Logic & Language and Forms & Facts: Preventing Coverage Gaps

This column began in 2019 when I wrote a year-long series of articles based on my book “When Words Collide: Resolving Insurance Coverage and Claims Disputes.” In the April 2019 issue, I wrote about seven factors that enable insurance professionals to avoid or prevent claim disputes. One of those factors involved exposure analysis and the insuring process.

It comes as no surprise that the dominant cause of errors and omissions (E&O) professional liability claims is the failure to properly insure exposures to loss. In discussing the aforementioned preventative factor, I identified three sources of coverage gaps that lead to disputes and, too often, E&O claims: (1) the failure to identify and/or quantify exposures, (2) the failure to insure or risk manage known or suspected exposures, and (3) the failure to quality-control policy deliverables.

In this article, I’d like to address the failure to insure or risk manage known or suspected exposures. A case in point comes from Minnesota. The agent insures a waterfront property that owns a number of portable docks that are removed in the winter and stored. The property is insured under the current ISO CP 00 10 form, which has an exclusion for “Bulkheads, pilings, piers, wharves or docks.”

He believes that this exclusion applies only to real, not personal, property and that the docks are personal, not real, property since they are removable and not affixed to the real estate. The insurer disagrees, essentially asserting that a dock is a dock, regardless of whether permanent or temporary. Upon checking with other carriers represented by the agency, he discovered no consensus opinion one way or the other.

So, if there is an otherwise covered claim, is damage to the docks now in storage covered? One could argue noscitur a sociis, a contractual concept I discuss in my book, that the property listed in the exclusion, such as piers and wharves, are largely permanently-installed waterfront structures and these “docks” are not. However, why wait until a claim occurs to determine the answer to the coverage question and learn whether your coverage gamble paid off?

A better solution is simply to attach the ISO CP 14 10 – Additional Property Coverage endorsement to the CP 00 10 form. This endorsement says, “The following is withdrawn from Property Not Covered and added to Covered Property….” Disagreement resolved and potential claim denial and perhaps E&O claim avoided.

Another example of the role of prevention in resolving claim disputes is the use of an endorsement to clarify coverage intent. ISO’s CA 00 01 business auto coverage form employs a symbolling system to identify the categories of vehicles being insured and how they are to be covered.

Autos not owned by a business usually fall under Symbol 8 (“Only those ‘autos’ ‘you’ lease, hire, rent or borrow”) which is most often used only to provide liability coverage or Symbol 9 (“Only those ‘autos’ ‘you’ do not own, lease, hire, rent or borrow”) which can provide liability and physical damage coverage.

So, when an employee rents a car on a business trip, which symbol applies? The answer is determined by who is renting the auto. Is it the business (“you”) or the employee? Symbol 8 applies if the named insured (“you”) rents the auto and Symbol 9 applies if the employee rents the auto. Why is the distinction important? The distinction is important because, if you want coverage for physical damage to the auto, you can get that through Symbol 8, but usually not Symbol 9.

‘If there is a coverage solution to a known or suspected exposure, take care of it in advance.’

I have always argued that whoever pays for the rental is technically the entity that is renting the auto. Others argue that whoever signs the rental agreement (usually the employee) is the person renting the auto. Blacks Law Dictionary defines “rent” to include, “Consideration paid for use or occupation of property. In a broader sense, it is the compensation or fee paid, usually periodically, for the use of any rental property, land, buildings, equipment, etc.”

Based on this definition, I believe my interpretation is the correct one, but I can tell you there have been claims denied on the basis that, since the named insured didn’t sign the rental agreement, this is a Symbol 9 exposure. So, who’s right? The point I make here is that it doesn’t matter who’s right and, as with the portable docks above, we don’t want to wait until a serious loss occurs to find out.

The solution is to attach the ISO CA 20 54 – Employee Hired Auto endorsement to the CA 00 01 form. Problem solved. Not only does it establish that this is effectively a Symbol 8 exposure, but it also clarifies that coverage is primary, even with respect to the employee’s own personal auto policy. I believe this endorsement should be attached to every business auto policy. Better, I’ve advocated in the past that the endorsement language should be incorporated into the CA 00 01 form.

If there is a coverage solution to a known or suspected exposure, take care of it in advance. I can assure you that many of your competitors are not this diligent. Good agents and underwriters are.

John Putnam, CPCU, is a former Colorado agent and now a consultant who has done extensive pro bono work following several wildfires. Among the first of these was the Waldo Canyon fire. What surprised him the most when reviewing the homeowners’ policies of those affected was how few broadening endorsements had been added to the policies.

There is a reason that policies usually have dozens or even hundreds of endorsements available, and one of them is that some endorsements exist to broaden or at least clarify coverage, both of which reduce the likelihood of an uncovered claim and a possible E&O claim against the agent. Many of these endorsements are free or very inexpensive.

Knowledge is power. How well do you know the policy forms you’re selling or servicing? How familiar are you with the coverage options available for a particular line of insurance? This knowledge gives you an advantage, and it minimizes your own professional liability loss exposure.

If you will indulge me in a nonpersonal promotional moment, this is why I recommend a membership to Insurance Journal’s Academy of Insurance. For just $279 a year, you get access to over 200 educational programs and 350 hours of instruction from over 50 national experts. For information, email the Academy’s director Patrick Wraight at pwraight@ijacademy.com. According to Patrick’s LinkedIn profile, “I teach insurance. I help other insurance learners and leaders. I get to read policies. Don’t be jealous.” Can’t go wrong with a guy like that.

Wilson, CPCU, ARM, AIM, AAM is the founder and CEO of InsuranceCommentary.com and the author of six books, including “Why Insurance Doesn’t Cover the COVID-19 Pandemic,” available on Amazon.