RISK MANAGEMENT
Mobile equipment coverage will be affected by
ISO’s 2004 CGL policy amendments
By Donald S. Malecki, CPCU
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… All land vehicles subject to a compulsory insurance or financial responsibility law or other motor vehicle insurance law in the state where it is licensed or principally garaged are no longer covered under the CGL policy and, instead, will be considered “autos.” |
In attempting to clarify coverage under the CGL, ISO is going to create a lot of work for everyone. And, if that’s not enough, coverage gaps will undoubtedly result as well, all because of something that happened in 1956. That was the year when voluntary coverage against injury by uninsured motorists was introduced. Its purpose then was to buttress the weaknesses of financial responsibility laws in compensating innocent victims for injuries sustained as occupants of covered autos or as pedestrians and caused by at-fault motorists who did not maintain insurance or by hit-and-run motorists.
Since becoming mandatory in many states for both private and commercial auto risks, uninsured motorists coverage not only is a common subject of dispute, but also is undoubtedly the leading subject of litigation in the United States. What is complicating matters—the subject of this article—is that insurers of the Commercial General Liability (CGL) policy are being hit with a barrage of claims involving mobile equipment, where the result is that insurers of the CGL policy must provide uninsured motorists coverage.
Concluding that it is not the CGL policy that should provide uninsured motorists coverage, but rather the Business Auto, Truckers, and Motor Carriers policies, ISO has taken steps to ensure that intent is understood.
The CGL policy and mobile equipment
Purely from a commercial insurance standpoint, liability coverage for mobile equipment under the CGL policy had its genesis in 1941, when standard liability forms were first introduced.
During this earlier period and until 1965, mobile equipment was not separately defined. The way coverage for this equipment was determined was by referring to the types of equipment specifically excepted by the defined term “automobile.” When the CGL policy was restructured significantly in 1966, one of the new additions was a definition of “mobile equipment.”
A new condition titled “Financial Responsibility Laws” also was added in 1966 in order to certify registered mobile equipment under financial responsibility laws of the states and Canadian provinces. This condition was applied as follows:
Say a certain self-propelled motor vehicle, not designed for on-the-road use, were to be involved in an accident on a public highway and found to be subject to the financial responsibility law of the state where it was licensed or principally garaged. The owner of this mobile equipment would be found to be liable and would have had to pay damages. The CGL policy, in effect, would certify that it could be considered as providing the coverages and limits prescribed by the financial responsibility law that required such proof. It also was a condition here that the named insured was to reimburse the CGL insurer for any payment made by the insurer that it would not have had to make in the absence of this provision.
This Financial Responsibility condition also appeared in the 1973 edition of the CGL policy until it was eliminated with the introduction of the 1986 CGL policy provisions. What was then required was the attachment of an endorsement titled Motor Vehicle Laws, CG 99 01 11 85.
This endorsement was intended to serve the same purpose as the policy condition it replaced in 1986, with two exceptions, one of which was very important. The exception that was not overly important was that the endorsement specifically referred to the coverages applicable, such as liability, no-fault (introduced in the mid-1970s), uninsured and underinsured motorists (introduced in 1980). The most notable and important exception was that, for the first time, the burden of determining the public highway usage of mobile equipment and the need for the endorsement fell upon named insureds.
As the trend reveals, the intent of insurers, in relation to mobile equipment under the CGL policy, has been to provide both uninsured motorists and underinsured motorists, in addition to other required coverages mandated by the applicable law, such as no-fault. What eventually has overwhelmed insurers, however, is the number of cases seeking uninsured and underinsured motorists coverages in relation to mobile equipment accidents, such as agricultural equipment, and forklifts.
Representative of such cases is Bills v. United States Fidelity & Guaranty Company, 280 F.3d 1231 (U.S.C.A. 9th Cir. 2002), where a front-end loader, as a self-propelled vehicle, was considered to be a motor vehicle for purposes of the uninsured motorists coverage. What is uncertain is whether coverage applied despite the absence of the Motor Vehicle Laws Endorsement, CG 99 01, which actually was a burden of the named insured to request.
The end of coverage under CGL?
Effective with its December 2004 CGL policy amendments, ISO is withdrawing the Motor Vehicle Laws Endorsement, CG 99 01. (Apparently this endorsement did not stop coverage from being provided despite its absence in the CGL policy.) In doing so, ISO states that this endorsement was developed before uninsured motorists coverage or no-fault were required coverages in many states and that such mandatory coverages, dealing with mobile equipment, can be more appropriately handled by commercial auto insurance.
What this means is that all land vehicles subject to a compulsory insurance or financial responsibility law or other motor vehicle insurance law in the state where they are licensed or principally garaged are no longer covered under the CGL policy and, instead, will be considered “autos.” What begs some question here is whether such a vehicle could be viewed as an auto in some cases and a general liability exposure in another.Say, for example, a forklift is used on the highway and therefore is subject to the law. What happens, however, when that same forklift, while being operated, is involved in an accident in a warehouse? Is the CGL policy then applicable? What about licensed vehicles? Are they always considered to be autos for purposes of public road use and during the operations exposure?
Whatever the answers may be, to meet this objective of removing coverage from the CGL policy, the following provisions of the CGL coverage form require amendments: The aircraft, auto or watercraft exclusion (g), making clear that the operations exposure of certain machinery and equipment, within the “mobile equipment” definition (f)(2) and (f)(3) is not excluded but remains covered. There also are new definitions of “auto” and “mobile equipment.”
The definition of “auto” is expanded to mean “[a]ny other land vehicle that is subject to compulsory or financial responsibility law or other motor vehicle insurance law in the state where it is licensed or principally garaged.”
The definition of “mobile equipment,” on the other hand, includes a new paragraph stating that such equipment does not include any land vehicles that are subject to compulsory or financial responsibility law or other motor vehicle law in the state where they are licensed or principally garaged. These land vehicles subject to compulsory or financial responsibility law or other motor vehicle insurance law will now be considered to be “autos.”
ISO also is introducing a commercial auto endorsement titled Changes In Coverage Forms—Mobile Equipment Subject to Motor Vehicle Insurance Laws, CA 00 51 12 04. Its purpose is to allow the commercial auto forms to better track with the CGL policy changes by amending the definitions of “auto” and “mobile equipment” in the commercial auto policies as well.
Thus, mobile equipment that meets the requirements for compulsory insurance or financial responsibility or other motor vehicle laws will, by the attachment of this new mandatory endorsement, be considered an “auto.” This endorsement also makes clear that the operations exposures having to do with certain mobile equipment under a commercial auto policy remain covered under the CGL policy.
The big task
Determining what mobile equipment currently owned, non-owned or hired by businesses may be subject to a compulsory insurance or financial responsibility law or other motor vehicle insurance law where such equipment is principally garaged is not an easy task. Even trying to determine what “principally garaged” means is not always easy, particularly when a vehicle is used out of state for long periods. The motor vehicle laws of many, if not most, states not only are different, but also are not presented in an orderly fashion. One can take hours to go through these laws and never find the answers sought.
The motor vehicle law of New Mexico, for example, states that every motor vehicle, trailer, semi-trailer and pole trailer when driven or moved upon a highway is subject to the registration and certificate of title provisions of the Motor Vehicle Code. It then has six broad categories of exceptions including any implement of husbandry (a thorn in the side of CGL insurers) that is only incidentally operated or moved upon a highway.
The vehicle and traffic law of New York states that every vehicle that is operated or driven on a public highway and that is propelled by any power (other than muscular power), trailers, semi-trailers and tractors is subject to licensing. Among vehicles not subject are tractors used exclusively for agricultural purposes, fire and police equipment, farm equipment, vehicles for snow plowing, other than for hire, and self-propelled caterpillar or crawler-type equipment while being operated on the contract site.
Considering the legality of determining what may or may not be subject to these laws, it may be wise for agents and brokers to serve solely as bearers of the bad news and leave the task of determining the applicable laws to attorneys of insureds, particularly since some questions about these changes cannot readily be answered. This means that insureds need to be informed rather quickly, preferably in writing, about these impending changes and what it is likely to mean in terms of cost.
On the subject of cost, insureds should not look forward to any reduction in CGL policy premiums when mobile equipment is covered by a commercial auto policy. They should, however, be informed to expect an additional cost for coverage under the commercial auto policy. What rates will be used remains to be seen. Certainly insurers cannot use mobile equipment rates when such equipment is now considered to be an auto, or can they? Anything is possible.
What could be a major glitch is when the CGL and commercial auto policies are written by different insurers and/or the expiration dates of these policies are different.
The ideal situation, in other words, is when one insurer writes both coverages and the inception dates are identical. Unfortunately, this is not always the case. So what may happen is that the CGL will no longer cover certain mobile equipment considered to be an auto, but the commercial auto policy will not yet be amended to recognize coverage for such mobile equipment to be considered as autos.
This type of situation could result when, for example, the CGL policy is amended to effect this change in March 2005, but the commercial auto policy does not have an expiration until July 2005. The result is a gap confronting the named insured. Depending on the circumstances, this nonconcurrency in dates between both policies could have an adverse effect on insurers, too.
Consider, for example, where the commercial auto policy with an effective date of March 2005 is written with a symbol 1 (any covered auto) for liability, symbol 2 (owned autos only) for physical damage, and symbol 6 (owned autos subject to compulsory uninsured motorists law) for uninsured and underinsured motorists coverages. This policy also is amended with the Changes In Coverage Forms—Mobile Equipment Subject To Motor Vehicle Insurance Laws, CA 00 51 12 04. The CGL policy, on the other hand, has a July 2005 expiration and has not yet been amended with this latest ISO change (or there may be no intention to amend it).
Depending on the facts of each case, it may turn out that there is another insurance problem or, in other words, duplication of coverage between the CGL and commercial auto policies. It is also possible where contractors’ equipment written for physical damage coverage with a $5,000 deductible on an inland marine form could also be covered by the commercial auto policy’s physical damage coverage for a lesser deductible amount. At best, it would appear that problems confront not only businesses, but also their insurers.
Additional factors to consider
Another endorsement that needs to be issued with the commercial auto policy is titled Mobile Equipment, CA 20 15 10 01. This is the document that shows the coverages, covered auto symbols, limits, and premiums applicable to mobile equipment to be covered by the commercial auto policy.
This endorsement will eventually be required to effect coverage under a commercial auto policy, since this endorsement states that it provides only those coverages where a premium is shown in the Schedule, and the coverages apply only to the vehicles shown as covered autos.
The endorsement, however, may not be necessary, at least for the first year, where, in the above example, the commercial auto policy is amended by Endorsement CA 00 51 to recognize certain mobile equipment as autos, and with the symbols designated reflecting automatic coverage for liability, physical damage and mandatory uninsured and underinsured coverages.
If there is any good news here, it may be that this change is not going to affect all businesses. In fact, some insurers writing businesses with high concentrations of mobile equipment are said to be willing to continue writing the pre-2004 CGL policy so as to avoid the problems highlighted here. This is also likely to be especially good news to those businesses in this category that are covering their physical damage coverages with contractors’ equipment floaters, where the cost is likely to be less, and the coverages broader than if written on a commercial auto policy.
In the final analysis, all of these changes are not going to be easy to pull off. They are going to cause problems for businesses and insurers alike. What agents and brokers need to do, in the meantime, is to practice good risk management. *
The author
Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, serves on the Examination Committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.