Care, Custody & Control in the CGL

Many insurance policies exclude or limit coverage for damage to property in an insured’s “care, custody or control,” but what does that term really mean? While we’ll probably be debating this issue for years to come, in this article, we’ll take a look at an actual claim and discuss some of the critical issues that govern coverage.

Question 1

“Insured is a cultural arts advocacy group promoting the arts in the area. It was described as a civic organization with dinners, balls, art shows and concerts. These events were added as they occurred.

“The group however held youth art classes in the local school without our knowledge. Children used mat knives to cut items. These knives damaged 10 table tops owned by the School. Damage estimated at $5,000. Insurer denied coverage based on the 1996 CGLDamage to Property Exclusion j.4. I understand the reason and purpose of the ccc exclusion and initially did not disagree with the denial (although I am disturbed by it).

“Does it make a difference that the damage was done by the children (not insureds) as opposed to the insured (employees, officers and members are insureds)? If they broke the window in the room, would the ccc excl apply? Would all of the room and the personal property be considered under their ccc? Does it matter if they rented the room as opposed to just been given permissive use? Does it matter if it was a 2 hour, one time session versus a 2 week course or a once per week for 3 week course?

“Even if we had known about this use, we probably would not have suggested property coverage (the purpose of the ccc exclusion) and even if we did, business personal property coverage would probably not cover due to the marring and scratching exclusions. Do you agree? If the denial is correct under the GL and the limitations under property insurance are correct, how can such a fortuitous event be covered?

“I once had a YMCA that used the School’s gym for basketball. A player on one team broke the backboard. The YMCA’s insurer paid without invoking the ccc exclusion. Where they just being good guys?”

Response 1

This is a really interesting claim and we think there’s probably a reasonable argument both for/against coverage. Below are a couple of faculty responses that discuss the issues.

Response 2

My thoughts on at least a few of the issues…

Does it matter if the insured rents? Very much so. As you look at the c,c,c exclusion some parts (j-1) apply to property (real or personal); some apply to only personal (j-4) and some apply to real (j-5). If they had rented the room and all of its contents j-1 could apply.

J-4 does apply to tables but it only applies to personal property of the insured in the c,c,c of the insured. Were those tables in the c,c,c of the insured? Quite debatable. If the damage was caused by the children (not insureds) and the named insured was held vicariously liable for the acts of the children (clearly covered by the CGL) there is an argument for coverage. The question is, since the insured had supervision of all of the activities and the room, were the tables in the “management” c,c,c of the insured? C,c,c can be more than just “hands on.” The carrier has an argument but I would go back with the children not insured’s position first and see what happens.

Where do you cover things like this? You generally do not. Insurance is not intended to cover everything and even property insurance would have deductibles and exclusions for things like “marring, scratching, denting, breakage, etc.

Response 3

This entire issue boils down to whether or not the tables were in “THE insured’s” care, custody or control. To be fair, this can probably be argued either way…of course, since it can, then to be fair, the carrier should probably pay the claim since, when there are two equally reasonable interpretations of policy language, that favoring the insured should prevail.

If you read IRMI, FC&S, PF&M, and other reference materials, you’ll find that the origins of this exclusion indicate that the original intent was to exclude bailment situations, usually where someone was storing the property of another or where someone was processing, repairing, etc. the property of another…essentially, it falls into the category of workmanship exclusions. This position is supported by Cindrich v. Fireman’s Fund Ins. Co., 432 P.2d919 (Ariz. App. 1967).

Also, the Louisiana Supreme Court in Ron Reynolds v. Select Properties Ltd. 634 So. 2d 1180 (1994) viewed this exclusion within the context of a bailment situation. The Court’s reasoning was the “CCC” circumscribes a legal relationship between the insured and the property.

According to one text, “The care, custody or control exclusion…is intended to withdraw from coverage the risk of property damage inherent in the business of storage, repair, service or delivery. After all, these are risks which can be insured under various forms of first party property insurance.” In this particular case, I don’t think the nature of the claim falls into a bailment/processing type of situation…there just isn’t a reasonable and practical insurance alternative (see below) for this type of insured that true bailment/processing risks have available.

There are many, many court cases dealing with CCC, though no clear, definitive answer to this frequently debated issue since so much hinges on the unique circumstances of each case and the prevailing logic of the court with jurisdiction. Many courts, though, have based their decisions on the degree of control exercised by the insured. Just occupying or using the property of others doesn’t necessarily create a bailment situation nor establish prima facie evidence of “CCC.”

IRMI cites the Tennessee case of American Family Mutual Ins. Co. v. Bentley, 352 NE2d 860 (1976) where Boy Scouts stored property in a shed that burned. The court found that CCC didn’t apply because the owner of the shed did not exercise active possession or supervision of the property…the Scouts still had free access to their property and could remove it and come and go as they pleased. In the claim that’s the subject of this discussion, the same could be said…the insured was not exercising control over the property…the kids were just using it to do their art work.

Researching case law, in situations where the exclusion has been held inapplicable, the courts took the position that the insured had merely been given temporary access to the damaged property, not complete care, custody and control. In other words, use was just temporal. Such cases include Bituminous Casualty Corp. v. Chicago R. I. & P. R. Co. (1972) 8 Ill.App.3d 172 [289 N.E.2d 464], Klapper v. Hanover Insurance Company (1963) 39 Misc.2d 215 [240 N.Y.S.2d 284], Meadows & Walker Drilling Co. v. Pacific Emp. Indem. Co. (S.D.Tex. 1971) 324 F.Supp. 282, and Haerens v. Commercial Cas. Ins. Co. (1955) 130 Cal.App.2d Supp. 892 [279 P.2d 211].

Another issue involves the issue of whether the tables were in the “CCC” of “THE insured.” Since the claim is against the insured, if anyone had CCC was it the insured, the kids, volunteers, or whomever?

Looking at the legal interpretation of CCC, here’s what Black’s Law says:

“Care”…watchful attention. Did the insured have watchful attention over the tables or were they just incidental to the purpose of the visit?

“Custody”…the keeping, guarding, care, watch, inspection, preservation or security of a thing. Did the insured have “custody” of the tables? Having custody implies the entrustment of property to another, which seems to be missing in this claim.

“Control”…to exercise restraining or directing influence over. It doesn’t sound like the school passed control of the property to the insured.

If I hire a computer tech to fix my PC and he drops it and breaks it, that property is clearly in his CCC. However, if he drops it onto the table where he was working, I don’t think the table is in his CCC. In the claim in question, I don’t thing “CCC” of the tables was explicitly passed to the insured, not were the kids working ON the tables. If the art class involved refinishing of furniture and the tables were damaged, that’s obviously a “CCC” exposure since the tables would be the subject of the processing. Here, that’s not the case…it would seem to be a very restrictive interpretation of CCC if it were to apply, effectively, to anything touched by an insured.

Another point involves the CGL Who Is An Insured section. It states that employees are not insureds for damage to property “…in the care, custody or control of, OR OVER WHICH PHYSICAL CONTROL IS BEING EXERCISED FOR ANY PURPOSE….” That’s a stronger exclusion than the pure CCC exclusion. That would imply that there’s no coverage for the person who immediately is exercising physical control for any purpose over property. By adding that to the “care, custody or control” language that precedes it, I think that means that just having physical control doesn’t constitute “CCC”…it takes more than that. Since “the insured” wasn’t directly exercising control, this exclusionary wording doesn’t apply…only the “CCC” wording does in the exclusions section and I don’t believe that’s adequate enough to exclude coverage for the insured.

The point is well taken about alternative methods of insuring if the CGL doesn’t respond. Most property forms do exclude marring, scratching, etc., though I think the intent of that type of exclusion is for long term wear and tear, not sudden and accidental damage of this type. The Legal Liability Coverage Form is probably not appropriate since it requires scheduling which isn’t practical, nor are bailee’s customers policies.

Probably the best bet is a manuscript “CCC” buy back that some carriers use, often with a limit of $5,000 or so (which would have been nice here). These endorsements are most often used for processing/contracting exposures (e.g., window washers) which indicates that the primary intent of the CCC exclusion is to preclude workmanship claims and bailment situations. I’ve never heard of this type of endorsement being used for this type of insured.

Another possibility is for the insured to begin using a very simple mutual waiver of subrogation contract whenever they use a facility like this. Then the school’s policy, barring any exclusion, would pay and their carrier wouldn’t subrogate against the insured.