What is Necessary and Incidental?

Commercial general liability policies provide expansive coverage to commercial insureds, covering damages arising out of occurrences resulting in bodily injury. This broad coverage, however, is often limited by the designated-premises endorsement, which limits the insurance to damages arising out of the insured's ownership, maintenance, or use of its premises.

Many designated-premises endorsements contain language similar or identical to the following: “This insurance applies only to 'bodily injury,' 'property damage,' 'personal and advertising injury,' and medical expenses arising out of the ownership, maintenance, or use of the premises shown in the Schedule and operations necessary or incidental to those premises.”

Courts in a majority of jurisdictions have interpreted designated-premises endorsements as requiring a causal connection between the damages in question and the “ownership, maintenance or use of” the designated premises and the “necessary or incidental” operations of those premises. These same courts have found that a causal connection between the damages and the insured's business to be irrelevant to the inquiry.

The latest of these cases comes from the Massachusetts Appeals Court in United States Liab. Ins. Co. v. Harbor Club, Inc., 2010 Mass. App. Unpub. LEXIS 259 (Mass. App. Ct. Mar. 12, 2010). In Harbor Club, Inc., the insured restaurant hosted an offsite tailgate party more than 60 miles from the restaurant's premises. An attendee of the party, who had traveled to the event from the insured's premises, was injured when a gas grill operated by the insured's employees exploded. A panel of the Massachusetts Appeals Court, in affirming the lower court's ruling, held that the insured's CGL policy did not provide coverage for the party because of the policy's designated-premises endorsement.

The panel found that the trial judge correctly distinguished between an offsite party generally connected to the insured's restaurant business, and an event that, while offsite, is necessary or incidental to the restaurant's premises. Although the insured argued that the party was sufficiently connected to the premises because the party was planned at the premises, the Appeals Court panel pointed out that “any business-related event can be said to have some abstruse connection to the business premises, e.g., the planning will be undertaken by individuals with offices on the premises, invitations may be sent from the premises, and the like. Since the policy is itself a commercial policy, such an interpretation would give no effect whatsoever to the endorsement.” In other words, what serves a business purpose does not necessarily serve a purpose necessary or incidental to the premises on which the insured's business is conducted.

While the necessary-or-incidental requirement contained in designated-premises endorsements is an explicit element of such endorsements, the requirement is often overlooked by insureds and, at times, even the courts.

For example, in American Guar. & Liab. Ins. Co. v. The 1906 Co., 129 F.3d 802 (5th Cir. 1997), a bottling company had a CGL policy with a designated-premises endorsement listing the site of its bottling operation as the premises The bottling company established a photography studio at another site about a mile away. Decisions were made regarding the studio at the bottling site, although all the other actions that gave rise to the underlying claim occurred at the studio.

The court found that there was coverage for the off-premises claim because a causal connection existed between the claim and the bottling company's “supervisory activities, the operation of the designated premises.” However, this ruling appears to overlook that the designated premises endorsement requires not just that the claim in question arise out of some “use” of the designated premises, but also the “operations necessary or incidental to those premises.”

Clarifications to “Necessary or Incidental”

Claim professionals should never confuse what is necessary or incidental to the insured's business with that of the premises itself. Such confusion has led at least one court to eviscerate a designated premises endorsement in a CGL policy, leaving it with little meaning.

In Southeast Farms, Inc. v. Auto-Owners Insurance Co., 714 So.2d 509 (Fla. Dist. Ct. App. 1998), the insured was a produce broker who had brokered the sale of potatoes transported in a truck involved in an automobile accident. The court ruled that the designated-premises endorsement did not preclude coverage of the off-premises automobile accident because the insurer, in the court's words, “[gave] the ball game away,” by arguing that “'Incidental' means incident to the main business purpose of the main business, as opposed to the premises.”

The moral of the Southeast Farms story for claim professionals: Never concede that a claim need only arise out what is “necessary or incidental” to the insured's business when the policy in question contains a designated premises endorsement.

Not all insureds conduct fixed-premises businesses like restaurants, bottling companies and the like, though. Many companies obtain expansive CGL coverage for more mobile enterprises such as contracting businesses, appraisers, and realtors. The mobile nature of these businesses could impact how courts interpret a designated-premises endorsement.

For example, in Sallie v. Tax Sale Investors, Inc., 149 Md. App. 141 (Md. App. 2002), the issue before the court was whether a “spectrum policy” — a broad policy of insurance for various types of business liability — provided coverage for a tenant's claim for wrongful eviction from a rental apartment owned by the insured. The Sallie court adopted the analysis employed by the majority of courts of whether there is a sufficient connection between the wrongful eviction and the operation of, or operations incidental to, the designated premises.

However, the court held that the nature of the insured's business rendered the designated-premises endorsement ambiguous “with respect to whether it provides coverage for the wrongful eviction that occurred on premises other than the premises designated in the policy.” The Sallie court reversed the lower court's grant of summary judgment in favor of the insurer and remanded the case for factual findings.

While a ruling that a policy provision is ambiguous is always disconcerting for insurers, the Sallie court's holding is, to a certain degree, understandable. The designated-premises endorsement limited coverage to the necessary or incidental uses of the designated premises. Yet, virtually none of the necessary or incidental uses of a real estate office—evictions, rental sales, and apartment showings—would occur at the office.

Thus, when faced with a claim involving a designated premises where the primary functions of those premises occur away from the premises, a claim professional should be aware that a designated-premises endorsement may not preclude coverage for claims arising out of off-premises activities. It is nevertheless crucial to analyze whether the claim arose out of the premises and the operations necessary or incidental to those premises and not to the business of the insured.