Fire in a Leased Bay: Three Claims, Three Different Exclusions

No, on both counts, and the reasoning differs slightly for each.

Exclusion j.(1) bars property damage to property the insured owns, rents or occupies, including costs to repair, replace, restore or maintain it. Cobalt leases and occupies the bay, so the landlord's building damage is squarely excluded. The lease indemnity makes the lease an "insured contract," which removes exclusion b. (contractual liability) from the analysis, but that does nothing for j.(1). Exclusion j.(1) has no insured contract exception and operates independently. This is the classic trap: a contractual promise to pay for fire damage to leased premises does not convert excluded property into covered property.

The lost rent fails by derivation. Parkline's loss of use is loss of use of the same building that j.(1) excludes, and the insured cannot recover for loss of use of property whose physical damage is excluded. Even treated as a separate item of property damage, it is property damage to premises Cobalt rents.

What should have been in place: a lease requiring Parkline to insure the building and waive subrogation against Cobalt, plus Cobalt's own coverage for fire damage to the leased premises, typically a legal liability or fire legal liability limit. Do not let a client assume the CGL fills that gap.

Not covered. Exclusion j.(4) bars property damage to personal property in the care, custody or control of the insured. The gearboxes sit in Cobalt's shop precisely because customers have bailed them for rebuild; Cobalt controls the premises, the access and the handling. That is the paradigm bailment the exclusion was written for.

Two supporting points sharpen the answer:

• "Your work" and "your product" are not the operative exclusions here. The gearbox is neither. j.(4), not l. or k., is the right answer, and citing the wrong exclusion is how candidates lose easy points.
• The exclusion applies to the full value of the customer's unit, not merely to the labor Cobalt had invested in it.

The right product is customers' goods or bailee coverage, either endorsed onto the CGL or written as a separate inland marine form. A rebuild shop holding six-figure customer equipment should also check whether the lease or the customer contracts shift the risk back to the owner.

Note the deductible plays no part. A $10,000 deductible never makes an excluded loss payable; exclusion precedes deductible in the analysis.

Vantage's claim is the one that is covered.

• The CNC machine and inventory ($88,000): Vantage's property is not owned, rented or occupied by Cobalt, is in a neighboring unit rather than Cobalt's care, custody or control, and is neither Cobalt's product nor its work. None of the j. exclusions reach it. It is ordinary property damage caused by Cobalt's negligent operations.
• The three weeks of lost production ($55,000): loss of use of tangible property that is not physically injured is within the definition of property damage. Because the CNC itself was physically damaged, exclusion m. (impaired property) does not apply - that exclusion requires property that is not physically injured and that can be restored by repairing or replacing the insured's product or work. The lost production flows from covered damage to Vantage's own property and is covered.

Arithmetic: $88,000 + $55,000 = $143,000, less the $10,000 occurrence deductible = $133,000 paid, well inside the $1M occurrence limit. One fire is one occurrence, so one deductible and one limit apply, and the excluded building and gearbox claims do not consume the limit.

Defense is outside limits. Because at least one claim is covered, the carrier must defend the entire suit, including the excluded counts, subject to a reservation of rights.