8.3 The Care, Custody or Control Exclusion

• Jurisdiction: Arizona

Standard CGL policies exclude coverage for damage to personal property that is "in the care, custody, or control of the insured." The rationale behind this exclusion was explained by the court in Slate Construction Co. v. Bituminous Casualty Corp.:^[226]

There are several different reasons for such an exclusion in the policy. Fundamentally, were it not for the exclusion there would be a greater moral hazard as far as the insurance company is concerned. It also eliminates the possibility of the insured making the insurance company a guarantor of its workmanship.

The liability policy contemplates payment generally in situations where the ordinary degree of care is the measure of liability. The premium is determined on that basis. Liability for damage to property in charge of or in care, custody or control of the insured where there is a bailment is controlled by different rules of law, and as a practical result the hazard is greatly increased.

There is usually some form of insurance available to cover injury to or destruction of the excluded property at a higher premium which is commensurate with the risk. The exclusion is to eliminate securing the same coverage under a liability policy at cheaper rates.^[227]

The exclusion is designed to prevent the general liability insurer from becoming a guarantor of the insured's workmanship in his ordinary operations.

In Stewart Warner Corp. v. Burns International Security Service, Inc.,^[228] the court upheld the care, custody, or control exclusion. In Stewart Warner, goods were stored in a warehouse protected by the insured's security services. The security guard set fire to the warehouse resulting in property damage. Although the insured's exclusive control over the warehouse premises was not continuous, the court held that there was exclusive control for short periods of time and that the insured was in control of the premises when the fire began. In holding that goods in the warehouse were in the care, custody, or control of the insured at the time of the fire, the court reviewed the purposes behind the exclusion:

One purpose [of the exclusion] is to prevent the general liability insurer from becoming a guarantor of the insured's workmanship in ordinary operations. Failures of workmanship are a normal business risk which the insured is in the best position to prevent. If such risk be transferred to the insurer via general liability provisions, the cost for general liability coverage will be greater. The "care, custody or control" exclusion is designed to avoid such result. . . . In the instant case the core of the [insured's] workmanship is to provide a trustworthy and capable watchman to care for the premises and their contents. If the "care, custody or control" exclusion does not apply to such contents, the general liability insurer will bear the burden of guaranteeing such workmanship.^[229]

The court in Country Mutual Insurance Co. v. Waldman Mercantile Co.,^[230] adopted a two-prong test for determining whether property was in the care, custody, or control of the insured so as to preclude liability under the exclusion. The court found that where the property damage is within the possessory control of the insured at the time of the loss and is a necessary element of the work performed, the property is deemed in the care, custody, or control of the insured. The court also found that while the control exercised by the insured must be exclusive, it need not be continuous, and if the insured has possessory control at the time the property is damaged, the exclusion clause will apply. In finding that the property was a necessary part of the "work performed" by the insured, the court noted that, while the lessees retained title to their merchandise, they consigned it to the insured for sale. The court concluded that in light of the relationship between the insured and its lessees and the nature of the business arrangement, the lessees' property was a necessary element of the work performed.

In considering the degree of control that is necessary to permit a determination that property is in the care, custody, or control of the insured, informed commentary indicates that the courts in other jurisdictions have reached general agreement that possessory control by the insured is sufficient, although there is some authority...