InSurOp-Ed: One of the Most Often Misinterpreted Liability Exclusions

Insured Was Considering A River Cruise But Was Worried About Coverage

A few days ago, I received an email question about the watercraft exclusion on a BOP policy. The exclusionary wording is identical to that in the ISO BOP, the relevant language being:

Aircraft, Auto Or Watercraft

“Bodily injury” or “property damage” arising out of the ownership, maintenance, use or entrustment to others of any aircraft, “auto” or watercraft owned or operated by or rented or loaned to any insured. Use includes operation and “loading or unloading”.

This exclusion applies even if the claims allege negligence or other wrongdoing in the supervision, hiring, employment, training or monitoring of others by an insured, if the “occurrence” which caused the “bodily injury” or “property damage” involved the ownership, maintenance, use or entrustment to others of any aircraft, “auto” or watercraft that is owned or operated by or rented or loaned to any insured.

This exclusion does not apply to:

(1) A watercraft while ashore on premises you own or rent;

(2) A watercraft you do not own that is:

(a) Less than 51 feet long; and

(b) Not being used to carry persons or property for a charge;

The insured was considering a river cruise for staff and customers but was concerned that someone could be injured and sue the insured. So the coverage issue was posed to the BOP carrier who responded that there would be no liability coverage “as the policy excludes on-water activity.” Is the insurer correctly interpreting the watercraft exclusion?

First, in the exclusion excerpt above, note that there are two specific exceptions to the exclusion. The first one doesn’t apply since, as the carrier puts it, this is an “on-water” exposure. In the second exception, the boat in question is over 51 feet long and is being used to carry persons for a charge. So, it appears that neither exception to the exclusion applies in this case.

However, is the stem of the exclusion even triggered at all? It says:

To trigger the exclusion, two sets of conditions must be met:

First, the insured must own, maintain, use, or entrust the watercraft to others (“arising out of the ownership, maintenance, use or entrustment to others of any…watercraft”). The insured does not own the boat, nor does the insured entrust the boat to others, and it’s not maintaining the boat. Is the insured “using” the boat? I would argue that being a passenger on a watercraft does not involve “use” of the boat, as in the vessel being entrusted to the insured. However, even if one could argue that this does constitute “use,” another set of conditions must be met….

Second, the watercraft must be “owned or operated by or rented or loaned to any insured.” First, we’ve established that the boat is not owned by a BOP insured. None of the claim scenarios addressed to the carrier involved any operation of the boat. Second, the insured is not renting or chartering the boat, but rather simply paying passenger fees. Also, the boat is not being “loaned” to an insured, something that implies a transfer of temporary possession.

So, the bottom line is that the exclusion is not triggered at all, so the exceptions to the exclusion are of no consequence.

Years ago, when my son was 6-8 years old, we went on a cruise hosted by my employer on the General Jackson paddlewheeler in Nashville, the largest in the world. My son was able to visit the bridge and meet the captain who let him sit on the captain’s chair and steer the vessel. If my son had struck another vessel and my employer was sued, there is no exclusion in the ISO BOP or CGL policies that apply to this scenario. Due to similar language, ISO homeowners policies would also extend liability coverage if I was sued since the exclusion in those forms do not apply to use of a watercraft of this type without ownership or rental.

This exclusion applies not only to watercraft, but also to aircraft and autos. Over the years, I have encountered dozens of improperly denied claims because the carrier did not recognize the circumstances under which the exclusion is triggered.

RTFP! And RTFP with comprehension.

Bill Wilson, CPCU, ARM, AIM, AAM

Founder at InsuranceCommentary.com

One of the premier insurance educators in America on form, coverage, and technical issues; Founder and director of the Big “I” Virtual University; Retired Assoc. VP of Education and Research from Independent Insurance Agents & Brokers of America.