Background

Exercising physical control principle

Contractors—repair, installation, etc.

Effect of a contract

Property being worked on

Incidental versus 7 necessary element

Applicability to employees

Background

 In the 1973 edition of the comprehensive general liability policy, exclusion (k) (3) refers to property damage to property owned or occupied by or rented to the insured, property used by the insured, or property in the care, custody, or control of the insured or as to which the insured is for any purpose exercising physical control. It should be noted that this exclusion makes no distinction between real property and personal property, since it just uses the general term “property” in describing its scope.

 The 1986 commercial general liability (CGL) form reworded the exclusion. Exclusion (j) (4) on that form refers to property damage to “personal property in your care, custody, or control”, thus distinguishing between real and personal property. It also makes use of the term “your”, thereby limiting application of (j) (4) to the named insured only, since the policy states that the words “you” and “your” refer to the named insured.

 The current version of the exclusion on the CGL form closely parallels the 1986 version, except that in the 1990 and later versions of the form the care, custody, or control part of the exclusion now talks about personal property in the care, custody, or control of the insured instead of in “your” (the named insured's) control. For more information on exclusion (j) (4) on the current CGL form, see CGL Coverage Form—Coverage A.

 Note that the current edition of the CGL form states that paragraphs (1), (3) and (4) of exclusion (j) do not apply to property damage to premises and contents of such premises that are rented to the named insured for a period of seven or fewer consecutive days.

 Exercising Physical Control Principle

 The majority of cases support the view that property in the care, custody, or control of the insured refers to possessory handling (actual possession or direct physical control) of the property as distinguished from proprietary control (simply having the legal right to control or the legal title to the property). Generally speaking, physical control of another's property is necessary for there to be care, custody, or control. Accordingly, property stored on an insured's premises, even when stored without compensation, is generally held to be in the care, custody, and control of the insured. However, if insured leases locked storage space to a third party and only the third party (not the insured) has a key to and can access the storage space at-will, the insured does not have care, custody, and control over the third party's property stored within the space.

 Courts typically hold that control exercised by the insured must be exclusive in order to establish possessory control. For instance, in Eisenbarth v. Hartford Fire Ins. Co., 840 P.2d 945 (1992), when an insured sought to recover damages arising from the death of cattle which were pastured in his corn fields, the Supreme Court of Wyoming found that in order for the care, custody or control exclusion in the insured's ranch policy to apply, total care, custody or control of the damaged property by the insured was necessary. The fact that the cattle were on land owned by the insured and were within his fences did not in and of itself mean that they were within his “care, custody or control” as those terms were used in the ranch comprehensive liability policy, and whether the insured had total care, custody or control of damaged property within the meaning of the policy exclusion was a question for the jury.

Shankle v. VIP Lounge, Inc., 468 So. 2d 548 (Fla. App. 5 Dist., 1985), is a case dealing with the “exercising physical control” provision found on the 1973 general liability policy. In this case, the court held that the exclusion did not bar coverage for property damage to musical instruments routinely left in the insured's lounge overnight by performers. This was so because the owner of the lounge could not and did not exercise care, custody, or control over the instruments. Simply leaving the instruments in the premises overnight did not establish physical control over them by the insured. The court also added that whether the exclusion applied was a factual question and its resolution depended on many circumstances, including the nature of the property, its location, and what the insured was doing with or to it.

 An alternate viewpoint can be found in Mead v. Travelers Insurance Company, 274 A.2d 792 (1971). Here, the New Hampshire Supreme Court considered the application of a policy exclusion for property in the care, custody, or control of the insured to a situation in which the insured was operating a crane. While an oil tank was being moved by the crane, the crane cable broke, causing the oil tank to fall and sustain damage. The insurance company argued that because the crane was being operated by the insured, the insured had care, custody, or control of the oil tank when it was damaged. The court noted that the insured was acting under the direction of the oil tank owner and that the crane and the insured as its operator were no more than instrumentalities of the oil tank owner; therefore, the exclusion did not apply. Thus it would seem that, even if possessory control is the key in most legal decisions on the exclusion, the actual meaning of possessory control can still be subject to judicial interpretation.

 Although the care, custody or control exclusion generally requires that control exercised by the insured be exclusive, that control need not be continuous, and courts will apply the exclusion so long as the insured has possessory control at the time the property is damaged. Such was the holding of the Appellate Court of Illinois, Fifth District, in Country Mut. Ins. Co. v. Waldman Mercantile Co., Inc., 103 Ill.App.3d 39 (1981), a case in which the court found that the owner and operator of a discount store had possessory control of a lessees' merchandise located in the store even though the lessees' employees came to the store once or twice a week and were responsible for taking inventory and restocking the merchandise. Further, exclusivity of possession may exist even if the possession is of short duration, and intimate handling of the third party's property is not a prerequisite to establishing possessory control. (See Stewart Warner Corp. v. Burns Intern. Sec. Services, Inc., 527 F.2d 1025 [C.A.Ill. 1975]). Lastly, exclusivity of possession does not require direct physical contact with the property, as passive duties such as guarding give the insured care, custody, or control of the property. Liberty Mut. Ins. Co. v. Zurich Ins. Co., 402 Ill.App.3d 37 (2010).

 Similar reasoning to that of the Stewart Warner and Country Mutual courts was recently employed in Essex Ins. Co. v. Soy City Sock Co., 503 F.Supp.2d 1068 (C.D.Ill., 2007). The Essex court found that the care, custody or control exclusion precluded coverage for third-party materials destroyed by a fire in an insured's warehouse where the insured took exclusive possession of the materials and the materials were stored for processing, packed, and shipped by his employees, such that they were a necessary part of the work insured performed. The court explained that although the exclusion required that control exercised by the insured be exclusive, control could exist even if the possession was of short duration. Further, determination of whether an insured has exclusive possessory control involved multiple factors; among those factors were who supervised the operation in which the property was damaged, who had control of the property at the time of the damage, and who exercised the right of access to maintain, move, or protect the property.

 Contractors—Repair, Installation, Etc.

 A contractor is generally regarded as having care, custody or control over the property upon which he is working, and that extends even to situations where the contractor subcontracts the work out to others.

 It has been held that a general contractor has custody or control of property at the site of the operation. This was the decision in L.L. Jarrell Construction Co. v. Columbia Casualty Co., 130 F. Supp. 436 (1955), a case in which the exclusion was held to apply to damage done by the insured, a general contractor, to property on the project erected by a subcontractor. The court stressed that the contract gave the contractor control of the work. Similarly, in Emile M. Babst Company, Inc. v. Nichols Construction Corp., 488 So. 2d 699 (1986), when a cherrypicker fell from a dock that was under construction, damaging the dock and the cherrypicker, the general contractor was held to be in control even though the subcontractor was operating the cherrypicker. The Court of Appeal of Louisiana held that the care, custody, or control exclusion did not release the insurer of liability because the dock was under the control and supervision of the general contractor and not the insured subcontractor.

 In McCord, Condron & McDonald, Inc. v. Twin City Fire Ins. Co., 607 S.W.2d 956 ( Tex. Civ. App. Fort Worth, 1980), a steel contractor sought recovery for damage to a school building that occurred when tees and beams set by the contractor fell down. The court held that policy exclusions for property in the care, custody, or control of the insured barred coverage where there was no evidence that the contractor had turned the partially completed building over to the school district. This decision was notwithstanding the contention by the insured that the school district had paid for most of the damaged property and therefore owned it.

 More recent cases, however, have modified this holding to the extent that the contractor's control is seen as limited to that particular object or area which he or she totally and physically manipulates. For example, in Hartford Casualty Company v. Cruse, 938 F.2d 601 (1991), the United States Court of Appeals in Texas decided a dispute where a contractor who performed foundation leveling services caused damage to an entire house through defective work. The court stated that the care, custody, or control exclusion did not apply to the entire home, other than the foundation itself, since the contractor worked only on the foundation and the owners of the home never gave up the control of the entire house to the contractor. Also, in Bituminous Casualty Corp. v. Fulkerson, 571 N.E.2d 256 (Ill.App. 5 Dist., 1991), the court stated that, standing alone, the mere performance of work by an oil well service contractor within a well bore did not establish as a matter of law that the contractor had care, custody, or control of the well itself. The court declared that the evidence confirmed that the contractor had exclusive physical control over the item being placed in the well, but not over the well itself, so the care, custody, or control exclusion could not be said to apply to damage to the oil well.

 Under the current CGL forms, of course, the exclusion might be easier for the courts to interpret should contractors cause damage while working on a project. The care, custody, or control part of the exclusion is limited to personal property and another part of the exclusion deals with “that particular part of real property” on which the named insured or any contractor or subcontractor is performing operations.

 This can be seen in Grefer v. Travelers Ins. Co., 919 So. 2d 758 (La. Ct. App. 5th Cir., 2005), a case in which an oil pipe cleaning contractor's CGL policy exclusions for property the contractor owned, rented, or occupied operated to deny coverage for environmental damages which the contractor's pipe cleaning operations did to property that the contractor had leased. The court determined that the property damage was on the property rented, occupied or used by the contractor, or to property in the care, custody, or control of the contractor; that the property damage occurred to that particular part of real property on which the contractor was performing its operations, and the damage clearly arose out of those operations.

 Effect of a Contract

 Contractual considerations are often important when analyzing care, custody or control situations. For instance, in Herbison v. Employers Insurance Co. of Alabama, 593 S.W.2d 923 (Tenn.App., 1979), a painting contractor sought to recover from his liability insurer the cost of sprinkler heads that the contractor had damaged while spray painting a customer's ceiling. The court held that the exclusion applied to the loss because the contractor had a contractual duty to exercise a degree of control over the sprinkler heads and in fact exercised physical control over them when he wrapped them in aluminum foil while attempting to protect them from damage.

 In County of Westchester v. Edo Corp., 504 NYS2d 63 (1986), the court determined that the care, custody, or control exclusion of the insured's umbrella liability policies applied where the insured leased an airport hangar that was damaged by fire. The court explained that, under the lease, the insured had contracted to care for and take control over the building, thus the exclusion precluded coverage.

 Crane Service and Equipment Corp. v. USF & G, 496 N.E.2d 833 (1986), had a different outcome from the cases listed above and deserves mention. In this case, there was a verbal agreement between the insured and the owner of a crane concerning use of the crane. The insured had general supervision but the owner retained physical control over the crane at all times. After the crane was damaged on a job, the insured looked to its insurance policy for coverage. The court stated that the crane was not rented to, used by, or in the care, custody or control of the insured contractor and so, the insurer had a duty to provide coverage for the damages. The court reasoned this way by saying the agreement to use the crane was a service contract and not an equipment lease, that any reference to a contractual agreement as a lease or rental does not dictate as a matter of course its true nature, and that a court must look to who has possession and who has control of the property before making a decision on the matter. In this case, the dispositive factors of possession and control lined up in favor of construing the transaction as a service contract rather than an equipment lease and the court, therefore, interpreted the exclusion as not applicable.

 Property Being Worked On

 Although it might seem that property on which the insured is actually working at the time of an accident would be under his or her control and, consequently, there would be no coverage for damage to it, some courts have held otherwise.

 In McLouth Steel Corp. v. Mesta Machine Co.,116 F. Supp. 689 (1953), the court held that a liability policy should cover damage to a machine being hoisted by the insured, a subcontractor, because the contract gave the prime contractor control over the machine, even though the insured did the actual hoisting. In Boswell v. Travelers Indemnity Co., 120 A.2d 250 (1955), the insured, who had a contract to renovate and replace some parts of heating units in a building, negligently damaged one unit when testing the work after completion. The court held for coverage, on the ground that the heating unit was part of the building and consequently was not in the insured's control even though the insured was still working on it. Also as an example see Mead, previously discussed in this article.

 Many felt that the addition of the phrase “exercising physical control” to the exclusion would remove coverage in a lot of cases of damage to property being worked on by the insured. However, in Elcar Mobile Homes v. Baxter 169 A.2d 509 (1961), a New Jersey court held otherwise. The insured was sued for damage to a trailer of a customer that the insured was sandblasting at the customer's premises, and the court applied Boswell, holding that the “exercising physical control” feature did not change the effect of the exclusion.

 Perhaps in reaction to the reasoning of Elcar and cases like it, further revision of the exclusion occurred, with the 1986 version and the current version of the CGL forms dropping the “exercising physical control” phrase for the exclusion of property damage to that particular part of real property on which the insured is performing operations. The CGL forms now strive to clarify that damage to real property being worked on by the insured is excluded.

 Incidental versus Necessary Element

 In determining the scope of the care, custody, or control exclusion, some courts have distinguished two situations: where damaged property is merely incidental to the property being worked on, and where damaged property is a necessary element of the work involved.

 In International Derrick & Equipment Co. v. Buxbaum, 240 F.2d 536 (C.A.3, 1957), the court determined that the insured's liability policy, which was written prior to 1955, should not apply to a claim for damage to a radio mast. The insured had been working for a manufacturer under a contract when the manufacturer called for the insured to erect a radio mast for a third party. The insured complied and subsequently the mast fell and was damaged. In denying applicability of the policy based on the care, custody, or control exclusion, the court explained that the exclusion was not applicable if the damaged property was merely incidental to the property being worked on. Rather, it applied where the property was under the insured's supervision and was a necessary element of the work involved.

 In Ronalco, Inc. v. Home Insurance Company, 606 S.W.2d 160 (1980), the insured had agreed to remove and replace the refractory lining inside a furnace at a customer's premises. While the work was being done, a dynamite charge misfired, damaging the outer wall of the furnace. The contractor's insurer denied coverage because of the care, custody, or control exclusion on a policy written after 1955. The Supreme Court of Kentucky, noting that the terms of the insured's agreement with the owner and union regulations prevented the insured from working on any portion of the furnace other than the inner lining, held that because the property damaged was merely incidental to the property being worked on, the exclusion did not apply. It should be noted that the court determined that no bailment existed between the insured and the owner of the furnace but, had a bailment existed, the exclusion would have been applicable.

 Similarly, the U.S. Court of Appeals, Fifth Circuit, held in Boston Old Colony Ins. Co. v. Tiner Associates Inc., 288 F.3d 222 (2002), that under Louisiana law, the provision of a transmission tower repair contractor's excess liability policy excluding damage to property in the care, custody, or control of the insured did not apply to preclude a television station's insurer from recovering for collapse of the station's transmission tower, which occurred while the contractor was repairing the tower. The court reasoned that the tower was only incidental to specific sections on which repairs were made.

 Also noting the difference between merely incidental property damage and damage to property that is a necessary element of the work involved was Ceramic Tiles of Fairfield, Inc. v. Aetna Casualty and Surety Company, 466 A.2d 348 (1983). Here, ceramic tiles installed by the insured were damaged when the insured used an acid solution to clean the tiles. The court felt that in this situation the floor and tiles were under the supervision of the insured. After explaining the two situations that could exist, the court held that the property damage was a necessary element of the worked involved, and the exclusion should apply to preclude the insured from recovering under the liability policy.

 Applicability to Employees

 In Holter v. National Union Fire Ins. Co., 459 P.2d 61 (1969), the Washington Court of Appeals held that because “employee” was not included within the definition of the term “insured” under a CGL policy, the exclusionary clause of damage to property in the insured's care, custody, or control was not applicable when a boat elevator the insured's employee was operating fell from its track and into water.

 Though the policy definition of insured did not include “employees” specifically, the insurer argued that the exclusion was still applicable because acts of employees are considered acts of the employer under the master-servant rule. In rejecting the argument, the court held that the master-servant rule did not broaden the scope of “insured” in the care, custody, or control exclusion. The court said that had the insurer intended to exclude such losses it could have made explicit reference to employees and worded the exclusion: “this policy does not apply . . . to injury or destruction of property in the care, custody or control of the insured or any of his employees, or property as to which the insured or any of his employees for any purpose is exercising physical control.” Since no reference was made to employees, however, the exclusion was inapplicable to this loss.

 This same reasoning was used by a Washington court in Phil Schroeder, Inc. v. Royal Globe Insurance Company, 683 P.2d 186 (1984). The court stated that the definition of insured under the policy did not include employees, thus the care, custody, or control exclusion on the policy did not apply to damage to a carpet as a result of the malfunctioning of a cleaning machine being operated by an employee of the insured.

 Based on the wording of the care, custody, or control exclusion in the 1986 CGL forms, the Holter case and the Schroeder case were logical conclusions, as the basis of these decisions was an employee not being included within the definition of the term “insured” with reference to the exclusion. Under the 1986 CGL forms, an employee is included as an insured for acts within the scope of employment. However, the care, custody, or control exclusion on the 1986 CGL forms states that the insurance does not apply to property damage to personal property in “your” care, custody, or control, and “your” is a defined term in the CGL forms referring to the named insured shown in the declarations and not to all insureds. Therefore, employees, although insureds for the most part, are not named insureds and the wording of the exclusion could be interpreted as not applying to employees.

 As mentioned earlier, the wording of the exclusion in the CGL forms now states that the insurance does not apply to property damage to personal property in the care, custody, or control of the insured. Of course, this still has no effect on the fact that the employee has no coverage for the property damage, because under the who is an insured section of the CGL form an employee is not an insured for property damage to property “in the care, custody or control of, or over which physical control is being exercised for any purpose by” the named insured or any employee. The employee is not an insured at all for a loss that involves property damage to property in his care, custody, or control, and, since he is not an insured, he has no coverage under the employer's CGL form. Thus, the applicability of an exclusion is not relevant.

 A question remains as to whether the care, custody, or control exclusion reaches the employer, the named insured, if the employee is the one doing the damage. The wording of the exclusion applies to “the insured”. If the named insured had custody or control of the property, then yes, the exclusion would apply. However, if the employee has the property in his custody and control, no “insured” has care, custody, or control over the property and the exclusion is not applicable to the named insured. The named insured would still have to be found somehow liable for the damage in order for the CGL form to cover the property damage loss, but if that happens, the care, custody, or control exclusion is not applicable.