seperate legal entity like a corporation they could put the structure in the companies name. or- They could lease the building to the company and require in the lease that the company is responsible for insuring the building.

I had a machine shop like this. I wrote the other structure seperately on a commercial property policy and covered the contents with the same. The building was on the same lot as the home and I wrote both with two different standard carriers.

Thanks that is very helpful. If you read this post again, what resource could I go to in order to show insured in writing that it does not cover the outside walls and roof?

[lauren]

Fire Legal Liability does not limit to inside walls and ceilings. I don't know what CIC instructor taught that, but it's not true. It applies to the PREMISES rented to the insured. It does not define premises so there is no way an insurance company can limit that to mean interior walls and ceiling. Maybe he was trying to say the tenant is just renting the interior walls and ceiling, but that is a ludicrous statment. The tenant is renting the BUILDING.

Also, the corporation leasing the building from the individuals would not negate the coverage. We have MANY clients that form separate companies to own and lease back buildings to the Named Insured, mainly for tax and investment purposes. Since they are separate entities, even with identical ownership, coverage COULD apply. Most Cross Suits exclusions, if the policy has one, are Named Insured vs Named Insured. If the policy has a Cross Suits exclusion for any insured vs any insured, then you could have a problem since the building owner should be an additional insured on the policy.

[b]However, Fire Legal Liability is not a valid way to insure the building for a couple of reasons:[/b]

1) You have to prove negligence on the part of the Corporation for the policy to pay anything to the building owner.

2) There are many more perils that can damage the building that are not fire.

The best way to insure this building is to add it to your commercial policy. We insure many contractors that use buildings on their residence premises for storing equipment and that is how we handle the exposure.

[mccluney]

Lauren was right about Fire Legal; and the structure or contents defintely not covered under homeowners policy. The individual should lease the structure to the corporation with the requirement that the corporation provide the insurance on the building. Of course an attorney should draw up the lease. The zoning could be a problem. The more obvious solution
is for the corp to lease storage space elsewhere and not use the structure at the home for any business storage.

[Pauran]

Rob,

Your issue is not complicated. I'm glad you asked the question for two reasons. The first is that your E & O carrier would probably not be happy with your solutions and so reaching out was good. The other reason is that fire damage legal liability is quite a misunderstood coverage and any discussion helps. If I had to tally, I would say I get asked to explain this coverage more than all others combined. I'm not quite sure why a lot of people don't get it since it's front and center in virtually all GL policies. Perhaps it's because of convoluted explanations like the one that follows.

As Lauren indicated, FDLL is meant to cover a tenant's legal liability for rented premises only. That is necessary because the CGL policy excludes coverage for "care, custody and control, and since a tenant is in care custody and control of the space it rents/leases then some coverage is necessary. FDLL is a way to give back what is taken away. One should select a limit sufficient to repair/replace the rented space.

So, having said all that your issue can be summed up as follows:


1. The homeowners policy is not suitable for insuring Commercial Risks.

2. Fire Damage Legal Liability is also unsuitable since its scope is so limited.

3. The zoning may be an issue for the municipality but it's not relevant with respect to the insurance.


You should recommend that the:


1. Property owners (individuals) insure the building & the premises liability under a commercial policy (lessors risk) and/or

2. The corporation can do the same but only through a lease agreement. If this is done you should, at the very least, have the corporation's policy name the owners as additional insured's. Even if this option is selected the property owners should still carry their own liability policy.



Hope this helps.

[Rob]

Rob,

Your issue is not complicated. I'm glad you asked the question for two reasons. The first is that your E & O carrier would probably not be happy with your solutions and so reaching out was good. The other reason is that fire damage legal liability is quite a misunderstood coverage and any discussion helps. If I had to tally, I would say I get asked to explain this coverage more than all others combined. I'm not quite sure why a lot of people don't get it since it's front and center in virtually all GL policies. Perhaps it's because of convoluted explanations like the one that follows.

As Lauren indicated, FDLL is meant to cover a tenant's legal liability for rented premises only. That is necessary because the CGL policy excludes coverage for "care, custody and control, and since a tenant is in care custody and control of the space it rents/leases then some coverage is necessary. FDLL is a way to give back what is taken away. One should select a limit sufficient to repair/replace the rented space.

So, having said all that your issue can be summed up as follows:


1. The homeowners policy is not suitable for insuring Commercial Risks.

2. Fire Damage Legal Liability is also unsuitable since its scope is so limited.

3. The zoning may be an issue for the municipality but it's not relevant with respect to the insurance.


You should recommend that the:


1. Property owners (individuals) insure the building & the premises liability under a commercial policy (lessors risk) and/or

2. The corporation can do the same but only through a lease agreement. If this is done you should, at the very least, have the corporation's policy name the owners as additional insured's. Even if this option is selected the property owners should still carry their own liability policy.



Hope this helps.

Yes thanks, although you will note that I didn't have any solutions which could put me in an E&O situation as I was fairly certain from the very beginning that FDLL was not going to cover them properly. In fact I told them no, but when they wanted an explanation, I really couldn't pinpoint the exclusion. The most obvious is what Lauren stated in that there are other perils to consider other than fire.

After I said no, they told me their homeowner's coverage was with Allstate and that it wouldn't cover that building (essentially a large detached garage where they perform some of their work). I advised in order for me to obtain a homeowners policy that may cover the building, we would need to find a carrier willing to do it and endorse the policy in some way to allow the business use. However this didn't seem likely or realistic and I advised I would research it further.

Which led me to posting here. I suppose that it was simple all along and now realize the best solution would be to write a commercial building policy.

I'd like to thank everyone who responded for their input.

[badger]

why hasn't anyone thought of writing a basic main street BOP, I know the residence doesn't negate eligibility

[Rob]

why hasn't anyone thought of writing a basic main street BOP, I know the residence doesn't negate eligibility

The standard carriers that write BOP's will not accept the insured's operations. I'm not sure about your state but here in California, a risk that repairs heavy construction and farm equipment, heavy trucks, dozers, etc would not be eligible for a BOP.

[yoyowordup]

Some BOP writing carriers might be willing to exclude products/compl ops and attach a designated premises endorsement. Then it really doesn't matter that they repair heavy equip.

[DEG]

There are companies that offer CGL coverage to individuals with a Personal Liability endorsement for the PL exposures at the property. But, both coverages are within the single limit. I think Northland does this...but don't hold me to it.