A difference of opinion appears to exist in the industry regarding interpretation of garagekeepers direct coverage options. When does a customer’s insurance come into play – if ever – when an auto dealership purchases garagekeepers coverage?
Garagekeepers coverage is a form of bailee liability designed to cover damage to autos belonging to others while in the insured’s care. The care, custody and control exclusion in the liability section creates the need for this coverage.
The basic wording in the auto dealers coverage form provides garagekeepers coverage on a legal liability basis, meaning the insured must be negligent in causing the damage before the policy will respond.
The form contains an option that allows the policyholder to pay additional premium and convert bare-bones liability coverage into direct coverage that will respond without regard to the policyholder’s negligence. After selecting the direct coverage option, the policyholder must then select whether the coverage will be primary or excess.
If the direct excess option is selected and the policyholder is not legally liable for damage to the customer’s vehicle, the garagekeepers coverage will pay only the amount of loss in excess of the customer’s own insurance if any. So, when the customer has no insurance, the garage policy will pay the full amount of the loss, and when the customer has insurance with a deductible, the garage policy will only pay the deductible and other direct loss in excess of the customer’s insurance, subject to a deductible if any on the garagekeepers coverage.
If the direct primary option is selected and the policyholder is not legally liable for damage to the customer’s vehicle, the garagekeepers coverage becomes primary. When the customer has no insurance, the garagekeepers coverage pays the full amount of the loss (just like with direct excess coverage).
In cases where the policyholder has purchased garagekeepers coverage on a "direct" basis (either excess or primary) and is legally liable for damage to a customer’s vehicle, the garagekeeper’s coverage will pay for the damage without regard to any other insurance, including the customer’s own insurance. While some adjusters have attempted to bring a customer’s insurance into the picture when garagekeepers direct coverage applies, leading technical authorities such as FC&S Bulletins, the International Risk Management Institute, and IIAT all agree this is not appropriate.
What happens under the direct primary option when the policyholder is not negligent and the customer has insurance to cover the loss? This is where the controversy begins.
The coverage experts who write the FC&S Bulletins believe that the Other Insurance provision of the garage policy comes into play. Under this scenario, the garagekeepers coverage and the customer’s insurance are both primary, and therefore they share the loss on a pro rata basis. Experts at IRMI also state this is the case, although they acknowledge that it is a more common practice for the garage insurer to pay the loss and not bring the customer’s insurance into it. Experts at IIAT, however, disagree. We believe direct primary means just that – primary insurance on the customer’s auto for the benefit of the garage policyholder’s “goodwill.” An Other Insurance clause in a liability or property policy, in our opinion, can only be interpreted to mean other insurance carried by the named insured.
What is an agent who sells insurance to a dealership to do? To avoid surprises at claim time, ask your underwriters and claims adjusters how they will pay losses when the garagekeepers coverage includes direct primary coverage. Get it in writing.
The policyholder can also select different covered causes of loss. Collision covers collision with another object or upset of the auto. Comprehensive coverage includes all causes of loss not excluded. When comprehensive and collision coverages are purchased, the dealership has the broadest possible protection for claims arising out of damage to a customer’s car, including damage caused while the auto is being worked on.
Here are some examples of losses that are covered by comprehensive but not covered by the specified causes of loss: (1) engine damage caused when starting up a vehicle on the garage premises before replacing oil during an oil change; (2) dropping a hammer on a windshield; (3) puncturing upholstery with a screwdriver; and (4) bending the hood while trying to close it.
When selling coverage to a dealership, be sure to sell by example and offer the broadest coverage options – direct primary with comprehensive and collision.