Drone Coverage

The Insurance Services Office (ISO) has recently published several endorsements to the commercial general liability (CGL) coverage form pertaining to liability coverage, or lack thereof, for drones. This article offers a summary of the endorsements. For a more complete discussion of drones and insurance coverage, see Drones.

CG 21 09, exclusion—unmanned aircraft, replaces exclusion (g) under coverage A on the CGL form. Exclusion (g) refers to aircraft, auto or watercraft, and the exclusionary language pertaining to those vehicles remains intact. What CG 21 09 does is increase the exclusion's scope to apply to liability insurance for bodily injury or property damages arising out of the ownership, maintenance, use or entrustment to others of any aircraft that is an unmanned aircraft.

The endorsement also adds exclusionary language to coverage B, personal and advertising injury liability. This exclusion states that coverage B insurance does not apply to personal and advertising injury arising out of the ownership, maintenance, use or entrustment to others of any aircraft that is an unmanned aircraft.

An unmanned aircraft is defined in CG 21 09 as an aircraft that is not designed, manufactured, or modified after manufacture to be controlled directly by a person from within or on the aircraft. (This definition is no doubt intended to limit the meaning of a drone to an aircraft that is remotely controlled, whether by a person or a computer. It will be up to the courts to decide in future lawsuits if the definition is unambiguous enough to withstand coverage disputes.)

CG 21 10, exclusion—unmanned aircraft (coverage A only), replaces exclusion (g) under coverage A on the CGL form. The only difference between CG 21 10 and CG 21 09 is that the exclusion in CG 21 10 applies only to coverage A; coverage B is not mentioned. Similarly, CG 21 11, exclusion—unmanned aircraft (coverage B only) applies only to coverage B, personal and advertising injury liability; coverage A is not mentioned.

CG 24 50, limited coverage for designated unmanned aircraft, replaces exclusion (g) under coverage A on the CGL form, just like CG 21 09. However, CG 24 50 relaxes the exclusion a little by allowing coverage for bodily injury or property damage arising out of the ownership, maintenance, use or entrustment to others of the unmanned aircraft described in the schedule, but only with respect to the operation(s) or project(s) described in the schedule. In other words, the insured must describe the unmanned aircraft and the operation or project in which the unmanned aircraft is involved for liability coverage to apply. The same exception to the unmanned aircraft exclusion also applies to coverage B, personal and advertising injury liability.

The schedule on CG 24 50 also provides for an unmanned aircraft liability aggregate limit of insurance. This limit is the most the insurer will pay for the sum of damages under coverages A, B, and C (med pay).

CG 24 51, limited coverage for designated unmanned aircraft (coverage A only) allows the exception to the unmanned aircraft exclusion to apply only to coverage A under the CGL form; no mention is made of coverage B. CG 24 52, limited coverage for designated unmanned aircraft (coverage B only) is the endorsement to use if the insured wants coverage for personal and advertising injury arising out of the ownership, maintenance, use or entrustment to others of any aircraft that is an unmanned aircraft.

For more information on these endorsements, see Exclusion-Unmanned Aircraft. Also see Limited Coverage for Designated Unmanned Aircraft.

Products-Completed Operations Hazard Exclusion

This matter is before the court on a motion for summary judgment. The insurer seeks a declaratory judgment declaring that its policy does not provide coverage or a duty to defend the insured as the result of an auto accident. This case is Atlantic Casualty Insurance Company v. LTA Distributor, 2015 WL 3466256.

LTA Distributor owns New Life Tires. A customer purchased tires from New Life. One of the tires had a defect that should have been visible to the employees that inspected the tires. About three months after the purchase, the customer was driving on the highway and the defective tire failed. As a result, the customer lost control of the vehicle and overturned. Serious injuries and a death resulted from the accident. New Life and its parent company, LTA Distributor were sued.

LTA was insured by Atlantic Casualty Insurance Company. The insured submitted the claim to Atlantic but the insurer denied coverage based on the products-completed operations hazard exclusion which excluded coverage for injury or property damage occurring away from premises owned by the named insured and arising out of the named insured's work. Atlantic filed this declaratory judgment action.

The United States District Court for the Southern District of Florida noted that the insured raised three arguments in opposition to the insurer's motion. The insured argued that the policy was ambiguous because the work at issue was not completed and because the exclusion conflicts with the policy definition of occurrence. The insured also said that the exclusion should not be enforced because the insureds believed that they were covered by the policy.

The court said that the insureds appear to misunderstand the meaning of the term “ambiguous” in the contract interpretation context. The insureds did not show a specific term of the policy that was open to two or more reasonable interpretations. As for the assertion that the work was not completed, the court said that the facts dispute this assertion. The work that was to be performed by New Life was performed when the tire was selected and placed on the vehicle. Under the terms of the insurance policy, the work was deemed to be completed when the work done at a job site was put to its intended use, and that is what happened. The court also found that the insured simply failed to show how the exclusion and the word “occurrence” conflicted.

It appeared to the court that the insured also argued that the exclusion may be defeated if an ordinary reader would find the language ambiguous or if he believed the policy covered the incident at issue. However, the court pointed out, the Florida Supreme Court has expressly rejected this doctrine of reasonable expectations, holding that there is no need for the doctrine because Florida law construes any ambiguity in favor of coverage and to apply the doctrine would be to rewrite the insurance contract.

Summary judgment was granted to the insurer.

Editor's Note: The U.S. District Court, S.D. Florida, finds that the facts of the incident do not support the insured's contention that the products-completed operations hazard exclusion did not apply. The injuries suffered by the third party occurred away from the premises of the insured and arose out of the insured's work. None of the exceptions to the exclusion were applicable.

Claims-Made Professional Liability Policy under Review

The insurer commenced an action in diversity against the insured software developer seeking a declaratory judgment that it did not have a duty to defend or indemnify the insured under its claims-made professional liability insurance policy. This case is Philadelphia Consolidated Holding Corporation v. LSI-Lowery Systems, 775 F.3d 1072 (2015).

LSI provides computer and technology consulting services. In 2004, it sold business software to Hodell and agreed to develop an add-on program for the software. In 2007, the software went live and Hodell immediately began experiencing performance problems.

Hodell sent an e-mail to LSI complaining that the system was unstable and slow, and demanding an around-the-clock effort to straighten things out. Hodell also stated that if its list of tasks were not completed, it would turn communications over to its legal advisors. After a year of wrangling, Hodell filed a lawsuit against LSI, asserting claims for fraud, breach of contract, negligence, and negligent misrepresentation arising from the performance issues with the software.

LSI sought coverage from its insurer, Philadelphia Consolidated. The insurer filed this declaratory judgment action. The U.S. District Court granted summary judgment in favor of the insurer and this appeal followed.

The United States Court of Appeals, Eighth Circuit, saw the issue before it as whether LSI gave the insurer timely notice of the claim for purposes of coverage under either the 2007 or the 2008 claims-made policy. The insurer had issued two successive claims-made professional liability insurance policies to LSI in 2007 and 2008. In order for LSI to have coverage under either policy, LSI was required to provide notice to the insurer during the policy period of any claim made against it or any circumstance that could reasonably be expected to give rise to a claim. In the 2007 policy, a claim was defined as a demand received by the insured for money. In the 2008 policy, a claim was a demand received by the insured for money or services.

The insurer argued that there was no coverage under the 2007 policy because LSI did not notify the insurer of any claim or potential claim during the 2007 policy period. And, the insurer argued there was no coverage under the 2008 policy because that policy covered claims first made during the policy period and Hodell first made a claim before the 2008 policy went into effect.

The court noted that under a claims-made policy, notice is especially important. Under a claims-made policy, the court said that notice defines the limits of the insurer's obligation—if there is no timely notice, there is no coverage. The district court concluded that there was no coverage under the 2007 policy because LSI did not give notice of a claim or potential claim to the insurer within the 2007 policy period. The circuit court agreed. As for the 2008 policy, the district court found no coverage because the communications between Hodell and LSI from March 2007 and April 2008 constituted a claim; in other words, the claim by Hodell was first made before the 2008 policy went into effect. The appeals court agreed. The appeals court said that the communications between Hodell and LSI prior to the date coverage began under the 2008 policy constituted a demand for money and so, amounted to a claim.

The Circuit Court affirmed the ruling of the district court.

Editor's Note: The U.S. Eighth Circuit Court of Appeals examines claims-made policies and finds that the insured failed to give timely notice under the one policy, and actually gave notice before the other claims-made policy went into effect. The claims of the insured fell into a coverage crack between two claims-made policies.

In another point of interest, the court noted that the prejudice requirement is generally not held to apply to claims-made policies.

Intrafamily Injuries

After the ex-wife brought a personal injury action against her ex-husband alleging that their daughter was bitten by his dog, the ex-husband's homeowner liability insurer brought a declaratory judgment action to determine if the daughter was excluded as a resident of the ex-husband's house. This case is Peerless Insurance Company v. Luppe, 2015 WL 3915752.

The parents of Maya were divorced and were awarded joint legal custody. Maya would stay at her father's house two days each week, overnight, on Wednesdays and Sundays. Her bedroom at her father's house contained some of Maya's toys and clothing and the house also contained various toiletries for Maya. On a Sunday when Maya was at her father's house, she was attacked by the father's dog and required significant medical attention.

The mother filed a lawsuit against the father and he sought a defense from his insurer, Peerless Insurance Company. However, Peerless denied coverage, pointing to an exclusion pertaining to injury to an insured, within the meaning of the policy. An insured was defined as the named insured and residents of the household who are relatives or other persons under the age of twenty-one and in the care of the named insured. Peerless contended that at the time of the incident, Maya was a resident of her father's house, an insured, and so, the policy did not afford any coverage for the claim. Peerless filed a declaratory judgment action seeking a declaration of no duty to defend or indemnify the father.

The Superior Court, Washington County, ruled in favor of the insurer and this appeal followed.

The Supreme Court of Rhode Island noted that both the parents argued that the test for residency should have resulted in a finding that Maya was not a resident of her father's household based on an affidavit from a family law attorney that the parents had agreed that Maya's physical placement would be with her mother. The insurer contested the relevance of the affidavit because possession and custody for purposes of divorce are not the same as residence for purposes of insurance. The court said that the affidavit was merely a legal conclusion based on the circumstances of the divorce and it raised no material issue of fact; the court was not swayed by the affidavit.

The parents also argued that the term “resident of your household” was ambiguous. However, the court said that the parents did not articulate how they believed the definition to be ambiguous, arguing simply that the meaning of the resident exclusion contained in the policy is ambiguous as it relates to the facts of the case. The court disagreed and said that a contract is not rendered ambiguous merely because the parties disagree over its proper interpretation. As for the meaning of a resident, the court pointed out that, in the context of insurance policies, multiple residences is common. In fact, shared custody arrangements are increasingly frequent in society and the court recognized that a child may call multiple dwellings his or her home.

The court noted that there are four factors that are significant in determining residency: the amount of time one spends in the locality; the nature of one's place of abode; one's activities in the locality; and one's intentions with regard to the length and nature of one's stay. Put simply, one who maintains a personal presence in a home with the intent to continue that presence for more than a temporary period is considered a resident of that home.

The court concluded that in the context of the totality of the circumstance, Maya was a resident of the father's home on the day she was injured because it was a place at which she had a recent history of physical presence together with circumstances that manifested an intent to return to the residence within a reasonably foreseeable period.

The ruling of the lower court was affirmed and the insurer was granted summary judgment.

Editor's Note: The Supreme Court of Rhode Island found that the child of divorced parents can be a resident of both her mother's and her father's home for the purpose of being insured under the homeowners policy of each parent. The court hold that this opinion was consistent with the purpose of homeowner policies, which is to protect against claims from outsiders and not for intrafamily injuries.