Author: Mike Edwards

“I am currently working with a commercial prospect that I hope to be able to quote soon. He is a referral from one of my current customers, and while he doesn’t appear to be having any problems with his current agent or coverage, he seems willing to give me a shot at looking at his insurance program. Yesterday, he agreed to let me go over his insurance needs with a coverage checklist. In the conversation, I uncovered a potential gap in his current coverage.

“As a part of his retail operation, he rents a 5,000 square foot warehouse in an industrial park across town. His current agent told him that he had coverage for damage to the warehouse under the CGL’s Fire Legal provision. I think that’s only partly right, and I feel the Commercial Property Legal Liability Coverage Form would be better. But before I explore that further with him and finalize my quote, I need to bone up on how the CGL vs. the CP forms would work in this situation. Next week I will have another meeting with him and his warehouse manager, who will bring the warehouse lease for me to review.”

First, my hat’s off to you for using a coverage checklist. The potential gap with the warehouse is a perfect example of how vital checklists can be. The specific coverage your insured will need on the rented warehouse depends mostly on the contract he signs with the owner/landlord. Once you get a copy of it from the warehouse manager in your next meeting, you’ll be in a better position to make recommendations, based on how much responsibility is placed on your insured as tenant. One note of caution on reading contracts for insureds.

Over the years, most E&O attorneys I’ve talked to recommend that in situations where agents need to review contracts and other legal documents related to structuring a client’s insurance coverages, the agent provide some form of written disclaimer to the client. It can be as simple as a statement included in the standard boiler plate language of the proposal, or a separate letter, etc., which says that the agency is only reviewing the insurance portions of the contract or document, and is not providing legal advice. We have a Technical Advisory (TA) on our website which discusses this in detail, and it includes a sample disclaimer which you could provide to your attorney for guidance on developing the exact language.

Depending on the requirements of the contract for the rental of the warehouse, the Fire Legal coverage in the CGL might be sufficient, or the Commercial Property Legal Liability Coverage Form might be more appropriate. However, my guess is that neither will work, given the broad responsibilities placed on tenants in most contracts these days, so alternatives would be needed – more on that in a minute.

Here’s a brief overview comparing the CGL’s Fire Legal coverage vs. the Commercial Property Legal Liability Coverage Form.

CGL Fire Legal

As often happens in insurance, terminology changes over the years, but sometimes we still use the old words and phrases. And so it is with “fire legal.” It’s gone the way of “all risk” and “full coverage.” Back in the days of the Broad Form CGL Endorsement (pre-1986 simplification), one of the coverages included was Fire Legal Liability Coverage – Real Property. That was reduced in the 1986 simplification changes to simply Fire Damage. In 1998, the coverage was tweaked and renamed Damage to Premises Rented to You. Most of us still refer to it as “fire legal.”

While on the surface the coverage seems simple enough – legal liability for fire damage – it is something of a dark alley with trap doors. For starters, the specific coverage provision is difficult to locate. The term “Damage To Premises Rented To You” is only found in two places in the CGL – once within some exceptions to the Damage To Property exclusion (Exclusion j.), and once in the Limits of Insurance Section III. (Medication is strongly recommended before reading.) One reason for the change in name from “Fire Damage” to “Damage To Premises Rented To You” is that in 1998, a second coverage was added beyond just damage by fire. So the “new” (since 1998) fire legal coverage has two parts: fire damage, and non-fire damage.

The traditional language which creates the old “fire legal” provision appears at the end of the Coverage A Exclusions, as follows:

Exclusions c. through n. do not apply to damage by fire to premises while rented to you or temporarily occupied by you with permission of the owner. A separate limit of insurance applies to this coverage as described in Section III – Limits Of Insurance.

Example: Fire damage to the rented warehouse for which your insured is legally liable through tort is covered. However, there is no coverage if your insured is legally liable for the fire damage due solely to the rental contract. There are two reasons for this. First, note in the excerpt above, the grant of coverage for “damage by fire to premises” applies as an exception to “Exclusions c. through n.” Importantly, Exclusion b. is the contractual exclusion, thus the fire legal coverage is still subject to that exclusion. Second, while the contractual exclusion includes an exception for “insured contracts,” the definition of a “lease of premises” as an “insured contract” does not apply to “…that portion of the contract for a lease of premises that indemnifies any person or organization for damage by fire to premises while rented to you or temporarily occupied by you with permission of the owner.”

For example, if the rental contract makes your insured legally liable for “any and all damages,” and a nearby forest fire gets out of control and destroys the warehouse, there would be no coverage (unless your insured accidentally caused the forest fire, making him liable under tort). Coverage applies for the duration of the policy (vs. 7 days – see below).

The 1998 change that broadened coverage beyond “fire damage,” and necessitated a revision of the title to “Damage To Premises Rented To You,” is found at the end of the Damage To Property exclusions (Exclusion j.), as follows:

Section I - Coverage A Exclusions [Excerpt].

j. Damage to Property

"Property damage" to:

(1) Property you own, rent, or occupy...

(3) Property loaned to you;

(4) Personal property in the care, custody or control of the insured;

Paragraphs (1), (3) and (4) of this exclusion do not apply to "property damage" (other than damage by fire) to premises, including the contents of such premises, rented to you for a period of 7 or fewer consecutive days. A separate limit of insurance applies to Damage To Premises Rented To You as described in Section III – Limits Of Insurance.

Example: Damage to the warehouse by other than fire for rentals of 7 or fewer consecutive days is covered. (This provision was added in the 1998 edition.) Coverage still only applies for tort liability, not contractual liability, as discussed above. This provision would not be applicable to your insured’s rental of the warehouse, since the rental period is over a longer period – probably a year at least. But if your insured rented a hotel ballroom for a trade show of 7 or less consecutive days, and caused some non-fire damage to the room, coverage would apply.

However, note that the “non-fire damage” would not cover any type of damage to the rented ballroom. This enhanced coverage from 1998 is created as an exception to only 3 of the exclusions (“Paragraphs (1), (3) and (4)”) for Damage To Property (Exclusion j.). That means that all the other Coverage A exclusions still apply to this provision. Therefore, if damage is done to the hotel ballroom by a vehicle (insured’s employee delivering equipment for the meeting hits accelerator instead of brake, vehicle enters the ballroom through open double doors and goes careening through the ballroom), Exclusion g. (auto) applies. But if a projection screen for the PowerPoint presentation was being moved around in the ballroom and it hit a fire system sprinkler head, damage to the sprinkler head and the ensuing water damage would be covered, since there is no exclusion for this type of damage under the Damage To Premises Rented To You provision (assuming that the rental was for only 7 consecutive days or less).

Limits of Insurance. The basic limit for Damage To Premises Rented To You is $100,000 – although some insurers will write higher limits. This raises a couple of issues. First, this limit is probably insufficient for your insured’s exposure. Assume the 5,000 sq.ft., warehouse your insured is renting is valued using a modest $50 per sq.ft., your insured’s potential exposure is $250,000. Second, the language in the Limit of Insurance provision is often misunderstood.

Section III - Limits of Insurance.

6. Subject to Paragraph 5. above, the Damage To Premises Rented To You Limit is the most we will pay under Coverage A for damages because of "property damage" to any one premises, while rented to you, or in the case of damage by fire, while rented to you or temporarily occupied by you with permission of the owner.

This issue comes up most frequently where an insured has rented a warehouse, and damages it with a vehicle or forklift. Assuming the rental of such warehouse is for more than 7 consecutive days (which is almost always the case), there would be no coverage. The confusion arises when only the first part of the sentence is read: “6. Subject to Paragraph 5. above, the Damage To Premises Rented To You Limit is the most we will pay under Coverage A for damages because of "property damage" to any one premises, while rented to you,…”

Based on just this portion of the Limits of Insurance provision, it appears that the $100,000 limit applies to any damage done to the rental premises. However, Section III Limits of Insurance does not have any impact on coverage; it simply states how much insurance is available for a covered loss. As discussed, in situations where the rental extends beyond 7 consecutive days, the only coverage is for fire damage. In addition, where the rental is for less than 7 consecutive days, all the other Coverage A exclusions still apply (other than the 3 exceptions to the Damage To Property (Exclusion j. – discussed above). Therefore, damage by an auto is excluded under Exclusion g. However, a forklift is generally considered “mobile equipment” and not an “auto,” so where the rental was less than 7 consecutive days, damage done by a forklift would be covered.

Short summary of Damage To Premises Rented To You:

(1) Rentals longer than 7 consecutive days: Coverage applies to fire damage to premises (not contents). Premises can be rented or merely “temporarily occupied with permission of the owner” – i.e., no rent was paid.

(2) Rentals less than 7 consecutive days: Coverage applies for losses to rented premises and contents by causes other than fire, which are not otherwise excluded by Coverage A.

(3) The insured is legally liable through tort and not solely by contract.

(4) Basic coverage limit is $100,000.

Legal Liability Coverage Form (CP 00 40)

The Commercial Property Legal Liability Coverage Form offers significantly broader coverage for damage to rented premises than the CGL. These excerpts provide a good overview of the coverage:

A. Coverage

We will pay those sums that you become legally obligated to pay as damages because of direct physical loss or damage, including loss of use, to Covered Property caused by accident and arising out of any Covered Cause of Loss. We will have the right and duty to defend any "suit" seeking those damages.

1. Covered Property And Limitations

Covered Property, as used in this Coverage Form, means tangible property of others in your care, custody or control that is described in the Declarations or on the Legal Liability Coverage Schedule.

Because the CP 00 40 is a property form, one of the Causes of Loss forms must be attached, which can be the Basic Form (CP 1010), Broad Form (CP 10 20), or Special Form (CP 10 30). Blending a property form with a legal liability requirement presents the problem surrounding being legally liable for certain perils. For example, it seems implausible that your insured as a tenant could be legally liable for tornado damage to the rented warehouse, except under a requirement of the rental contract. And just as contractual liability is excluded from the “fire legal” coverage under a CGL, it is also excluded when using the Legal Liability Coverage Form. Interestingly, the contractual exclusion is found in the Causes of Loss form, and not the CP 00 40 itself. This exclusion is found in all three Causes of Loss forms:

Special Exclusions

The following provisions apply only to the specified Coverage Forms.

c. Legal Liability Coverage Form

(2) The following additional exclusions apply to insurance under this Coverage Form:

(a) Contractual Liability

We will not defend any claim or "suit", or pay damages that you are legally liable to pay, solely by reason of your assumption of liability in a contract or agreement.

One additional limitation of the Legal Liability Coverage Form is that coverage only applies to property (buildings or contents) which are described in the Declarations. Therefore, in the situation discussed earlier where your insured rents a hotel ballroom, the Legal Liability Coverage Form would provide no coverage unless the ballroom was listed in the Declarations.

Which is better: CGL or Legal Liability Coverage Form? Trick question! Neither. Each has advantages and disadvantages. Best answer: use both, and remember to consider increased limits above the $100,000 in the CGL.

Alternatives. When dealing with rented buildings such as your insured’s warehouse, most authorities recommend that coverage be provided with a Building and Personal Property Coverage Form (CP 00 10), or BOP. This eliminates the legal liability issues discussed above. Since Damage To Premises Rented To You is automatically included in the CGL, no action is necessary here, except perhaps to increase the limit above $100,000. In addition, waiver of subrogation is also recommended by most experts.

However, there is no magic bullet. Most commercial rental agreements in use today place impossibly broad requirements on the tenant for damage to the rented building. Typically the requirement is for “any and all damages,” regardless of fault. There is no insurance contract that would satisfy that requirement. In a larger sense, this is not uncommon in Triple Net Leases, for example.

Lastly, the IIABA’s Virtual University has at least five excellent articles on all this. To access them, simply search the web site for “triple net.”

Thanks for a great question. I hope you get the new account.