DON’T ASSUME THAT EXPOSURES ARE SIMPLE
It is understandable to think that premises liability may be routine, but there are often elements or circumstances that cause complications. Even exposures that are essentially residential can become entangled.
One family owned a farmhouse and several properties as investments. They were all purchased and insured by a Commercial General Liability policy under the name of a limited liability corporation (LLC). The furnished farmhouse was used recreationally. After some family members and a couple of guests enjoyed a day of riding ATVs and dirt bikes, the family’s father left. He asked his son to lock up. The son and his friends were inside the farmhouse prior to locking things up. The son picked up a rifle that had been left out during a previous farmhouse visit. The firearm went off and its bullet struck one friend who, later, died. Matters worsened when the family’s request to cover the tragic loss was denied and they sued. The dispute was over whether the son qualified for protection as the policy’s named insured was an LLC.
See how a court addressed their dispute over eligibility.
Jay and Lorrie Lala owned a farmhouse that was purchased as an investment. The Lalas owned a variety of properties besides the farmhouse and all were bought under the name of Parker House Properties, L.L.C. (Parker House). The farmhouse, which was furnished, was not used as a residence.
The Lalas often used the farmhouse and land for various recreational purposes including hunting. Jay Lala, Nick Lala (one of his sons), Nick’s girlfriend and another friend, Hunter True, had used the location to ride dirt bikes and ATVs. Jay left ahead of the teens, asking his son, Nick, to lock up the farmhouse when they left. Nick noticed that a rifle, owned by his father, had been left on a bed after a previous use of the farmhouse. When Nick picked up the rifle, it went off. A bullet struck his friend Hunter in the abdomen and he later died at a hospital where had had been taken for treatment.
At the time of the fatal accident, the Lalas had a homeowners policy provided by Metropolitan Property and Casualty Insurance Company (Metropolitan) and a Commercial General Liability (CGL) Policy from Auto-Owners Mutual Insurance Company (Auto-Owners). The latter policy was written under the name of Parker House. The Lalas filed claims with both insurance companies, but Auto-Owners denied their claim. The Lalas and Metropolitan reached a settlement of $900,000 with Hunter’s parents and, after securing subrogation rights from the Lalas, Metropolitan sued to recover $450,000 from Auto-Owners. The latter filed for summary judgment and then filed an appeal after a lower court denied the motion.
The higher court re-examined Auto-Owners two primary arguments. One, that the loss circumstances were not covered since they did not involve Parker House’s business activities or interests and two, that there was no exposure for Parker House based on premises liability.
After consideration of the applicable policy language, relevant cases and testimony of expert witnesses that were part of the lower court hearing, the higher court shared its decision. It agreed with the lower court decision, ruling that Nick, in locking and securing the farmhouse, was acting in the business interest of Parker House. The LLC would derive a benefit from the farmhouse being locked and freed from dangerous conditions. An attempt to secure a firearm before locking the premises qualified Nick as a form of worker, acting on behalf of Parker House. The higher court also decided that, given an opportunity, a jury would conclude that a loss under a premises liability theory occurred. The lower court decision, in favor of Metropolitan was affirmed.
Metropolitan Property and Casualty Ins. Co. d/b/a MetLife Auto & Home and Economy Premier Assurance Co., Appellees, vs. Auto-Owners Mutual Ins. Co, Appellant. Iowa Supreme Court. No. 18-0129. Filed March 8, 2019. Affirmed.
https://cases[dot]justia[dot]com/iowa/supreme-court/2019-16-1972[dot]pdf?ts=1549032127 [downloaded 1/8/21]
Align The “Who” With the “How”
The situation above demonstrates the importance of making sure that how coverage is written aligns with who needs the applicable protection. Policies routinely identify the parties qualifying for its protection. Defined terms, which can easily be overlooked, are critical. They must be considered according to the nature of the party appearing as the named insured.
The family depicted above likely expected that writing coverage for their investment properties under the name of their LLC was logical. Their insurers were prepared to meet their coverage obligations and most did. However, insurers also challenge requests for protection that, in their opinion, fall outside of contractual terms. This was the course taken by the property owners’ commercial insurer.
Here is an excerpt of wording regarding coverage and exclusions found under the AAIS Commercial Liability Coverage Form Analysis Section of PF&M found in Advantage Plus.
The insurance company agrees to provide the commercial liability coverage described in the policy. However, the coverage is provided subject to terms and conditions of the policy being met. All contracts require consideration be provided and, in an insurance contract, the consideration is the insured’s payment of the required premium.
The policy terms related to cancellation, changes made to the policy, examination of books and records, surveys and inspections, and assignment or transfer of rights or duties also apply even though they are not contained in this coverage part. These are mentioned separately because they are not part of this coverage form. They are found in CL 0100–Common Policy Conditions which must be attached to every commercial lines policy.
When any of the following terms are used in the policy, the explanation in this section applies rather than the dictionary definition of the term.
- You and your
The entity named as the insured on the declarations. There can be more than one you or your.
- We, usand our
The insurance company providing the insurance coverage in this form.
A broad term meaning the actual declarations, supplemental declarations and schedules relating to this policy.
The first group of defined insureds is based on the type of business entity entered on the Declarations:
- Individual: The individual and his or her spouse are insureds. However, they are insureds only with respect to the conduct of the business for which the named insured is the sole owner.
- Partnership or Joint Venture: The named insured, its partners, members and their spouses are insureds. However, they are insureds only with respect to the conduct of the named insured’s business.
- Organization That Is Not a Partnership or Joint Venture: The named insured and all its executive officers and directors are insureds. However, each is an insured only within the scope of their duties for the organization. The named insured’s stockholders are also insureds but only for their liabilities as stockholders.
The next group qualifies as insureds, regardless the type of business entity:
- The named insured’s real estate manager. This can be a person or organization but if a person, he or she cannot be an employee of the named insured.
- If the named insured is an individual and dies the business may continue, so others become insureds. The named insured’s legal representative is an insured but only while acting within the scope of duties as such.
Any person having custody of the named insured’s property at the time of the named insured’s death is an insured but only with respect to liability arising out of the maintenance or use of that property and that person stops being an insured as soon as the legal representative is appointed.
The legal representative takes on all the named insured’s rights and duties under this coverage.
- The following are insureds when using the named insured’s mobile equipment but only if the use is with its permission:
- An employee of the named insured while using the equipment during the course of employment. If a fellow employee is injured, the employee that caused the injury is NOT an insured.
- Non-employees but only if they have no insurance coverage and the liability is due to the operation of the equipment. Organizations or persons legally liable for that non-employee’s conduct are also insureds. They are not insureds for any damage they cause to their employer’s owned or rented property, to property that employer is occupying or to property for which their employer is responsible.
- Insured status based on mobile equipment use described above does not apply for any loss that involves damage to the named insured’s owned or rented property, to property the named insured is occupying or to property for which it is responsible.
- The named insured’s employees. This is limited to only for acts that are performed within the scope of their employment. It is further restricted with employees not being insureds for bodily injury, personal injury or advertising injury to either the named insured or a fellow employee. Also, they are not insured for property damage to property owned by, rented to or loaned to employees or to partners, members or the partners or members spouses. Executive officers are not considered employees in this section.
- Any newly acquired or formed organization of the named insured. This applies only when the named insured has a majority interest in it. Newly formed or acquired joint ventures or partnerships are not insureds.
The newly acquired or formed organization is not an insured for any of the following:
- When it carries or has in some way other comparable coverage available to it
- After the policy period in which it was formed or acquired ends or 90 days after its formation or acquisition, whichever comes first
- For any bodily injury or property damage occurring before the date of acquisition or formation
- For any personal injury or advertising injury offense committed before the date of acquisition or formation.
Unless a partnership or joint venture is listed as a named insured on the declarations no person or organization is an insured in relation to the partnership or joint venture’s conduct either past or present.
Named Insured Description, Please
The dispute above involved more than one aspect of the policy, in particular:
- what party was described as the policy’s named insured?
- whether the person who handled a firearm that resulted in a tragedy held status as an insured?
- was the loss of the sort that was eligible for protection under the policy?
While Commercial General Liability policies grant covered status to a variety of persons/entities, it depends upon, primarily, the description of the named insured. Insured status may exist as a relative under certain circumstances, but the relationship may be irrelevant under others.
Handling any set of risks initially means having a basic understanding of risk elements. Such understanding leads to insights on what to expect regarding liability associated with, in this case, property ownership. It can be helpful to take a step back and review foundational information.
Here is a discussion on risk management and identification from Gordis on Insurance found in Advantage Plus.
Several steps must be taken to minimize risk before the insurance mechanism is brought into play. Insurance is actually only one phase or element of a broader area of protection against loss and is often the last step in the overall process of risk management. The process as described in this section is based on business exposures, but most will also work with personal exposures. In the nature of a broad and simplified outline, the usual steps in risk management are:
The term “exposure” has three possible meanings when used in this text:
1) Synonymous with risk: chance of loss by fire, radiation, accident, etc.
2) The danger of loss, particularly by fire, arising from what happens to another risk close by.
3) The sum total of values that, if damaged or destroyed, would cause loss under a policy; i.e., the value of everything a policy insures.
RISK IDENTIFICATION AND ANALYSIS
A careful survey of the operations of the business, its assets and exposures, plus the probability of a loss occurring and the potential severity of a loss highlight the potential losses. The analysis addresses the physical assets that may be threatened by damage or destruction, such as buildings, equipment and materials. It also considers crime losses, both the internal kind caused by employees and the external ones from sources outside the business; suits by government agencies, customers, members of the public, employees and contractors; and various types of interruption of business operations, among others.
What Is Your Narrative?
The more information that can be developed about a given situation, the greater the ability to identify exposures that must be addressed. Even before questions can be asked, familiarity should be built with the sort of exposures that are typically found with certain classifications.
Tools that can provide such knowledge are risk narratives. They focus on hundreds of individual business classifications belonging to more than two dozen business categories. They discuss key coverage areas related to those individual, commercial operations. They can be an important guide in the effort to address a prospect’s risks.
Below is a description of an operation from the risk narratives section of the Commercial Risk Survey found in Advantage Plus.
Category: Real Estate and Rental Property
SIC CODE: 6514 Dwelling Operators (excluding apartments)
NAICS CODE: 531110 Lessors of Residential Buildings and Dwellings
531311 Residential Property Managers
Suggested ISO General Liability Code: 63010, 63011, 63012, 63013
Suggested Workers Compensation Code: 9012, 9015
Description of operations: Dwellings are residential structures built to provide living accommodations for one individual or family through a rental agreement called a lease. The dwelling premises may include outbuildings, such as a storage shed or garage.
Property exposures are light. Ignition sources are from the electrical wiring, heating, air conditioning, and cooking systems. If the dwelling was converted from a prior occupancy, it should meet current residential building codes. There should be hard-wired smoke/fire alarms. Items provided by the building owner, such as kitchen or laundry appliances, may be stolen by tenants or outsiders.
Crime exposure is generally limited to employee dishonesty. Background checks should be conducted on all employees. Money and securities exposure may be a concern, particularly if there are multiple dwelling units and payment is in cash. Payments by mail and by check are the preferred methods for collecting rents. Monetary transactions must be controlled through the use of receipts and regular monitoring. Deposits must be made on a regular basis, with appropriate security provided during collections.
Inland marine exposure may include accounts receivables for rents due, computers, and valuable papers and records for lease, mortgage, and tenant information. There may be contractors’ equipment for maintenance, repairs, and lawn care. Duplicates of all data should be kept off premises for easy replication in the event of a loss.
Premises liability exposure is limited due to the low number of tenants at each dwelling unit. All dwellings should meet all life safety codes and be in compliance with codes on smoke and fire detection, fire extinguishers, and carbon monoxide detectors. Lead exposure, particularly on windowsills, must be considered if the dwelling was built prior to 1980. To prevent slips, trips, or falls, the dwelling must be well maintained with floor covering in good condition. The number of exits must be sufficient and well marked, with backup lighting in case of power failure. Steps should have handrails, be well lighted, marked, and in good repair. Sidewalks and driveways should be free from defects and cleared of ice and snow in inclement weather. The landlord must provide a secure dwelling to tenants. Locks should be changed when a new tenant moves into a unit. There should be a maintenance activity log to document the owner’s response to tenants’ needs. Personal injury losses may occur due to alleged wrongful eviction, invasion of privacy, or discrimination. Clear guidelines for tenant acceptability are important.
Automobile exposure is generally limited to hired non-owned for employees running errands. If there are owned vehicles, such as those used to service dwellings, any driver should have a valid driver’s license and acceptable MVR. Vehicles must be maintained and records kept in a central location.
Workers compensation exposures are normally service, janitorial, or maintenance-related. Back pain, hernias, sprains, and strains from lifting and working from awkward positions are common. Skin and lung irritation can result from working with cleaning chemicals and paint. Interaction with tenants can be difficult. Employees should be trained to deal with difficult situations. Animals owned by tenants can bite or kick workers.
Minimum recommended coverage:
Building, Business Personal Property, Business Income and Extra Expense, Employee Dishonesty, Money and Securities, Accounts Receivables, Computers, Valuable Papers and Records, General Liability, Employee Benefits, Umbrella, Hired and Nonownership Auto, Workers Compensation
Other coverages to consider:
Earthquake, Flood, Computer Fraud, Contractors’ Equipment, Cyberliability, Employment-related Practices, Business Automobile Liability and Physical Damage, Stop Gap Liability