By LeRoy H. Utschig, CPCU, ARM

This is the second article regarding garage insurance exposures. The purpose is to explain points that can be considered when writing this class of business. ISO's Form CA 0005 0797, Garage Coverage Form, is the insurance contract upon which this column is based.

Boat coverage?

The following actual loss occurred during the late 1970s in central Wisconsin. Several people were in a boat, running at full throttle, as it headed 22 miles across the largest natural freshwater lake in the United States. The boat was being used for the first time since having its fiberglass hull repaired. A boat dealer had referred the boat owner to an auto body shop to have the repair work done. Auto body shops regularly work on damaged fiberglass car bodies, and the boat dealer had never done fiberglass repairs.

The people in the boat were having a good time when the boat's hull began to vibrate. Suddenly it shattered like broken glass. No one survived the accident.

Claims were presented to the owner of the automobile body shop which had done the fiberglass hull repairs. The body shop was told there was no coverage for the boat accident. The garage form has a specific exclusion pertaining to boats.

Some boats have automotive-type engines in them. It is somewhat common to find this in inboard-outboard boats. One owner of an inboard-outboard boat had been disappointed in the tune-up work done by his boat dealer the previous summer, so he decided to have the boat tuned up by an auto service station that he had used for many years to have his cars serviced. Shortly after the boat tune-up was completed, he took his rig for a spin on the water. He was very pleased with how the boat was performing. While returning to the docking area, he slowed down. The area on the stern where the inboard-outboard driving mechanism was located sank into the water. Because the seals around the mechanism had been damaged when some oil was spilled on them at the service station, they did not hold the water out of the boat. Water gushed into the boat through a six-inch hole and it sank.

Once you start paying attention to it, you will see more and more service stations, body shops, used car lots and even franchise dealerships with one or more boats on the premises. My recommendation is that you ask each of your garage accounts if it handles boats. You might be surprised to learn how many of these accounts presume they have coverage for boats. In an actual case, I knew the owner of a dealership from whom I had bought a car. He was beginning to sell boats. I asked him if boats had been added to his coverage. His reply was, "My insurance agent is in here frequently and sees the boats. It's his job to be sure that I have coverage for boats."

Garagekeepers

Garagekeepers insurance provides physical damage coverage for damage to customers' vehicles while the vehicles are in the care, custody and control of the garage. Typically, comprehensive and collision are the covered perils when using garagekeepers insurance. One Midwest service station regularly parked customers' cars in a shopping center parking lot directly across the street from its location. A customer's car was stolen from the shopping center parking lot. When the loss was reported to the service station's insurer, the insurer denied coverage because the loss occurred from a location not named in the insurance policy. Garagekeepers insurance covers customer cars while they are being test-driven off premises, but for continuously used locations, coverage applies only for the site(s) listed.

Covered auto designations

The garage policy uses 11 covered auto designations. These designations are entered next to the various coverages to activate coverage for diverse garage exposures. For example, when designation 30 is put next to the garagekeepers section on the declarations page, the policy will provide coverage for garagekeepers exposures. Designation 25 is used to activate no-fault coverages.

It is possible to use a garage form to cover a tow truck operator's towing exposure but not provide liability coverage for the remainder of the account's exposures. By using designation 27 next to the liability coverage section of the garage policy, coverage would be provided only for the use of the vehicles listed on the policy. There would be no coverage provided for the remainder of the client's loss exposures. This designation, number 27, is the most restricted covered auto designation that is available on the Garage form. My recommendation is to use this only where you want to severely restrict a client's coverage.

Designation 21 stands for "Any Auto" and is the broadest designation that is available. ISO's rating manual rules state that designation 21 is always to be used for the liability coverage for franchise dealerships and used car sales operations. My experience has been that some underwriters are reluctant to provide the proper coverage for some garages. These underwriters will use the most limited exposure definition that they can. Some garages will have uncovered losses due to the use of restricted exposure symbols. In many states, it will be your errors and omissions insurance that will respond for a loss that could have been covered but was not, due to an underwriter's use of a restricted exposure symbol(s).

For auto dealers, there is no difference in premium between broad coverage and restricted coverage. I would think an agent would not want to be in the position of having to tell the Office of the Commissioner of Insurance that he/she had violated a filing and did not give a rate credit for the restricted coverage. An insurance commissioner(s) might be unhappy about receiving that type of consumer complaint.

Consigned vehicles

Why would a dealership need coverage for consigned vehicles? Let's say a married couple decides to sell its motor home. For a while they try to sell it via ads in the local newspapers. When that does not work, they take the motor home to a motor home dealership which agrees to sell it on a consignment basis. Title to the motor home remains with the couple, and they set the price they want for it. Whatever amount the dealership can sell it for above the couple's price will be the dealer's commission for handling the sale.

The consigned motor home is damaged and there are injuries to people. Auto designations 22, 28 & 29 were used instead of covered auto designation 21. This insurer took the position that the consigned auto was not included in the combination of the three covered auto designations 22, 28 & 29. Of course, the loss would have been covered had auto designation 21 been used. There is no difference in premium whether designation 21 or the combination of 22, 28 & 29 is used.

Consigned autos were not marked on the motor home dealer's reporting form declarations page so there was no coverage for the physical damage to the motor home. Coverage could have been provided by simply putting an "X" in the appropriate box on the dealer's declarations page. Even though many dealers do not handle consigned vehicles, they might have an occasional exposure.

In an actual case during the mid-1980s, the son of the owner of an Indianapolis, Indiana, dealership put his motorcycle at his father's auto sales operation to try to sell it. This was in the springtime and the son had dropped the insurance on the cycle during the winter. There was no coverage for the son's motorcycle when it was stolen from his father's auto dealership.

Driveaway collision

Here is an example of another loss that a car dealer should try to avoid. A dealership, Cars, Ltd., has its new cars delivered by truck and obtains used cars by having its own drivers pick up cars from nearby auto dealers or from an auto auction which is located about 25 miles away. One of its new car buyers wants to buy a car like one on the lot and agrees on the price but wants it in a different color. A dealer about 85 miles away has the same car with the same equipment and in the color the customer wants. So the two dealers arrange to trade vehicles.

The driver for Cars is driving the car to the other dealership to exchange the cars, when he has an accident. The accident occurs about 70 miles away from Cars, Ltd. There is coverage for the liability claim resulting from the accident. However, no collision coverage is provided as the accident took place more than 50 miles from the dealership.

Defective product

Let's say a business called Trucks, LLC, sells tires as well as new and used trucks. The dealership has a policy of paying for the replacement of any tires it sells that prove to be defective. However, the owners of Trucks have never given any thought to what would happen if one of its big products--a truck--were to prove to be defective. A customer buys a used truck for $55,000. Within a week, the truck has a fuel leak that results in a fire that destroys the entire vehicle. The customer wants to be reimbursed for the value of the vehicle. When the dealer reports the loss to its insurer, it is informed that there is no coverage for the destroyed truck.

Coverage is provided for damage to people or other things caused by the destroyed truck but not for damage to the truck itself.

Faulty workmanship

A woman has repair work done to the water pump on her car. Upon completion of the work, she leaves the repair shop. About one week later, one warning light comes on and then another. She keeps on driving and several miles later the car makes some unusual sounds and stops running. The water pump had been improperly installed and the motor completely stopped running because it had gotten too hot.

Coverage for this kind of loss will vary depending upon a given insurer's interpretation of a garage policy exclusion. One approach is that there is no coverage for anything done on the repair order. There also is no coverage for the installed parts. Plus, no coverage is provided for damage to anything that the installed parts touch. However, there are many interpretations to this workmanship clause, and sometimes people will disagree with the above interpretation. The faulty workmanship example is given to aid in understanding the kinds of damage the garage form does not intend to cover.

Boat coverage

A garage that normally deals in repairing trucks with diesel motors agrees to tune up the engine on a boat. The boat brought to the garage seemed to be about a block-and-a-half long and as tall as a house. Actually, the boat was on a tri-axles trailer. While truck tractors with wind deflectors on top could easily drive into the garage, this boat could not be moved into the garage as it was too tall. Hence, the boat stood outside at the garage.

The boat was stolen from the garage location. A claim was put into the owner's insurer. After paying the insured, the insurance company made a subrogation claim against the garage. Upon forwarding the subrogation claim to its insurer, the garage was informed that it had no coverage for the loss of the boat.

Earlier we discussed the fact that a garage form does not automatically provide good coverage for boats. There is no products-completed operations coverage. Physical damage to the boats on the premises is not insured either. Boats on the premises might be owned by either the customer(s) or the garage operation. Sometimes boats even will be stored at the garage's premises.

When faced with this exposure there are two ways to insure it. One way is to have an underwriter write some manuscript forms to modify the garage insurance policy to include boat exposures. The other way is to use inland marine forms.

Boat dealer/marina operators legal liability coverage is available by using inland marine forms. My recommendation is that the boat dealer/marina operators legal liability coverage be written side-by-side with the garage forms. Auto exposures will be covered by the garage form while the boat exposures will be covered by the boat dealer/marina operators legal liability coverage.

This inland marine coverage can provide liability coverage for premises and operations exposures as well as products-completed operations exposures. Coverage while someone is on a demonstration ride with a boat also can be insured. Storage of boats can create an exposure that is uninsurable with a garage form. Marina operators legal liability is specifically designed to address the exposure of customer boat storage. Coverage for the physical damage to boats while they are at the garage also can be covered by the marina operators legal liability coverage. Boats owned by the garage can be covered by the use of the boat dealer's form.

While I have used the terms boat dealers/marina operators legal liability, these may not be the names your insurance company(s) uses for this type of coverage. These names for this coverage are used by many insurers; hence they are used here. Regardless of the names used for these policies, you will need to be sure a given insurer is providing coverage for premises and operations and products-completed operations. You need to cover owned boats, consigned boats, boats in storage (sometimes), and boats that are to be repaired. Coverage is to be provided on premises, in transit and while on water.

Summary

These are the main points discussed in this article:

* More and more garages work on boats.

* Garage insurance does not cover boats.

* Boat dealers/marina operators legal liability can be used to cover boat exposures.

* Use the broadest coverage designations that you can.

* Some garages need coverage for consigned autos.

* For garage keepers insurance, be sure to show all of the locations used by the account.

* No protection is provided for the loss of a product.

* There is no coverage for faulty workmanship. *