Author: VU Faculty

In the liability coverage of the garage policy (similar to that in the CGL), there is a contractual liability exclusion. However, the exclusion doesn't apply to "liability for damages...[t]hat the 'insured' would have in the absence of the contract or agreement." Now take a look at the contractual liability exclusion in the garagekeepers portion of the policy...but before you do, make sure you're sitting down.

Here is a question received recently by one of our faculty members:

I got a call the other day from an agent that is having a GKLL problem. It does appear that the insured was negligent and a vehicle was damaged in their care, custody and control. The carrier is not really arguing that. Apparently there is some kind of a contract (on the work order) between the insured and customers stating that the insured will pay for damage for loss if they are negligent to customers' cars. The carrier is denying under exclusion #1 of GKLL. That exclusion says:

This insurance does not apply to any of
the following:
a. Contractual Obligations
   Liability resulting from any agreement
   by which the "insured" accepts
   responsibility for "loss".

Under GKLL there is not the usual "this exclusion does not apply to liability for damages that the insured would have in the absence of the contract or agreement" that is found in the garage liability section and the CGL.

I had never noticed that GKLL does not make any exceptions. The carrier is saying that, since they assumed responsibility by contract, there is no coverage even if the insured had Direct Primary! The agent and insured are making the argument that having the statement on the work orders helps with arguments (and the GKLL carrier) to make sure that only negligence applies. Such a statement actually helps the carrier and statements like this are not that unusual on work orders, etc. The carrier is not budging.

Does anyone know why GKLL does not have the normal exception to the contractual exclusion? This hit me hard because the carrier is taking the position that there is no coverage for any property damage loss if a contract is involved. There is almost always a contract! With their position, an insured has no property damage coverage with any party that is a part of any contract.

This is, indeed, disturbing and, if every GKLL carrier out there interprets this the same way, then we suspect that there are THOUSANDS of garage risks that are currently without coverage for damage to customers' vehicles.

We have contacted ISO for some background information on this exclusion and are currently waiting on their response. In addition, we plan to add this as an agenda item on our regional and national technical affairs committee meeting agendas coming up over the next few months.

In the meantime, we contacted several of our faculty garage gurus and asked for their opinion. Unanimously, they disagreed with the insurer's interpretation and most pointed out the need to carefully review the exclusionary language for its true intent. Below are their responses:

I wish I could go back to the 1980 filing to find out why. BUT, I say the exclusion could be voided in the instance at hand. It is against public policy in most states to sell a cover that would never pay a loss. In this instance, every garage has a contract (written, verbal or public custom) under which they assume liability for their negligence.

When the insured buys "direct primary," he has actually made another contract where he assumes liability for negligence AND non-negligence damage. This contract is between the insured and insurer, with the customer being a third-party beneficiary. Would this insurer say the exclusion applies here also? The exclusion doesn't say the contract has to be between the insured and customer. Of course they wouldn't apply the exclusion in this fashion. Then how can they sell direct primary and say, "We cover any loss (subject to normal loss based exclusions) regardless of fault EXCEPT when you contractually agree to accept fault. We don't like you to accept fault, we just want to pay when you don't accept fault."?

I think the answer is simple: The garage's liability is not "resulting from the agreement," it is resulting from his negligence. Same thing with direct primary...it is not resulting from the agreement; it's not resulting from negligence; there is no liability; but the insurance contract says it will pay without regard to fault. The adjuster is making too much of this exclusion. If it were intended to be an "absolute" exclusion without exception, it could have been worded: "We do not cover damage when the insured has accepted responsibility for loss in a written agreement."

This contractual exclusion is different from the CGL exclusion because of the nature of the agreements being addressed. In CGL, we are agreeing to cover hold harmless agreements in favor of third parties. In garagekeepers, we are talking about an agreement addressing damage to property in our CCC.

While I was aware of this particular exclusion, it has always been my opinion that it only applied in cases where the insured accepted liability even though they were not at fault. In addition, it has always been my opinion that if the insured has selected Direct Primary coverage, then that would supercede the exclusion since, by providing the coverage and accepting the premium, the company has agreed to make payment on the insured’s behalf regardless of negligence.

I’d be curious to see what would happen if a court was involved. I believe that, especially in cases where there is clear negligence or where Direct Primary coverage is chosen, the form then creates ambiguity by saying two completely opposite things and therefore the insured would win out.

Not even being an attorney, it seems to me that the wording clearly states the situation and why this exclusion doesn't apply. Here, with my emphasis, is the key phrase: Liability resulting from any agreement by which the "insured" accepts responsibility for "loss." Simple answer in this case...the liability didn't result from the agreement. It resulted from the insured's negligence. I would suggest the reason no one noticed this "terrible" wording in the past is simply because it doesn't do anything different than the regular contractual exception for liability the insured would have in absence of the contract or agreement. In fact, I kind of like this GKLL wording better than the CGL, since it's so simple...the effect is the same as the CGL without the verbage.