CLASSIFYING RISK
Noting footnotes and endorsements is crucial to proper classification
By Linda D. Ferguson
The phone rang at 1:30 a.m. My son's voice didn't sound right. He was in pain and wanted to know what to do next. This is the fear of every parent with a freshman away at college: "What happens if they become sick and I'm not there to help?" My initial reaction was to get the keys and drive to the college, but since it is two and a half hours away, I took my second option and told him to call the nurse on staff. And of course, I reminded him to "call me back."
What does this have to do with classifying risk? One word--footnotes. The minute my son calls that nurse and begins to get advice, a liability exposure is established and the question must be asked: "Is there coverage?" The coverage question, in this case, starts with a footnote which will lead to an endorsement.
The classification for this scenario is: Schools - colleges, universities, junior college or college preparatory - not for profit only - 67509. Three separate footnotes will help explain coverage that the loss cost for this class is and is not supposed to cover. The first footnote has three distinct parts:
1) Coverage does not apply to medical payments to students.
2) Coverage does not apply to bodily injury or property damage arising out of the use of aircraft, automobiles, school buses or watercraft or transportation of students.
3) As respects infirmaries which have facilities for lodging, this classification excludes professional services.
How is this information communicated to policyholders? We can't expect them to carry around a classification manual. The next footnote provides that explanation and has only two parts:
1) Use Colleges Or Schools (Limited Form) Endorsement CG 22 71.
2) If coverage for medical payments to students is provided, use Colleges Or Schools Endorsement CG 22 72.
The endorsements CG 22 71 and CG 22 72 are identical except for one line. The line, added to CG 22 71 but not to CG 22 72, says: "The following exclusion is added to Section I - Coverage C - Medical Payments: We will not pay expenses for 'bodily injury' to your student."
The other three sections of the endorsement are identical.
The first paragraph excludes the "transportation of students" exposure:
The school nurse recommended that the resident advisor take my son to the hospital emergency room. If an accident had occurred, the general liability policy would not respond. (Yes, there might be coverage under the college's hired non-owned policy and the resident advisor's personal auto policy.)
The next paragraph has two parts. The first excludes professional coverage if there is an infirmary with lodging:
My son's college has no lodging, so the professional coverage for the college based on the nurse's advice would be covered.
The next part of the paragraph excludes "bodily injury" to any person while practicing for or participating in any sports or athletic contest or exhibition if there is no direct management, organization or supervision of such sports or athletic contest or exhibition by any insured:
My son had been playing a game of Capture the Flag on the college grounds and ran into a pole. The game had been organized by a group of students and was sanctioned by the college, but there was no insured providing oversight. A number of questions would need to be answered before it could be determined if coverage might be available.
The last paragraph adds the trustees and the board of the college to the policy as insureds, along with any student teachers.
Were there any trustees, board members or student teachers or any other insureds supervising that evening? Not to my knowledge, although I did not research that point at 1:30 a.m.--I had other things on my mind. Definitions of insureds never seem terribly important--until the claim is presented.
The classification footnote provides the instructions, but the form actually alters the policy. If the form is not attached, the conditions of the footnotes cannot be met. The problem comes when the attachment of the form is viewed as optional or as part of the negotiations. It is not optional and cannot be "just left off." The footnotes are part of the rate and rule filings made by ISO on behalf of the companies that use the manuals. Arbitrary altering is therefore in violation of the filing.
As an example, if Company USA always attaches the form but because Agent Bill asks for the endorsement not to be attached and they comply, Agent Bill's insured would have received more coverage than Agent Frank's insured. Therefore, an unfair pricing advantage has been granted. Company USA does not have to be in lockstep with ISO and has a number of legal choices.
a) They could agree with Agent Bill to not attach the form and then make a "refer to company" filing for the rate differential. A charge would need to be determined and filed accordingly.
b) They could decide to never attach the form and make a filing altering the classification for all insureds.
c) They could alter the form to include only the last paragraph. This would entail both a rate and form filing.
The footnotes that accompany a classification are another reason to be very careful about proper classification. The incorrect classification could lead to the attachment of forms that are not applicable or to the non-attachment of important endorsements. The endorsements may be to the advantage of the insured or may provide exclusions that are necessary to clarify intended coverage.
Was I really worried about the coverage while I waited to hear about my son's diagnosis? No, I just wanted to hear the phone ring, and to hear his voice telling me everything was going to be fine. He called back at 5:00 a.m., then we both headed back to bed. He is doing fine, but his mother is still a little jumpy. *
The author
Linda D. Ferguson, CPCU, has 30 years of underwriting experience with national commercial lines carriers. She now operates a consulting business, Pleasant Street Consulting Company, in Newtonsville, Ohio. She can be reached at ldfcpcu@hotmail.com