By: Chris Boggs | Big I Virtual University Executive Director

This article was originally published in our September 2020 Wisconsin Independent Agent. Read more from our September issue here. 

Thousands of restaurants engage in food delivery. This is, by no means, a new phenomenon. With that reality in mind, two questions arise:

1. Is the restaurant covered for food delivery if it does NOT have a business auto policy; and

2. How does a restaurant’s business auto policy respond to food delivery when they have the  coverage?

What appears to be two simple questions simply aren’t.

The simple answer is, yes, the restaurant is covered for its auto liability exposure – well, maybe there is coverage. The more  complicated answer is, yes, the restaurant is covered, but is that coverage adequate for the restaurant and the employee?

Let’s begin by looking at the reality of coverage when the employee is using his or her personal auto to make deliveries for the restaurant. The questions that must be answered include:

• Is there liability coverage in the personal auto policy (PAP) for food delivery?

• Is coverage provided by the business auto policy (BAP) for employees using their  personally-owned autos for food delivery?

• Who is covered by the BAP, if coverage is provided?

• Which policy is primary?

• Which policy is excess?

• What key endorsement is needed?

Coverage in the PAP

Decades ago, pizza and maybe Chinese food delivery began the PAP’s delivery coverage  debate. Does the personal auto policy cover food delivery? Note that as this question is answered, Grub Hub, Uber Eats and every other such app-based food delivery service are completely ignored. The focus here is solely on food delivery by the employee of one restaurant.

PAP Exclusions of Interest

Whether the PAP provides liability coverage for food delivery is a function of two exclusions: the business use exclusion and/or the public or livery conveyance exclusion.

Business Use Exclusion: The business use  exclusion is a non-factor in this discussion. The PAP excludes the use of an auto when being used in an auto-related business (sales, service, repair, etc.), unless the car is owned by the named insured, a family member or others provided the car is listed on the PAP. So, this exclusion can be ignored.

Public or Livery Conveyance Exclusions: This exclusion may have more teeth. The applicable part of this exclusion reads:

EXCLUSIONS

A. We do not provide Liability Coverage for any “insured”:

5. For that “insured’s” liability arising out of the ownership or operation of a vehicle while it is being used as a public or livery conveyance.

Does an employee delivering food qualify as either public or livery conveyance? If so, the PAP provides no coverage. Although generally phrased as one concept, public conveyance and livery conveyance are actually two  different threshold requirements (notice the “or” between the terms). Let’s define both terms to clarify coverage (or the lack thereof).

• Public conveyance: Making the vehicle available for public use (like a common carrier);

• Livery conveyance: Carrying persons or property for a fee.

Is food delivery for one restaurant considered “public conveyance”? No, the vehicle is not available for public use; it is being used by the employee on behalf of his/her employer only, and only for a single purpose – food delivery. Making the vehicle available for public use is what the ride sharing and food delivery apps do. When working for one restaurant, the vehicle is not available to others (to the public).

However, does food delivery trigger the “livery conveyance” exclusion? The employee is carrying property (namely food), but is the cost of the food considered a fee? And considering fees, does charging a separate delivery “fee” make a difference?

Courts seem to agree that an employee delivering food for an employer is not livery conveyance, even if a separate delivery fee is charged. In a livery conveyance, the fee is charged by the carrier as their remuneration for providing the service. In pizza delivery or food delivery, the fee is charged by the employer for its own purposes (probably a charge for convenience) and is not necessarily for the benefit of the driver.

Remember, the public or livery conveyance is intended to exclude coverage for those who are in a common-carrier-like business, not the person using their personal auto to delivering property for his or her employer.

This discussion is a long way around to answering the question of coverage in the PAP. Yes, there is coverage for food delivery in the PAP. But this doesn’t mean carriers won’t try to utilize the public or livery conveyance exclusion if the injury is bad enough.

BAP and Employee Use of a Personally Owned Auto

If the employer/restaurant has a business auto policy, does that policy extend coverage for the employee’s use of their personal auto for any reason, particularly to deliver food? Secondly, who is covered?

Is Coverage Provided?

Whether liability coverage is provided by the BAP for an employee’s use of his/her personal auto on behalf of the employer is a function of the coverage symbol or symbols used.

• If Symbol 1 – Any Auto is used, yes, there is coverage. If any other primary symbol is used  (2, 3, 4 or 7), no, there is no coverage.

• If the primary liability symbol used is 2, 3, 4, or7, the only way there is coverage for use of the  employee-owned auto is if Symbol 9 –  Non-Owned Auto is also used within the liability coverage.

If either of these requirements is met (Symbol 1 or Symbol 9), then the BAP provides coverage for the employee’s use of their personal auto. But that is only part of the issue. Who is covered by the BAP?

Who is Covered by the Unendorsed BAP?

When the employee is using his or her personal auto on behalf of the named insured only the named insured (the restaurant) is protected by the unendorsed BAP. The exclusion for the employee is clearly stated within the Who is an Insured provision:

1. Who Is An Insured

The following are “insureds”:

a. You for any covered “auto”.

b. Anyone else while using with your permission a covered “auto” you own, hire or borrow except (this means they are excluded from coverage):

(1) The owner or anyone else from whom you hire or borrow a covered “auto”.

This exception does not apply if the covered “auto” is a “trailer” connected to a covered “auto” you own.

(2) Your “employee” if the covered “auto” is owned by that “employee” or a member of his or her household.

Again, this means the BAP protects only the named insured restaurant when the employee uses his/her personal vehicle to deliver food. Worse still, because the employee is not an insured in this situation, the employer’s business auto carrier can actually subrogate against the employee.

But remember, this is how the unendorsed BAP responds, there is an endorsement that solves this problem. But before we get to the solution, we need to understand how the PAP and BAP dovetail.

Which Policy is Primary and Which is Excess?

Even though the business is benefiting from the employee’s use of his/her personal auto, the employee’s personal auto policy provides primary coverage in the event of a claim. This primary protection extends to both the   employee and the employer.

Don’t believe me? Here is the policy language:

PART A - LIABILITY COVERAGE

INSURING AGREEMENT

B. “Insured” as used in this Part means:

3. For “your covered auto”, any person or organization but only with respect to legal  responsibility for acts or omissions of a person for whom coverage is afforded under this Part.

As is seen in this language, the employee’s personal auto policy extends coverage to the employer for its vicarious liability for the actions of the employee. Although this wording doesn’t specifically state that the PAP is primary, we need only to review the BAP for proof.

The Other Insurance provision in the BAP reads:

5. Other Insurance

a. For any covered “auto” you own, this Coverage Form provides primary insurance. For any covered “auto” you don’t own, the insurance provided by this Coverage Form is excess over any other collectible insurance.

Remember, the PAP is always primary when the policy’s named insured owns the vehicle and it is listed on the personal auto policy. The BAP is excess, but only for the employer’s benefit (unless the policy is endorsed otherwise).

Because the PAP is primary, the first issue for the employee and the employer is coverage limits. Are the employee’s PAP limits adequate in the event of an at-fault incident? Remember, both the employee and employer are covered.

Consider this scenario, the employee, while delivering food for his/her employer, is involved in an at-fault accident – hitting a surgeon on her way to the hospital. In the accident, the surgeon severely injures her right hand and can no  longer perform her surgical duties.

Will the insured (the employee) have adequate limits? Probably not (regardless of the amount). If the employee’s limits are exhausted, then the BAP responds on an excess basis (if Symbols 1 or 9 is used) – but only for the employer (in an unendorsed BAP).

Let’s throw in another “but” or “what if;” what if the employer doesn’t have a BAP? Let’s end the suspense, this is a very bad situation – for the employer.

If the employer is held vicariously liable for the actions of the employee, the employer is financially responsible for damages caused by the employee over and above what the PAP pays. This is true even if there is no business auto policy in place. The lack of insurance does not relieve a legally liable party of its responsibility to the injured party. Legal liability can be direct or vicarious (see the article “How Does a Person Become Legally Liable”).

To avoid this out-of-pocket expense, the employer needs a business auto policy to protect its financial assets – at least to the level of coverage.

Lest you get jaded and say, “But Boggs, what is the likelihood the employee will hit a surgeon?” Fair question. The victim doesn’t have to be a surgeon, nearly any accident can be financially devastating under the right circumstances.

Two recommendations so far:

• Require the employee to carry relatively high liability limits. At minimum 100/300/50. I  recommend higher with an umbrella/excess policy, but there are certain financial realities  that may make higher limits too expensive. But remember, don’t limit the insured’s  options by not letting them know that higher  limits are available.

• If the business doesn’t have a BAP, explain the dangers of not having one; namely that  the insured can still be required to pay  because of their vicarious liability for the actions of the employee. Recent anecdotal reports are that carriers are not as willing to  provide hired and non-owned liability coverage only at this point; but you have to try to find it (even in the E&S market). Some other reports are that certain carriers are going to  automatically extend this coverage if the insured restaurant did not provide delivery service previously (if the insured did provide  delivery but never bought the coverage, they are on their own, which is OK because they should have had the coverage

A Key Endorsement

Throughout this article, the fact has been highlighted that the unendorsed BAP does not extend protection to the employee when he/she is using his/her personal auto on behalf of the employer. This lack of employee   protection can be detrimental to the employee. As was previously discussed, the BAP insurer can subrogate against (seek recovery from) the employee if the BAP is required to pay to cover the business owner’s vicarious liability for the actions of the employee.

Whether the BAP carrier would want the PR storm that comes with this is irrelevant; they can do it, and if the loss is bad enough, they may. But there is a remedy.

To fix this gap and keep relations between the employer and employee intact, attach the CA 99 33 10 13 - Employees as Insureds  

endorsement. As the title suggests, the endorsement extends insured status to  employees when driving their personally owned vehicles for the benefit of the employer/insured. But this endorsement does NOT change the order of response.

Even when the CA 99 33 is attached, the employee’s PAP still responds as the primary coverage. The BAP remains excess. The

difference is this endorsement extends protection from the BAP to the employee on an excess basis. Further, as an insured, the carrier no longer has the ability to subrogate against the employee if the loss requires the BAP to respond as excess.

Always attach the CA 99 33 anytime an employee is using his or her personal auto on behalf of the employer, even in non-delivery situations such as are addressed in this article.

Takeaways

Keys to remember from this article:

• The PAP is always primary for an employee-owned auto;

• The public or livery conveyance exclusion isi ntended for those in common carrier type businesses, not food delivery for their employer;

• Don’t put it past an insurance carrier to try to  use the public or livery conveyance exclusion;

• An employer can be held vicariously liable for the actions of its employees, especially when the employee is using his/her personally-owned auto for the benefit of the employer;

• Because the employer can be held vicariously liable for the actions of the employee’s use of the employee-owned auto, the employe should carry relatively high PAP limits;

• Because the employer can be held vicariously liable for the actions of the employee’s use of the employee-owned auto, the employe should have a BAP; and

• Because there is no coverage for the employee in the unendorsed BAP, the CA 99 33 should be attached.

States are in various stages of reopening following months of COVID-19 lock downs. As the states progress through the phases, businesses are making key decisions regarding masks, should masks be required or optional? Some legislatures have taken the    responsibility for this decision away from business owners and are requiring masks be worn; but other states leave the decision to the business owners.

In states where the decision rests with the business, some operations have made the corporate decision to require masks be worn by all who enter the premises. From a legal liability perspective, is this necessary?

Legal Liability

Legal liability is liability imposed by the court or regulators on the person or entity legally responsible for injury or damage suffered by another party. Such legal obligations (or liability) can arise from intentional acts, unintentional acts, contracts (express or implied) or regulations. Legal liability generally focuses on civil wrongs but can include criminal wrongs. “Legal liability” exists when:

• The wrongdoer is found guilty of “Negligent Conduct” (breached the duty owed);

• The injured party suffers actual damages; and

• The wrongdoer’s “negligent conduct” is the proximate cause of the injury or damage.

A key requirement towards proving “negligent conduct” and ultimately legal liability is proving that the supposed tortfeasor (the wrongdoer) has or owed the injured party a specific duty of care and breached or failed to satisfy that duty. The degree of care owed to an injured party is based on the relationship between the wrongdoer and the injured party.

The greater the degree of care required or expected, the lower the threshold for breaching a duty owed (it is easier to breach a duty when greater care is required). Courts generally recognize four degrees of care or “levels” based on relationships are:

• Slight Negligence: A high degree of care is required;

• Ordinary Negligence: Requires “reasonable” care such  as would be provided by a reasonable and prudent  person;

• Gross Negligence: Very little care beyond slight care (not to be  confused with slight negligence) is required. This is represented by a deliberate or reckless disregard of a duty to exercise care which is  likely to cause foreseeable and significant harm; and

• Negligence per se: A breach of duty because the law says it is.  Negligence per se requires: 1) the at-fault party to violate the  law, 2) the law to pertain to public safety, 3) the violation of the  law be the cause of the injury, and 4) the injured person be a  part of the class of persons the law was designed to protect.

In a business/customer relationship, the business generally owes the customer a duty of reasonable care. While there are certain business relationships that increase the duty owed (such as that owed by an operation transporting passengers in a vehicle), reasonable care is the most common duty owed. For sake of this review, assume the business owes a duty of reasonable care.

Examples of duties owed by business establishments under the concept of reasonable care include repairing/correcting known hazards; warning against intrinsic/unrepairable hazards; and taking steps to avoid preventable hazards.

Consider the example of a restaurant that has several sets of steps in the path to the dining area, where a member of the wait staff has spilled some water and where the plate comes out of the oven very hot. Reasonable care in such a restaurant might include actions such as the person showing the customer to a table warns of the steps (“watch your step”), the wait person puts up a little yellow sign warning of the wet floor, and the person delivering the food says, “Be careful, the plate is hot.” These are examples of reasonable care.

Let’s return to the question of masks and legal liability associated with requiring or not requiring them. For this discussion, the injured party moves from a restaurant (it’s hard to eat while wearing a mask) to a retail location.

From the perspective of reasonable care, are masks necessary to avoid legal liability?  

(Note, this discussion does not and will not address the availability or applicability of liability insurance coverage. Only the concept of legal liability regarding customers in a typical retail setting is addressed in this article.)

Effectiveness of Masks

Before exploring the relative differences in legal liability between requiring masks and allowing customers the option, the purpose and effectiveness of masks must be considered. Discussions focused on the effectiveness of masks may be more complicated than the  concept of legal liability because of the emotions and the lack of clear

information surrounding the wearing of masks.

Purpose: The Centers for Disease Control (CDC) and the World Health Organization (WHO) both state there are essentially two “grades” or levels of masks: 1) those that filter out the virus designed to protect the wearer from contracting the virus and prevent the wearer from spreading the virus; and 2) those intended to prevent the wearer from spreading the virus, but that do not necessarily prevent the wearer from contracting the virus. The masks most often worn by the public are the second type – masks intended only to prevent the spread and not the contracting of the virus.

Effectiveness: Unfortunately, the question of effectiveness seems to be unanswerable. Some claim the masks are very effective (giving percentages of protection without credible source substantiation) and some say they are little more than a “feel good” measure using drywall dust and even smoke to prove the point. Even the CDC and WHO are inconsistent in their messages. In regard to legal liability, effectiveness is largely irrelevant.

Masks Optional

Business operations choosing to allow the customers to make the mask-wearing decision may subject themselves to accusations by a customer that he or she contracted the virus from an unmasked  person or persons in the store. The injured person may assert that close contact with an unmasked person or persons led to their  sickness.

Such charges may be impossible to prove. A virus is a humankind exposure and is not limited to a location where people are not wearing masks. If the claimant visited the grocery store, bank,  pharmacy, office and/or other places during any particular day, proving the only place where they were exposed to the virus was the grocery store would be of utmost difficulty. Add to this the reality that other members of the family may have been several places, contracted the virus, and brought it home to everyone else in the house. Lastly, the masks worn in public are not designed to keep the virus from getting in, they are designed to limit the expulsion of the virus from the nose and mouth.

Frankly, lacking a law to the contrary, the business owner does not owe the customer a duty beyond reasonable care. Reasonable care is limited to the premises and what the business can actually control; viruses exist in more places than just the business premises and a business cannot be expected to protect a customer from exposure in all aspects of a customer’s life. Narrowing the person’s exposure down to one business on one particular day is truly picking gnats out of pepper.

Additionally, the legal concept of assumption of risk may be an affirmative defense to the mask-optional discussion. Assumption of risk is a legal doctrine under which an individual is barred from   recovering damages for an injury sustained when he or she voluntarily exposed him or herself to a known danger. Put another way,   assumption of risk prohibits the injured party from seeking damages on the basis that the plaintiff (injured person) knew of a hazardous or potentially hazardous condition and willingly exposed him or herself to it.

Assumption of risk defenses require the defendant to show:

• The injured party had actual knowledge of the risk involved  (conspicuously post signs warning “Enter at your own risk, masks are  optional”); and

• The plaintiff voluntarily accepted the risk (they entered the store).

When a customer visits a business where masks are optional, they make a conscious decision to enter the premises or not. If the injured party assumed the risk by entering the premises, the law generally  recognizes the defendant no longer owes a duty to protect the plaintiff against that risk.

Given the relatively unclear requirements of reasonable care, the difficulty in proving the virus was contracted at a particular place on a particular day, the doctrine of assumption of risk, and the limited purposes of the masks, business owners are unlikely to be held legally liable solely because masks were not required of all customers.

Requiring masks may exceed the requirement of reasonable care. In fact, certain disabilities and ADA laws may make it impossible for all customers to wear a mask. If courts made mask wearing the  minimum standard of reasonable care, removing the freedom of personal choice generally granted to the business owner and the customer/citizen, in a sense, the court would “legislate” masks by making mask wearing the minimum standard of care while ignoring the protection of assumption of risk. Some states have already undertaken legislative efforts to protect business owners.      

Masks Required

Previous paragraphs addressed the types and relative effectiveness of masks. Does requiring all customers to wear a mask decrease the business owner’s potential for being held legally liable?

Health officials recommend (where not a requirement) masks be worn that prevent the spread of droplets and mists from the nose and mouth that may contain the virus. Again, these masks aren’t  necessarily designed to prevent the wearer from contracting the virus, but when every customer wears masks, the theory is everyone has a reduced (though not completely eliminated) chance of contracting the virus.

On the surface, requiring everyone to wear a mask appears to lower the chances that the business will be accused of contributing to or causing a person to contract the virus. Requiring a mask seems to be a physical manifestation of an exculpatory statement such as, “Not Responsible for Broken Windshields” or “Enter at Your Own Risk, Not Responsible for Injury.” The statement doesn’t make it so.

Individuals may be less likely to sue but requiring masks may not lower or heighten an operation’s legal liability for injury to a  customer – if it can be proven the virus was contracted at the location. What other steps were taken to protect the customer?

Legal liability is a function of duty and facts. Requiring masks of all customers may be above and beyond the duty of reasonable care owed to customers.

To Mask or Not Mask

Requiring masks or allowing customers to make a personal choice apparently has no effect on the business owners’ ultimate legal liability. What is the duty owed (reasonable care)? Did the owner meet the duty owed? If both questions are answered “yes,” the business is not legally liable for any injury suffered.

Can the infected person prove the virus was contracted at the business? Given the facts of a virus and particularly this virus (with its long incubation period), proving it was contracted in any one place on any given day is nearly impossible.

Holding a business legally liable without other clear and convincing evidence simply because customers were not required to wear masks forces the court to set a standard of care almost impossible to  maintain in the future. Every flu season or the event of another community sickness will subject business owners to a higher degree of care than ever required in history or should be considered   reasonable.

A virus is a natural organism that man can avoid only so long. Holding a business owner legally liable is unreasonable given the facts of care and the reality of a virus.

Requiring masks may dissuade some from naming the business in the suit; but not requiring masks likely does not increase the overall chances of being held legally liable.

By: Chris Boggs | Big "I" Virtual University Executive Director

“Who owns the building?” Asking this rather basic, four-word question can save your insured, you, and your errors and omissions carrier a major heartache and undue costs following a building damage claim.

Never assume a small, closely-held corporation is as simple as it appears on the surface. Exposure and legal realities often exist, the importance of which are not fully understood by the “business owner.”

Consider the following example, George Bailey owns Widgets, Inc., a manufacturer of widgets (who would have guessed?). The manufacturing operation is conducted in a building that, according to Mr. Bailey, is “owned by the insured.” However, Mr. Bailey owns the building individually.

Understand, Mr. Bailey is not attempting to mislead the insurance carrier or misrepresent the facts. In his mind, there is no distinction between the operations of Widgets, Inc. and the ownership of the building. To Mr. Bailey, it’s all the same because he owns both. Such belief is more common than many agents realize.

But within the realities of insurance and law, two separate “persons” are involved in this all-too-common situation. Potential insurance coverage gaps arise from the existence and participation of two separate

“persons.” Each natural person and legal person must be accounted for and managed separately within the insurance policy. (Natural persons are flesh and blood individuals. Legal persons are created by the filing of specific legal documents such as articles of incorporation or articles of organization.)

Natural persons and legal persons have the same rights; the right to sue, to be sued, to own property, etc. Therefore, each “person” presents his/her/its individual risk exposure that must be analyzed and specifically insured.

Unless each person’s exposure is properly addressed, the property policy may not respond to a property

claim for one of two reasons:

1. Lack of insurable interest; or

2. Lack of insurance protection.

Property insurance policies do NOT respond to a claim if insurable interest does not exist at the time of the loss. Likewise, if the party with insurable interest is not an insured, the policy does NOT pay.

Insurable interest, in a property insurance context, exists when a “person” suffers direct financial loss as a result of damage to or destruction of the specified property. If the “person” with insurable interest is not covered by a property policy, the loss must be paid out of that “person’s” resources. Insurable interest in real and personal property is created in one of three ways:

1. Ownership;

2. Legal liability: Responsible for someone else’s 

    property – like a dry cleaner is responsible for its 

   customer’s clothes; or

3. Contract: A lease agreement making another party 

    responsible for insuring the property.

Returning to the initial scenario: George Bailey owns the building individually, but Widgets, Inc. is the policy’s only named insured. If the building is damaged or destroyed by any covered cause of loss, the property policy covering the building owes – nothing. The legal person listed on the policy as the named insured, Widgets, Inc., did not have insurable interest; and the natural person with insurable interest, George Bailey, is not covered in the policy as an insured.

Beyond the individual (natural person) ownership of a building, one of several possible ownership scenarios

could exist that must be considered, anticipated and/or researched, including:

1. The building is owned individually by the “owner” of 

    the business operation (as in our example above);

2. The building is owned by several individuals;

3. The building is owned by a separate legal person; or

4. The building is owned by any combination of natural 

    and legal persons.

Attorneys often recommend such separation for various reasons. But sometimes, the building is not owned by the named business entity because it was purchased first, willed to the individual, or any number of reasons. Again, never assume ownership.

How is building ownership confirmed? The simplest way is to ask the question; specifically, “who or what entity owns the building.” Even Mr. Bailey in our example knows he owns the building individually, he just didn’t see or understand the need to tell the agent. Explain the need.

A second method requires individual effort, but it’s quick and painless in most circumstances. Research the county’s online tax, GIS, or other public record system. Most counties offer access to at least one public record. Once the proper site is located, an address search can be done. Depending on the county, massive amounts of building information can be found when such an online search is done:

• Year built;

• Square footage;

• Construction (sometimes);

• A photo or footprint drawing; and

• Who owns the building.

Once you become familiar with a particular county’s website, these searches can be conducted in a matter of minutes. A few minutes of work to save thousands of dollars in uncovered claims, E&O deductibles, and court time seems like a fair trade.

Managing and insuring the separate ownership exposure is the delicate and tricky part. Since the same “person” or groups of persons who/that own the operation also own the building, it is unlikely they will want to purchase a separate Lessors Risk Only (LRO) policy, which is an option.

In most “common ownership” situations presented previously, the owner(s) want the building insured on the same policy as the operation. Two main methods to accomplish this are:

1. Name the building owner as a named insured; or

2. Legally lease the building to the business. Naming the building owner as a named insured. As simple as this seems, this is often an improper or unavailable option – especially if that person (natural or legal) is involved in other ventures or activities. Remember, the specific operation was underwritten and adding named insureds has the possibility of extended protection to unintended or unexpected exposures.

Many underwriters are unwilling to extended what is  essentially LRO coverage in a package policy because of the uncertainty surrounding the breadth of the building owner’s operations. Underwriters may also be unwilling to add the additional named insured because it may own several building or be involved in other operations.

Legally lease the building to the business (named insured operation). This is the most proper way to manage and cover the building owner’s exposure. Remember, insurable interest can be created by contract. The lease agreement can and should be used to create insurable interest by making the tenant operation responsible for insuring the building. Once the tenant has insurable interest by legal contract, the building is properly covered and the building owner’s exposure can be protected by attaching specific endorsements:

• CP 12 19 Additional Insured – Building Owner: This is 

   a property endorsement extending property coverage 

   to the named building owner; and

• CG 20 11 Additional Insured – Managers or Lessors of 

   Premises: A general liability endorsement extending 

   additional insured status to the building lessor/owner.

Creating a proper lease and attaching the proper endorsements extends the necessary protection to the building owner without the need of a separate policy. This is also the best option because many underwriters are unwilling to add the building owner as a named insured on the operation’s (Widgets, Inc.) policy.

To end, never assume building ownership. Always ask what seems like a “duh” question. If the question isn’t asked, research ownership through the county’s website. Once ownership is known, insure the exposure.

States have gone to war against some municipalities over COVID-19. Executive orders currently in place in many states still bar certain businesses considered “non-essential” from opening; but some municipalities have told their respective governors they are opening the community regardless.

Governors finding themselves in these situations have undertaken various tactics to prevent these municipalities from carrying through with their reopening plans. North Carolina’s governor told a county that all state funding would be cut if they opened, the county capitulated. Other governors, seemingly out of options, have undertaken a unique and indirect tactic – misrepresenting insurance coverage.

Although this sounds like an odd tactic, the goal is to scare the business owners into remaining closed. If the governors can successfully dissuade the business owners, it doesn’t matter what the city or county does, businesses won’t open solely out of fear.

Governors and their representatives are publicly stating that if a business opens in violation of the executive order, doing so places its insurance coverage in jeopardy because of the “illegal,” “criminal” and/or “dishonest” acts exclusions. The problem is, there is enough untruth in these statements to make them lies.

Let’s review the truth or half-truths of these claims on a coverage-by-coverage basis. Note, the following analysis  is of unendorsed policy language, endorsements can alter application of this policy language analysis.

Commercial General Liability (ISO’s CG 00 01 04 13) 

Coverage A – Bodily Injury and Property Damage Liability. 

Simply, there is NO illegal or criminal acts exclusion applicable to Coverage Part A. One state knowingly took indecent liberties with the “Expected or Intended Injury” exclusion in its attempt to assert that coverage would be denied.

The expected or intended injury exclusion does not act to deny claims resulting from opening against a governor’s orders. This exclusion applies to the actions of an insured that one would EXPECT or INTEND to cause injury such as punching someone in the nose or setting a trap. A reasonable person intends and would expect that someone would be injured by such acts.

There does not appear to be an applicable exclusion in Coverage Part A. So, a slip-and-fall incident is covered, a products liability claim is covered, basically anything covered under Coverage A in “normal” times is covered if/when the business opens – even against a governor’s orders.

Coverage B – Personal and Advertising Injury Liability. 

There is a “Criminal Acts” exclusion appliable to personal and advertising injury coverage. Within Coverage B the specific exclusion reads:

2. Exclusions: 

This insurance does not apply to: 

d. Criminal Acts

“Personal and advertising injury” arising out of a criminal act committed by or at the direction of the insured.

“Personal and advertising injury” is a defined term. Basically, this exclusion applies to activities and actions such as libel, slander, defamation of character, violating a right of privacy, wrongful eviction, false arrest and other such actions. If any of the acts listed in the definition is done in violation of a law, there is no coverage.

If the store owner calls the governor a nasty name, that would be excluded; but only if doing so is considered a criminal act. Thus, this exclusion is a non-issue.

Coverage C - Medical Payments. 

In short, there are no exclusions for “illegal,” “criminal” or “dishonest” acts in Coverage C. Where the insured had coverage before the orders, they still have coverage.

Commercial Property

Within ISO’s CP 00 10 10 12 - Building & Personal Property Coverage Form there is one reference to “illegal.” The policy excludes coverage for “contraband, or property in the course of illegal transportation or trade.” Although this is intended to exclude coverage for products that are illegal to import, export or sell, the wording may present problems if the insured opens against government orders.

Two key questions arise:

• Is operating in defiance of an executive order a criminal act (making it illegal); and

• If it is a criminal act, does ignoring an executive order mean the operation is “in the course of” illegal…trade?

Illegal or Criminal Act

An illegal act is one that is forbidden by law. In the absence of this pandemic, the reasonable assumption is that the insured is a legal operation and was operating legally. Whether an executive order disallowing the operation of a business is given the effect of or is equivalent to a law is a question for the courts.

If operating in defiance of an executive order is forbidden by law (making it a criminal act), will the “law” be upheld in court? Reports are that at least one state court has determined that stay-at-home orders are not legal. Whether other courts will follow this lead is unknown.

For sake of this analysis, let’s make the worst-case assumption that operating in defiance of an executive order is considered a criminal or illegal act. If operating against a lock down order is a criminal act, this is strike one towards the lack of property coverage.

However, given the anecdotal evidence, these orders do not appear to hold status as a law. Governors can make emergency declarations that can be enforced to a certain degree; but if they were, in fact, laws and the actions were illegal, the governors would not need to use scare tactics and/or threats such as the revocation of the business’ operating license, they would simply have the owner arrested.

Additionally, laws cannot generally be created by edict. A law (statute) generally requires approval of both houses. Yes, as stated, an executive does have broad powers during a declared emergency, but that does not include the ability to create a law or statute.  

Lastly, in general the US is designed as a “bottom-up” regulatory model. The only reason the NC county succumbed to the governor’s orders was because the state threatened to take away state funds. Evidently, opening is not illegal, it’s just against the governor’s wishes contained in the emergency declaration. (It’s unlikely that any level of government would want the executive to have the ability to create law by edict.)

If the actions are NOT criminal, coverage for the property is NOT excluded.

Is Operating in Defiance of the Order “In the Course of” Illegal Trade

“In the course of” can be defined to mean “during a specified period.” Other definitions include “in the process of,” and “during.”

Black’s Law redirects the definition of “course of trade” to “trade usage.” “Trade usage” redirects to “usage.” Under “usage” is found the meaning of “trade usage.” A long way around to the information needed.

Trade or trade usage in Blacks Law essentially means the common methods of operation. Other sources define trade to mean a business or occupation entered into for profit.

Given the above, it appears any business operating is “in the course of trade.” If operating in defiance of a governor’s order is illegal (a criminal act), the business is “in the course of illegal trade.” Operating in the course of illegal trade negates property coverage during the time of illegal operations.

The commercial property form does not limit the application of this wording to real or personal property – the wording applies to all property.

Unfortunately, there is not a “fix” for this possible exclusion of coverage. The lynchpin or key factor to whether the property is covered or excluded from coverage is whether the operation is illegal. If opening is not illegal, there is coverage; if opening is a crime, there is no property coverage.

ISO’s CP 10 30 09 17 - Causes of Loss - Special Form contains an exclusion for dishonest or criminal acts; however, the wording applies to actions undertaken by the insured to damage or destroy covered property. This exclusionary wording does not apply to the operation of the business within or outside the allowances of an executive order.

Is coverage excluded for property losses when the business is operating in defiance of an executive order? This may ultimately be a question for the courts; but it appears:

If a governor’s decree does NOT carry the weight of a law, it’s unlikely this wording would apply – meaning there would be coverage regardless the governor’s wishes;

If a governor’s decree IS given the weight of a law, making the act of opening illegal, the insured may lose property coverage; or

If a governor’s declaration is granted the weight of a law, but such decree is struck down by the courts, coverage may be reinstated.  

From a property coverage perspective, the question of coverage is murky. Carriers may or may not attempt to spit hairs to deny or provide coverage.

Workers’ Compensation and Employers’ Liability

Does NCCI’s workers’ compensation policy respond to cover an injury to an employee arising out of and in the course and scope of employment if the business is operating against that orders of the state? Workers’ compensation is a unique coverage, the policy responds in accordance to the guidelines of the state’s workers’ compensation statutes. To answer the question, the statute must be reviewed. If statute does not exclude protection to employees working in violation of the law, the work comp policy responds and pays for injury – regardless of the executive order.

Because workers’ compensation is for the benefit of the injured worker, it is unlikely any state law would disallow coverage for any work-related injury, even if the business is operating against an executive order. This violates the spirit and intent of the coverage. In fact, some work comp statutes specify that it applies to workers whether lawfully or unlawfully employed.  

The respective state law must be reviewed, but such limitation or exclusion is unlikely to be found. Furthermore, there is no wording in the policy itself that would allow the insurance carrier to seek repayment from the insured. Thus, opening in defiance of an executive order does not appear to jeopardize workers’ compensation coverage.

Part Two – Employers’ Liability does contain exclusionary wording regarding employment in violation of the law. The policy reads:

C. Exclusions

This insurance does not cover:

3. bodily injury to an employee while employed in violation of law with your actual knowledge or the actual knowledge of any of your executive officers.

Is the employment in violation of the law or is the operation in violation of the law? The apparent intent is to exclude employers’ liability protection for those employed in violation of federal guidelines regarding status as a legal worker in the US. Given the intent, this exclusion does not appear to apply. But remember, this is regarding the employers’ liability protection only, this wording does NOT apply to workers’ compensation.

Business Auto (CA 00 01 10 13-Business Auto Coverage Form)

There is no illegal, criminal or dishonest act exclusion in Section II – Covered Autos Liability Coverage of the business auto policy (BAP). 

Like the CGL, there is the Expected or Intended Injury exclusion; but, as in the CGL review, this is irrelevant in regard to this conversation.

Operating in disregard to the executive order does not appear to negatively affect the liability coverage provided by the business auto policy. If the BAP did exclude illegal acts, there would be no coverage for injury caused when speeding, when making an illegal turn or many other actions that are illegal.

Neither is there an applicable exclusion under the physical damage coverage. No specific exclusionary wording appears to affect uninsured/underinsured motorist coverage either.

Apparently, the business auto policy responds regardless of any orders in place.

Professional Liability and Errors & Omissions Policies

There is no “standard” professional liability or errors and omissions (E&O) contract, thus each will require separate review. However, most of these forms do contain exclusions related to criminal conduct. But does such wording exclude coverage simply because the business is open regardless of the governor’s declarations?

Given the intent of coverage, professional liability and E&O policies cover the professional activities of the insured and the harm caused by the improper practice of those activities. Opening against the wishes of the governor doesn’t seem to entail the professional activities, it is a business decision.

For example, assume insurance agencies were not considered essential businesses and were forced to close. If an agency owner decided to reopen in spite of the order, any act or failure to act for or on behalf of a client may result in an E&O suit. 

IF opening is a criminal act (it’s not clear if such act is criminal), does that activate the criminal acts exclusion?

Opening in defiance of any order has no correlation to the erroneous act of the agent. They are separate and distinct incidents. One has no relationship to the other.

This same logic appears to apply to all other activities covered by either a professional liability or an E&O policy. Opening against the wishes of the governor does not appear to affect coverage.

However, some governors have threatened to revoke and some already have revoked certain professional licenses. If holding a professional license is a condition of the professional liability or E&O coverage, then these coverages appear to be in jeopardy.

Most occupations that require professional liability or E&O coverage also require a license to provide the service (not the same as a business license). 

If the government, through its police powers, revokes a professional license, the coverage may cease to exist for any future events. Revoking a professional license is not the same as revoking a business license. For agents, this is revoking the agent’s P&C license, not the agency’s license to exist. Whether such revocation is allowed by law is not a topic for discussion in this article.

Executive or Management Liability

Directors and Officers (D&O), Employment Practices Liability (EPL) and Fiduciary Liability are the three most commonly discussed executive or management liability coverages. Like professional liability and E&O, there are no “standard” forms. Likewise, these forms generally do contain exclusions related to illegal, criminal, and/or dishonest acts.

Following are examples from two separate management liability forms:

Exclusions:

The Insurer shall not be liable to make any payment for Loss in connection with 

any Claim made against any Insured:

A. alleging, arising out of, based upon or attributable to:

                             (2) the deliberately fraudulent or criminal acts of an Insured; provided, however, this exclusion shall only apply when it is finally adjudicated that such conduct occurred;

Exclusions:

We will not pay for any “loss” resulting from any “claim”:

A. Based upon, attributable to, or arising 

     in fact out of any dishonest, 

     malicious, fraudulent or deliberately 

     criminal act or any willful violation of 

     any statute or regulation;

Notice the key words common to both exclusionary examples, “based upon,” “attributable to” and “arising out of.” Neither exclusion applies to any management liability suit unrelated to opening against the will of the governor. The only suits that might be excluded are management liability suits directly related to the violation of the decree; otherwise, the policy is unaffected.

Findings

Overall, opening in defiance of a governor’s decree appears to have little effect on insurance coverage. Questions arise in two policy types:

Commercial property; and Professional liability / E&O policies.

If, and this seems to be a big “if,” the act of opening is a criminal act, the insured’s commercial property coverage may be compromised. And if the state revokes the business owner’s professional license (not business license), the professional liability or E&O policy may exclude coverage.

The fear tactics being used by some states surrounding insurance coverage are largely unsupported. Not being lawyers, no agent should advise on what constitutes a criminal act, but agents can and are within their licensure to explain insurance language.