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Vol. 5, Iss. 5
April 29, 2016

ISO Take Note:
Another Court Gives “Designated Premises Endorsement” A Way Too Broad Interpretation

 

In my 2015 “Top 10” cases article I addressed the Hawaii Supreme Court’s decision in C. Brewer and Co., Ltd. v. Marine Indemnity Ins. Co., where the court gave a very (make that two verys) broad interpretation to a “Designated Premises Endorsement.” Consider this. A large portion of a dam in Hawaii collapsed, releasing over three million gallons of water. The insured was the seller of the dam and the purchaser alleged that the insured was aware of the dam’s questionable structural stability. The insured’s commercial general liability policy had a Designated Premises Endorsement that limited coverage to liability “arising out of the ownership, maintenance, and use of the [designated] premises.” And, most importantly, the dam site was not listed as a designated premises. Despite this, the court concluded that the “policy provides coverage for injury and damage arising out of [the insured’s] ‘use’ of its corporate headquarters to make negligent corporate decisions [the headquarters was a designated premise] even though the resulting damage happened at the unlisted Dam site.” I concluded that C. Brewer provided an important policy drafting lesson for insurers that sought to limit their CGL coverage to liability on designated premises.

Well, well, well. Here’s a recent decision, not from Hawaii, that follows C. Brewer. In fact, the court in Western Heritage Ins. Co. v. Cyril Hoover dba Okanogan Valley Transportation, No. 15-1154 (W.D. Wash. Mar. 30, 2016) relied so heavily on the Hawaii Supreme Court’s decision in C. Brewer that it should have just attached it as an exhibit and incorporated it by reference. It would have been easier.

In Western Heritage, the Washington federal court addressed the availability of coverage, under a commercial general liability policy, in the following circumstances. Eric Malkuch was driving an automobile that he borrowed from his step father-in-law. Mr. Malkuch’s wife and Albert Slater were passengers in the vehicle. Mr. Malkuch was driving near Lakeview, Oregon when the vehicle was involved in a single-vehicle rollover accident. Mr. Slater alleged that he sustained serious and ongoing injuries, totaling more than $400,000 in medical costs to date. According to Mr. Slater, Cyril Hoover is liable for the accident because it occurred while Mr. Malkuch and Mr. Slater were on their way to Arizona, to pick up a tow truck, which Mr. Slater alleged was for the benefit of Mr. Hoover.

Mr. Hoover was insured under a CGL Policy issued by Western Heritage. [Yes, there were issues concerning the auto exclusion, but that’s not relevant here.] The policy contained a Limitations to Designated Premises Endorsement, which stated that the “insurance applies only to ‘bodily injury’, ‘property damage’, ‘personal and advertising injury’ and medical expenses arising out of: 1. The ownership, maintenance or use of the premises shown in the Schedule and operations necessary or incidental to those premises.” The premises shown in the Schedule were in Tonasket, Washington – 500 miles from the site of the accident.

Western Heritage argued that the losses from the accident, 500 miles away from the policy’s designated premises, did not fall within the scope of coverage. The court, however, concluded that the “Limitations to Designated Premises Endorsement” was ambiguous, and, therefore, did not exclude coverage.

In reaching this conclusion, the court quoted several pages from the Hawaii Supreme Court’s decision in C. Brewer. I’ve never seen a court quote verbatim, to such extent, from another court’s decision.

Not surprisingly, after reciting so much of the C. Brewer decision, which involved the same policy language, the court held that the same rationale applied. Just as in C. Brewer, where the insured used its corporate headquarters [which were a designated premises] to make negligent corporate decisions, the court in Western Heritage held that “the decision to purchase the tow truck is sufficiently connected to the premises such that it could fall within the scope of the policy.”

Also, just as in C. Brewer, the court was persuaded that the “personal and advertising injury” language supported an interpretation that it contemplated injury stemming from a decision made on the premises -- but occurring elsewhere. For example, a decision made at corporate headquarters would likely be the cause of advertising injury; however the resulting injury would not occur on the designated premises. Lastly, as did the C. Brewer court, the Western Heritage court observed that the coverage territory was defined as the United States of America, which further supported a broad interpretation of the policy.

I have never been one of those people who believes that, anytime an insurer is told by a court that it must provide coverage, that it didn’t believe was owed, the insurer needs to amend its policy language. That is simply not feasible or sensible. There are myriad reasons why an insurer may lose a case. And one loss on an issue, or even a few, may not be a reflection of the policy’s ability, in the grand scheme, to do its intended job.

But sometimes decisions come along, especially from a state high court (C. Brewer), involving an important policy provision, that is interpreted so far afield from its intent, and with reasoning that other courts may find easy to adopt – i.e., Western Heritage’s love affair with C. Brewer -- that insurers need to take a hard look at whether a change is in order. The concept that a CGL policy provides coverage, for injury and damage at a non-designated premises, because the injury and damage arose out of an idea that was hatched at the insured’s corporate headquarters, which is a designated premises, was surely not the intent of the Limitations to Designated Premises Endorsement.

The Hawaii Supreme Court’s decision in C. Brewer and Co., Ltd. v. Marine Indemnity Ins. Co., addressing the interpretation of a Designated Premises Endorsement, is in the return-to-the-drawing-board category. I said this in the 2015 Top 10 article and now Western Heritage makes this point even stronger.

 

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