CGL Fire Damage Legal Liability and Higher Limits

Question 1

“I have hit a brick wall with a nice commercial account I am quoting on. One of the insurance requirements is for limits of ‘fire legal’ coverage higher than the standard $100,000 provided in the ISO CGL. The contract my insured must comply with requires $1,000,000 limit. So far, the highest limit any of my markets will write is $300,000. In addition, no excess/umbrella market I have contacted will include the coverage. Any suggestions would be greatly appreciated.”

Response 1

Insurance policies are essentially tools designed to solve problems (exposure to certain types of losses). In situations like yours, it’s unfortunate and vexing when the choice of the insurance tool(s) needed to address the problem is predetermined by a contract or bid spec, which are often not written by insurance experts. Ironically, this provision in the lease, probably inserted for the benefit and protection of the landlord, is actually an impediment to procuring the best coverage for the exposure. Fire legal coverage in the CGL is not the best tool for the exposure contemplated under a typical landlord/tenant arrangement.

This problem is frequently seen with Certificates of Insurance. It is not uncommon for a certificate request to stipulate a certain coverage form or endorsement by name and/or edition date (the CG 20 10 11 85, is a prime example).

CGL Fire Legal

The fire legal coverage in the CGL is very limited and narrow. Broadly speaking, fire legal only covers: (1) fire damage to a rented premises; (2) if the insured is legally liable for the fire under tort, but not due solely to a contract; and (3) the coverage limit is $100,000. Some insurers will increase this limit. It is possible that an umbrella carrier might drop down over a higher underlying limit in the CGL.

Fire legal coverage likely grew out of lease provisions decades ago, where requirements placed on tenants was minimal, as illustrated in this excerpt from that era:

“Lessee will keep said premises in good repair, and upon termination of this lease, in any way, will yield said premises to Lessor in good condition and repair (loss by fire and ordinary wear and tear excepted).”

As early as the 1950’s (possibly earlier), litigation developed as to whether or not the exception for fire applied to any fire damage, even if caused by the tenant. Case law was mixed. Where fire damage caused by the tenant was not deemed within the “exception for fire,” a need arose for insurance coverage for fire damage to a rented premises by negligence of the tenant.

And while the term “fire legal” is commonly used, the ISO CGL has called the coverage “Damage to Premises Rented to You” since the 1998 edition.

Here is a quick example. Coverage form excerpts and comments below are based on Insurance Services Office (ISO) forms and endorsements. Proprietary forms may be different.

Assume Jill Smith is the owner of Smithco Services, Inc. Smithco rents one 5,000 sq.ft. unit of a 3-unit, $1,000,000 warehouse building. If the entire building burns because of the negligence of a Smithco employee, Smithco does not need $1,000,000 of fire legal coverage. Smithco’s ISO CGL covers any BI/PD under Coverage A for which Smithco is legally liable, subject to exclusions, terms and conditions of the CGL. Exclusion j. provides the following:

Commercial General Liability Coverage Form

j. Damage To Property

“Property damage” to:

(1) Property you own, rent, or occupy, including any costs or expenses incurred by you, or any other person, organization or entity, for repair, replacement, enhancement, restoration or maintenance of such property for any reason, including prevention of injury to a person or damage to another’s property;

Comments:

(1) While Smithco is legally liable for the $1,000,000 loss, their CGL excludes damage to the unit Smithco rents [see j.(1) above]. This provision is often incorrectly described as the “ccc exclusion,” meaning that any property in the insured’s “care, custody or control” is excluded. However, the “ccc exclusion” in the CGL is actually found in Exclusion j.(4), and only relates to personal property:

j. Damage To Property

“Property damage” to:

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

(2) Smithco’s CGL does provide coverage for the parts of the warehouse that it did not rent, so theoretically, that could mean the other 2/3 of the building, or $666,666.

(3) However, while the damage to the rented unit is $333,333, the amount payable under the standard ISO CGL fire legal coverage is only $100,000, leaving an unpaid gap of $233,333.

(4) If Smithco rented the entire $1,000,000 warehouse, the entire building would still be subject to the $100,000 limit for fire legal. On the surface, this would clearly indicate a need for $1,000,000 of fire legal coverage.

(5) In reality, most commercial leases these days place far greater responsibility on tenants than just fire damage they cause to the portion they rent. A common requirement is that the tenant is legally responsible for “any and all damage to the building.” As we saw with Smithco, their CGL Coverage A, plus their fire legal coverage, would not fully comply with this “any and all damage” requirement.

Legal Liability Coverage Form CP 00 40

A much-needed companion to the CGL for commercial tenants is the Legal Liability Coverage Form CP 00 40. This coverage form provides tenants with coverage as follows:

CP 00 40 10 12

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.

Comments:

(1) Although the CP 00 40 is a commercial property form, it provides the insured tenant with legal liability coverage for damage to tangible property in their care, custody or control, if caused by a Covered Cause of Loss.

(2) At the same time, just as in the CGL fire legal coverage, the coverage is only provided if the insured is legally liable through tort, and does not apply if the liability arises solely from a contract.

This restriction is not found in the CP 00 40, but is included in each of the three ISO Causes of Loss Forms, one of which would be attached to the CP 00 40.

CP 1010 10 12 Basic Form

CP 10 20 1012 Broad Form

CP 10 30 1012 Special Form

B. Exclusions

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.

Comments:

(1) The CP 00 40 is frequently recommended by many experts as a necessary addition to the CGL in the insurance program for tenants. It helps fill the large gaps that CGL fire legal coverage leaves exposed for the insured tenant.

(2) But as noted, the CGL fire legal, as well as the CP 00 40 Legal Liability Coverage Form, both exclude losses that arise solely from contractual liability. In addition, the CP 00 40 only covers the insured’s tort liability that arises from Covered Causes of Loss.

(3) Therefore, an alternative preferred by other experts is to write a straight building policy, using the CP 00 10, or a Business owners Policy (BOP). These provide coverage on a cause-of-loss basis, with no distinction made between tort liability and contractual liability, vs a contractual exclusion in both CGL fire legal and the Legal Liability Coverage Form.

Lastly, while researching your question, I contacted several colleagues who are experts in this area. Here are some comments.

My understanding is that most excess/umbrella policies don’t make excess FDLL coverage available. The reality is that FDLL is an obsolete coverage that had some usefulness many, many years ago when tenants were responsible for fire damage due to their negligence. Virtually all leases today make the tenant responsible for ANY damage to the premises in their care, custody and control, probably most without regard to fault.

So, it doesn’t really matter how much FDLL coverage you have if vandals cause $50,000 in damage to the premises or HVAC equipment or plate glass that the lease requires the tenant to return at the end of the lease with no damage beyond normal wear and tear.

Even the CP 00 40 won’t work for liability for damage for which the tenant has no liability outside the contract (which is excluded), such as vandalism, lightning, theft, windstorm, etc.

As a number of VU articles outline, FDLL coverage and probably the CP 00 40 simply don’t cut it. You need a CP 00 10 or BOP coverage written with the broadest available perils, likely including flood.

In this case, the agent is correct that “there is a large hole in coverage that most agents are not aware exists.” The hole is probably larger given that he may not be aware that ANY limit of FDLL coverage still leaves a large hole of uncovered exposure.

 

Additional information

• “CGL Fire Damage Legal Liability Coverage vs the CP 00 40 Legal Liability Coverage Form”
• Is Fire Legal Coverage Primary or Excess?”

 

Special thanks to Bill Wilson, CPCU, ARM, John Eubank, CPCU, ARM, and Jim Mahurin, CPCU, ARM, for their assistance with this article.

Last Updated: August 8, 2016