CP 00 40–LEGAL LIABILITY COVERAGE FORM ANALYSIS

(June 2019)

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Insurance Services Office (ISO) CP 00 40–Legal Liability Coverage Form is a legal liability coverage form wrapped in the Commercial Property Program. It is used to provide contract-mandated coverage for real or personal property of others.

This analysis is based on the 10 12 edition of this coverage form. Changes from the 06 07 edition are in bold print.

CP 00 40–LEGAL LIABILITY COVERAGE FORM ANALYSIS

INTRODUCTION

This coverage form opens by stating that various policy provisions restrict coverage. For this reason, the named insured should carefully read it to determine and understand its rights and duties and to understand what is covered and what is not covered.

It also defines the terms "you or your" as the named insured and "we, us, and our" as the insurance company that provides coverage. Named insured is not defined. As a result, it means only entities listed or named on the declarations. If a given entity is not listed, there is no coverage for its property, even if the property is described on the declarations.

This coverage form has one word that has a special meaning which is defined in F. Definitions.

A. COVERAGE

The insurance company pays amounts the named insured is legally obligated to pay as damages due to direct physical loss or damage to covered property. This also includes loss of use of that property. The loss or damage must be caused by an accident that arises out of a covered cause of loss.

Note: The insuring agreement reads more like a liability coverage form than a property one because coverage applies only if the named insured is legally obligated to pay. This liability type language will continue throughout the coverage form.

The company also has the right and duty to defend any suit filed that seeks those damages. However, it is not obligated to defend any suit for loss or damage that this coverage form does not insure. The company has the discretion to investigate and settle any claim or suit, subject to both of the following:

The amount it pays is limited as C. Limits of Insurance explains and describes.
Its right and duty to defend ends when it uses up the limit of insurance paying settlements or judgments.

ShoeStore_2 (2)

Example: Shoes is the only tenant in the Alpha Building. Shoes signs an agreement that legally obligates it for up to $150,000 fire damage to the building. Shoes purchases CP 00 40–Legal Liability Coverage Form from DoItRite Insurance Company with a $150,000 limit and CP 10 10–Causes of Loss–Basic Form. A fire causes $300,000 in damage to the building. DoItRite pays $150,000 and Alpha accepts the payment. Alpha must then fund the rest of the loss from its own resources because DoItRite’s payment satisfied Shoes’ obligation.

1. Covered Property (10 12 change)

Coverage applies to tangible property of others described on the declarations or the legal liability coverage schedule. Covered property must be in the named insured’s care, custody, or control.

Coverage does not apply to electronic data or to programs and data, however stored.

Note: This limitation means that the named insured should carefully review any contract to determine if any legal liability extends to electronic data. If it does, there is a significant gap in coverage and other coverage should be arranged.

There is an exception to this restriction on electronic data. Electronic data that is a part of the building’s heating, ventilating, air conditioning, elevator, lighting, or security systems is covered if it is used to control or operate those systems.

Note: Be aware that this coverage form does not provide a listing of items that are considered buildings and items that are considered your business personal property. It is important to provide a complete description of the property that is to be covered on the CP DS 05 –Legal Liability Coverage Schedule. The description should match the description of the property from the contract.

2. Covered Causes of Loss

This coverage form requires that one or more of the causes of loss forms be attached. The causes of loss form that applies is entered on the declarations.

Note: The contract between the named insured and the property owner should provide a listing of the causes of loss that must be covered; the cause of loss form that meets the contract terms is the one to be purchased.

Example: Shoes, from our previous example, was required to provide only fire damage coverage so selected coverage under CP 10 10-Causes of Loss – Basic. Paying the additional premium for the CP 10 30–Causes of Loss – Special would have been more expensive and not provided any additional coverage because Shoes' only obligation was for fire damage coverage.

3. Additional Coverage–Supplementary Payments

Note: Payments made under this section do not reduce the limits of insurance.

The insurance company pays the following amounts in addition to payments it makes to investigate and settle any claim or defend any suit against the named insured.

a. All expenses it incurs

Note: This provision is important because these expenses can be substantial and could reduce the available limits if they were included in the limits of insurance that apply.

b. Cost of bonds to release attachments. This is limited to the cost of bond amounts within the limit of insurance that applies. The insurance company is not required to furnish these bonds.

Note: The cost of the excess amount of such bonds is at the named insured’s expense.

c. Reasonable expenses the named insured incurs at the insurance company's request to assist it to investigate or defend a claim or suit. This includes up to $250 per day in lost earnings if the named insured must be away from work.

d. Costs that the court assigns to the named insured.

Note: The liability coverage forms typically state that attorney fees taxed by the court are not included in this item. This liability limitation is not part of this coverage and could be expensive for the insurance company.

e. Prejudgment interest on the part of any judgment the insurance company pays, provided the interest is awarded against the named insured. However, prejudgment interest that accrues during the period of time after the insurance company offers its full limits is not covered.

f. Interest that accrues on the full amount of any judgment after it is entered but before the insurance company pays, offers to pay, or deposits with the court the part of the judgment that is its responsibility and within the limits of insurance.

Note: The interest amount in this item is for the full amount not just the insurance company’s obligation but that interest stops accruing as soon as the insurance company offers to pay or deposits only its obligation.

Example: The lawsuit was messy and involved multiple defendants. The verdict awarded was $50,000,000. Larry’s part of that verdict was only $25,000 but his insurance company was obligated to pay interest on the entire $50,000,000 until it paid or offered to pay.

4. Coverage Extensions

a. Additional Insureds

The terms you and your mean the named insured. When you or your are used in the coverage form, they also mean the following: The named insured’s partners, when the named insured is a partnership.
The named insured’s members and managers when the named insured is a limited liability company.
The named insured executive officers, trustees, directors, and stockholders when the named insured is a corporation.

These are additional insureds only with respect to duties that are a part of their relationship with the named insured.

b. Newly Acquired Organizations

If the named insured forms or acquires a new organization other than a partnership, joint venture, or limited liability company, it is also a named insured if the named insured owns it or has majority interest in it. However, this coverage applies only as long as there is no other insurance available to that organization.

This coverage extension is only temporary. It ends 90 days after the organization is formed or acquired or when the policy expires, whichever occurs first. However, there is no coverage for direct physical damage or loss that occurred before the organization was formed or acquired.

Note: The 90-day/policy expiration limitation is important. It provides the named insured time to contact the insurance company to add or amend the named insured or purchase specific coverage for the new organization. On the other hand, the insurance company is protected to some extent because the coverage is temporary, and the named insured must make it aware of the new organization and the additional exposures involved. The company can then decide whether or not to cover the new exposure(s). However, the 90-day limitation is subject to the expiration date on the policy.

Example: Company A acquires Company B on 12/01. Company A’s policy expires on 12/31. Coverage for Company B ends on 12/31. If the renewal policy is issued on 12/31 without Company B named, it is not covered.

c. Newly Acquired Property

When the coverage provided applies to buildings, this extension applies to the named insured’s legal liability for buildings that come into its care, custody, or control after the policy period begins subject to the following:

· This coverage form’s terms and conditions apply to such buildings.

· The building must be intended for either the same purpose as others scheduled on the declarations or as a warehouse.

$250,000 is the most the insurance company pays in any one accident that causes loss or damage to such buildings.

Note: It is very important that the building occupancy be similar to others. Insurance companies accept risks based on their occupancy and should not be expected to add significantly different occupancies.

Example: Corbett Shoe Stores has the opportunity to lease a downtown building. The contract requires that Corbett permit a sub-lessee to continue to operate its furniture repair and refinishing business in the basement while Corbett operates its shoe store on the first floor. Corbett jumps at the opportunity and contracts to accept legal liability for the entire building. It has legal liability coverage on its other three stores and does not notify its insurance company immediately. A small fire starts in the back of the store within 30 days of Corbett occupying the space and beginning to remodel it. The fire ignites the lacquers stored in the furniture operation’s space and destroys the building. The building owner demands payment and Corbett contacts We Do Legal Liability Coverage, its carrier. We Do denies the claim because the occupancy in the basement is very different from the other occupancies under its legal liability coverage.

When the coverage provided applies to personal property, this extension applies to personal property of others that comes into the named insured’s care, custody, or control after the policy period begins. Such personal property must be at an owned location or one that is in the named insured’s care, custody, or control. Coverage does not apply to property at exhibitions or fairs.

The most the insurance company pays in any one accident that causes loss or damage to such personal property is $100,000 at each building.

The coverage that is provided by this extension ends when the first of the following events occurs:

This policy expires
Thirty days after the named insured assumes the care, custody, or control of the property
The named insured reports the values to the insurance company

The new acquisition must be reported to the insurance company as of the date it was acquired. The company charges premium from the acquisition date. However, there is no coverage for direct physical loss or damage that occurred before the acquisition.

B. EXCLUSIONS AND LIMITATIONS

Exclusions and limitations are in the Causes of Loss Forms that apply. More than one causes of loss form may be attached.

Note: There are two exclusions that apply to only legal liability. These changes eliminate five property type exclusions and add two liability type exclusions.

C. LIMITS OF INSURANCE

The most the insurance company pays as a result of an accident is the limit of insurance on CP DS 05–Legal Liability coverage schedule and/or on the Declarations. Payments made under Additional Coverage Supplementary Payments and Coverage Extensions c. Newly Acquired Property are in addition to the limits of insurance.

The limit of insurance does not increase because of additional insureds or newly acquired organizations.

		Example: Freddy is a partner in the law firm of Attorney. Attorney’s lease of a building includes accepting legal liability for damage due to named causes of loss including theft and theft-related damage to the building. Thieves break into the building, remove building fixtures, and destroy all interior doors. The building owner sues Attorney and. The limit of insurance is $100,000 but the lawsuit seeks $200,000. The insurance company defends Attorney and Freddy as though they are separate insureds. However, it pays only $100,000.

LOSS CONDITIONS

These loss conditions apply in addition to CP 00 90–Commercial Property Conditions. However, refer to Additional Conditions below because it explains that only three of the Common Property Conditions apply to this coverage form.

CP 00 90–Commercial Property Conditions Form Analysis

1. Duties in The Event of Accident, Claim, or Suit

The named insured is expected to act reasonably immediately after a loss occurs. The company’s obligation to pay the loss may end if it does not. The named insured must:

a. Promptly notify the insurance company of an accident that may involve a claim. The notice should include the following information:

How, when, and where it happened
Names and addresses of potential witnesses

Note: Notifying the insurance company of an accident is not the same thing as filing a claim. They are two separate and distinct actions, and both must be done.

b. Give prompt written notice to the insurance company of a claim made or a suit brought against it.

c. Do all the following:

Give the insurance company copies of any demands, notices, summonses, or legal papers received that relate to any claim or suit.
Give the insurance company authorization to obtain records and other information.
Cooperate with the insurance company as it investigates, settles, or defends the claim or suit.
Help the insurance company enforce any right against any person or organization that may be liable for damage that this insurance covers but only if the insurance company requests such assistance.

d. Do not make any voluntary payment, assume any obligation, or incur any expense without the insurance company’s consent. Otherwise, the named insured bears the cost.

2. Legal Action against Us

No party has the right to bring the insurance company into a lawsuit for damages against the named insured. No party can sue the insurance company unless all the coverage form's terms and conditions are completely met.

The company can be sued to recover on an agreed settlement or on a final judgment against the named insured. However, the insurance company is not liable for damages when payment is not required under this coverage form's terms. It is also not liable for damages that exceed the available limit of insurance.

An agreed settlement is a settlement and release of liability that the named insured, the insurance company, and the claimant or its legal representative sign.

3. Other Insurance

The named insured may have other insurance that applies to a loss this coverage form insures. If so, each insurance company pays its proportional share of the loss. That share is determined based on each carrier’s limit compared to the total limits that apply.

Note: There is no explanation of what occurs if insurance from parties other than the named insured could apply to the loss.

4. Transfer of Rights of Recovery against Others to Us

Any rights the insured has against others to recover all or part of any payment the insurance company makes transfer to the insurance company. The named insured must preserve those rights and not do anything after the loss occurs to impair them. The insurance company can request that the named insured bring suit or transfer those rights to it and help it enforce them.

Note: The named insured can waive any or all of its rights of recovery against any party prior to a loss as long as it does so in writing without impacting coverage. Only rights that the named insured has at the time of the loss must be transferred to the company. Those rights cannot be waived following the loss.

Example: Jill leases a building from her father. Jack, her brother, sub-leases a space from her in the building but no contract is signed between them. Jill purchases a Legal Liability Coverage form from Good Company, Inc. for her legal liability in the building. Jack causes a loss that damages the building and Good Company, Inc. pays for that damage. Good Company then sues Jack for the damage he caused. Jill must cooperate with Good Company, Inc. in the suit because there was no written contract waiving rights of recovery against Jack.

E. ADDITIONAL CONDITIONS

These conditions are in addition to IL 00 17–Common Policy Conditions.

1. Amendment of Commercial Property Conditions

This condition explains which of the Conditions within the CP 00 90–Commercial Property Conditions apply to this coverage form.

Only three conditions in CP 00 90–Commercial Property Conditions apply to this coverage form:

Condition A–Concealment, Misrepresentation, or Fraud
Condition C–Insurance Under Two or More Coverages
Condition E–Liberalization

Note: This means that Condition B–Control of Property, Condition D–Legal Action Against Us, Condition F–No Benefit to Bailee, Condition G–Other Insurance, Condition H–Policy Period, Coverage Territory, and Condition I–Transfer of the Rights of Recovery Against Others to Us do not apply to this coverage form.

2. Bankruptcy

The insurance company is not relieved of its obligations if the named insured or its estate becomes bankrupt or insolvent.

3. Policy Period, Coverage Territory

The policy period and coverage territory are explained. They both apply to all losses.

a. Policy period: The accident must occur during the policy period shown on the declarations and inside the coverage territory.

b. Coverage territory: The accident must occur in the United States of America, Puerto Rico or Canada.

Note: There is no coverage in United States’ possessions or territories.

4. Separation of Insureds

This insurance treats the named insured and each additional insured as if it were the only named insured. The only exception is the limit of insurance.

Note: The limit of insurance is the most the insurance company pays, regardless of the number of insureds, claims, or suits.

F. DEFINITIONS

There is one definition.

Suit

This is a civil proceeding that alleges damages for injury or offenses that this insurance covers. Suit also includes any arbitration or other alternative dispute resolution proceedings but only when the named insured is required to submit to them or when the insurance company consents to such proceedings.