Liability Coverage Can Be Limited to Designated Premises

The commercial general liability (CGL) coverage form applies to bodily injury or property damage claims that occur in the coverage territory, which is defined as the United States, Puerto Rico, and Canada . In general, this means that the CGL form applies anywhere in the country, no matter how many locations that the insured may own or operate. However, endorsements do exist that limit liability coverage to designated premises or projects, and this case from Pennsylvania attests to that fact. The case is Tuscarora Wayne Mutual Insurance Company v. Kadlubosky and Mrochko, 2005 WL 3291981 (Pa. Super.).

This was a declaratory judgment action based on injuries suffered by a minor when she was attacked by two dogs owned by the insured (Kadlubosky). The trial court sided with the insured and denied the insurer's request for summary judgment. Upon appeal to the Superior Court of Pennsylvania, that decision was reversed.

The insured owned the dogs and used them as watchdogs at his towing and repair shop. The dogs escaped from that premises and attacked Mrochko's daughter while she was walking on a public sidewalk. When the claim for injuries was sent to the insurer, it denied coverage, claiming that its insurance policy only covered Kadlubosky's property at another location and not the towing and repair business. The general liability policy issued to Kadlubosky by Tuscarora Insurance was for a property located at 313 McLean Street and the dogs were at and escaped from property at 41 Frederick . In addition, the Tuscarora policy had an endorsement that stated the coverage applied only to bodily injury or property damage arising out of the ownership, maintenance, or use of the premises shown in the schedule. The insurer claimed that this meant only the specified location was a covered location; the claimants asserted that the policy language and the endorsement language were ambiguous and that the insurance applied to the coverage territory, which meant the whole country.

The appeals court began its decision with the firm statement that the language on the policy and the endorsement was clear and unambiguous on its face. Then the court noted that the insurance policy issued by Tuscarora was issued for the premises at McLean Street and that the attack occurred after the dogs had escaped from an entirely different location. The court said that there has to be a causal connection between the insured property and the underlying incident, and there was no such connection in this instance. The dogs escaped from a property that was not covered under the Tuscarora policy, and so, the injuries did not arise out of the ownership, maintenance, or use of the insured property. The Tuscarora policy, through the endorsement, clearly limited coverage to the McLean Street property, and the court could not see that there was any extension of the coverage contemplated on the part of the insured or the insurer to anywhere within the United States. The trial court's decision was reversed.

Insuring to Value: Homeowners

Defining the problem:

The Oakland Hills, California, fire of 1991 is arguably recognized as the event that brought the problem of underinsurance to the insurance industry's attention. Although other natural disasters had certainly occurred prior to this, many with resulting underinsurance issues, this is the event that most focused the spotlight of public perception on insurers as the “bad guys.”

In this loss, which resulted in nearly $2 billion in insured losses, over 3,000 homes were destroyed. Countless stories of inadequate claims settlements poured out, many of which found a sympathetic ear at the Insurance Commissioner's Office. And, although many claims were settled amicably, others resulted in lawsuits alleging either that insurers had misled insureds about the amount of coverage necessary to rebuild, or that the agents selling the policies had been the guilty parties.

Adding to the problem was the fact that many insurers had sold “guaranteed” replacement coverage. So, for example, a dwelling insured at $300,000, but costing $450,000 to replace, had to be replaced at the higher figure. Although these endorsements often incorporated language to the extent that, at the time of loss, the policy limits would be adjusted upward to the necessary amount, and an increase in premium from the date of loss until the next renewal billed, in essence the dwelling had been underinsured until a total loss brought that fact to light.

California is particularly susceptible to major fire losses. This is true for two reasons: one, the amount of fuel—the brush in the canyons—available; and two, the warm Santa Ana winds that propel the fires. When wildfires began near San Diego in October 2003, wind gusts of 50 to 60 miles per hour made the fires almost impossible to stop. When these fires first began, it seemed that resulting damage would be less than that in Oakland Hills, but when they were finally extinguished over 3,000 homes had been destroyed, 26 lives were lost, and the insured losses amounted to over $2 billion.

The lessons that had supposedly been learned from the Oakland Hills fire did not appear to translate, though, to the wildfires of 2003. A report issued by the California Department of Insurance contained statistics to the effect that of the 2,734 “total loss” claims filed, 676 generated complaints regarding the handling of a claim; of these, half involved underinsurance. And, although 316 complaints might not seem to be many, public perception was that insurers were somehow, once again, cheating their policyholders, even though California Commissioner John Garamendi reminded insureds that they should not depend on insurers to remind them of the need for additional coverage on an annual basis.

This is not to imply that California is the only area targeted by natural disasters. One need only think back to Hurricane Andrew's devastation in 1992, when the town of Homestead, Florida, was virtually wiped off the map. Andrew was the costliest natural disaster in American history, until Katrina and Rita in 2005. The estimate in insured loss for these two “ladies” is currently over $60 billion, and still counting.

Hurricane Andrew highlighted another problem. In the case of State Farm v. Metropolitan Dade County, 639 So. 2d 63, the county sued the insurer seeking a ruling that homeowners policies, despite the exclusion for increased expense caused by enforcement of any ordinance or law regulating repair or rebuilding, should provide coverage to bring the hurricane-damaged structures into compliance with building code. Local code required that, if repairs amounted to more than 50 percent of the replacement value of the existing building, then the repairs had to be made to conform to the code in effect for a new building. Further, any dwelling in a flood plain that was damaged in the amount of 50 percent or more of its pre-damaged market value had to be elevated to or above the flood plain area in order for a building permit to be issued.

Although the county attempted to force coverage, the appellate court said the language was plain and unambiguous, and ruled in favor of the insurer. Currently, many homeowners policies provide some coverage for ordinance or law, but in event of a total loss the 10 percent of the coverage A limit that is generally provided may prove to be insufficient.

The United States is susceptible to other natural disasters. Tornadoes, such as those that devastated the area around Oklahoma City in 1999, resulted in 2,000 homes and businesses destroyed. Insured losses amounted to over $1 billion. The 1994 Northridge earthquake caused over $30 billion in insured losses.

Whose problem is underinsurance?

At first blush, the problem would appear to be the insured's. Most courts hold that insureds are responsible for reading their policies and verifying that requested coverage is, in fact, in place.

See, for example, MacIntyre & Edwards Inc. v. Rich, 599 S.E.2d 15 (Ga. App. 2004), in which the insured sued his insurer, agent, and the insurer's adjuster for failing to inform him there was a cap on “guaranteed” replacement. The court made the point that “in general, an insured has an obligation to read and examine an insurance policy to determine whether the coverage desired has been furnished.” The court continued, “even if an agent holds himself out to be an expert in insurance and the insured relies upon the agent's expertise to identify the insured's needs and procure the correct amount or type of coverage an insured's duty to read the policy remains if an examination of the policy would have made it readily apparent that the coverage contracted for was not issued….the duty to read will still bar a lawsuit against the agent even if the insured relied upon the agent's expertise.”

And, in the case of Free v. Republic, 8 Cal. App.4th 1726 (1992), the court said that, generally, the duty of care owed by an agent did not require the agent to advise the homeowners regarding sufficiency of limits.

However, these cases also highlight the fact that agents' actions can trigger a special duty of care with regard to insureds. For example, if the agent assures an insured that the policy limits are adequate, holding him or herself out as an expert on the cost to rebuild, the burden for underinsurance will often shift to the agent and/or the insurer.

These two cases, though, involve total loss. Most homeowners losses are partial losses. For example, a major blizzard in Colorado in 2003 caused over $33 million in insured losses—claims for collapsed roofs and water damage from burst pipes quickly added up. But if these homeowners were underinsured at the time of the loss, it probably made no difference in how the claims were adjusted.

The standard ISO form states that in event of a covered loss, the insurer pays the least of: the limit of liability that applies to the building; the replacement cost of that part of the building damaged for like construction and use; the necessary amount actually spent to repair or replace. The ISO form also makes the statement that, for the insured to collect full replacement, the insured must carry at least 80 percent of the full replacement at the time of the loss.

Many current homeowners forms do not contain this provision, perhaps thinking that it could discourage insureds from carrying full replacement coverage.

So, going back to the Colorado blizzard, and considering that most losses are partial, the answer to “whose problem is underinsurance?” becomes—the insurer's. Why? Because the insurer is not receiving premium based upon the actual replacement of the home, and yet is settling losses as if the home were fully insured. Not only do insurers lose out on premium dollars, but agents lose out on commissions.

The states weigh in:

In endorsing the “Homeowners Bill of Rights” (HOBOR), a legislative package passed in California following the 2003 wildfires, Commissioner Garamendi said “…I especially thank the courageous survivors of the 2003 Southern California firestorms for testifying in support of these bills… We are learning from their hardships so that we can prevent future survivors from being victimized by the insurance process.”

What the Commissioner hoped for under HOBOR is that insurers clearly state on the policy that additional coverage is available, what it would cost, valuation of the insured dwelling (the dollar amount per square foot to rebuild), and, if replacement coverage for the dwelling is purchased, wording to the effect that the coverage is not unlimited. “Replacement Cost Coverage,” for example, is to be renamed “Limited Replacement Cost Coverage.”

What are the solutions?

Endorsements can be attached to a homeowners policy. The inflation guard endorsement applies a percentage increase to each renewal. However, if a dwelling is underinsured to begin with, simply increasing the limit will never compensate for a shortfall.

ISO also has two endorsements that allow an insured's limit to be increased following a loss. For example, under one endorsement the insured selects a percentage increase so that if coverage A is inadequate, the additional amount is available. Another endorsement states that if coverage A is inadequate, the coverage will be increased to the amount necessary to replace. (Coverages B, C, and D are also increased by the same percentage.) In both of these forms, premium is adjusted to apply until the end of the policy term. Again, if the dwelling was not fully insured, the insurer has missed out on premium dollars.

These two endorsements have other pitfalls. Both state that they apply if the insured has allowed the insurer to adjust the coverage A limit in accord with the property valuation made by the insurer, and apply any inflationary increases. If the insurer has not correctly figured replacement cost, the insured cannot be held liable for inadequate limits. These endorsements also stress the insured must tell the insurer of any improvements, alterations or additions to the building which increase the replacement cost by 5 percent or more.

Now, most persons can understand an addition, but what are alterations and improvements? If oak veneer kitchen cabinets are replaced with solid cherry, is this an improvement or, as will be more likely in the insured's mind, simply a cosmetic change?

The best solution, therefore, for all concerned is to make absolutely sure that insured dwellings are fully insured to value at the onset, and that all understand fully what the insurance policy will or will not do in event of a loss. With regard to ordinance or law coverage, figuring replacement cost might well include notification that in event of a loss bringing the dwelling up to current code would cost additional money. It's possible to achieve a win-win situation, in which insureds are adequately compensated for a loss, and insurers obtain adequate premium dollars for the exposure.