RISK MANAGEMENT
By Donald S. Malecki, CPCU
Restrictions on mobile equipment, electronic data
and athletic activities--plus some confusing additions
In a period of less than 20 years, the standard CGL forms have been whittled to the point where they are nothing to brag about. Considering that the proposed 2004 revisions are the seventh such ones, it may be a while before producers and others get to the point where they can get a handle on them.
News forums informing producers and others that more liability policy amendments are in store have not generated the kind of anticipation that was displayed when the standard ISO 1986 Commercial General Liability forms were introduced.
Of course, 1986 was a significant period in time. The industry was just coming out of a hard market, and competition was being restored. The new CGL forms introduced at that time took some study, particularly the mechanics of the claims-made forms; but the new forms were welcomed since they included, as part of the basic provisions, coverages that formerly required the attachment of several endorsements.
In a period of less than 20 years, the standard CGL forms have been whittled to the point where they are nothing to brag about. It still takes time to digest the changes, and considering that the proposed 2004 revisions are the seventh such ones, it may be a while before producers and others get to the point where they can get a handle on them.
What complicates matters is that not all state insurance departments will accept the December 2004 proposed changes at the same time, and some insurers may decide not to implement them at all in order to remain competitive. Despite all of this, it is still necessary to eventually grasp an understanding of what these changes are, since career-minded persons need to keep up with developments.
Certain mobile equipment coverage removed
The current standard CGL forms (occurrence and claims-made) cover liability arising out of the ownership, maintenance, use or operation of mobile equipment. In fact, this is the way coverage has been provided since the introduction of standard forms in 1941.
Even liability from mobile equipment required to be registered for public road use is covered by the CGL forms. What is necessary to properly effect this coverage is the attachment of Motor Vehicle Laws Endorsement CG 99 01 11 85. An insurer that provides this endorsement, when issued, promises to provide "any liability, uninsured motorists, underinsured motorists, no-fault or other coverages required by any motor vehicle law." It also provides that if the minimum limits required by the jurisdiction where an accident takes place are higher than the CGL limits, the limits of the motor vehicle law apply.
But, because of the number of uninsured and underinsured motorists cases over the years, many cases involving mobile equipment under CGL forms, this Motor Vehicles Laws endorsement is being withdrawn. The impact is that if coverage for this exposure is desired, it will now be part of the Business Auto policy. For some businesses, this is going to be a costly proposition, even if an underwriter is willing to accept some of these risks.
It may turn out that, as an accommodation to write the liability coverage on mobile equipment, the underwriter may insist on also writing the physical damage, which may currently be handled under an inland marine form. This requirement, too, may be more costly.
In light of the foregoing change, ISO also deems it necessary to revise the Aircraft, Auto or Watercraft exclusion to remove coverage for the bodily injury or property damage arising out of the ownership, maintenance or use of land vehicles that are subject to motor vehicle laws.
The "auto" and "mobile equipment" definitions also have to be redefined to state that "mobile equipment" subject to motor vehicle laws is now "autos."
Electronic data exclusion
A number of changes were introduced earlier having to do with liability stemming from electronic data. One of these earlier changes was a redefinition of the defined term "property damage" to specifically state that electronic data is not tangible property and to define what "electronic data" means for purposes of this statement.
Another change was to introduce some endorsements excluding the professional or errors and omissions exposures for software developers, manufacturers, programmers, and others who need to purchase special insurance. At the same time of these changes, ISO also introduced an Electronic Data Liability Endorsement CG 04 37 intended for use when coverage for loss of computerized or electronically stored data or software results from physical injury to tangible property.
Apparently, these amendments have not been sufficient to clearly exclude coverage having to do with electronic data. So, one of the 2004 proposed changes is to add a new exclusion (p) to the CGL forms which specifically excludes coverage for "damages arising out of the loss of, loss of use of, damage to, corruption of, inability to access, or inability to manipulate electronic data."
What is really clever is that with this change, the opportunity arises for insurers to now sell back what has been taken away. The tool to do this is a new form titled Electronic Data Liability Endorsement CG 00 65, to be written on a claims-made basis.
The Electronic Data Liability Endorsement CG 04 37, mentioned earlier, also is being revised again to make clear that it is not affected by the introduction of the new exclusion (p).
Athletics exclusion broadened
The athletic activities exclusion currently applicable under Coverage C Medical Payments is being revised, it is said, to more clearly express underwriting intent. Apparently, ISO has received requests from agents and insurers asking to more clearly explain the meaning of the term "athletics."
The new exclusion disallows expenses for bodily injury "[T]o a person injured while practicing, instructing or participating in any physical exercises or games, sports or contests." This change, it is said, has no impact on coverage. Judging from the court cases that have been rendered, this new wording may still be problematic.
In Twin City Fire Insurance Co. v. Delaware Racing Association, et al., 840 Atl.2d 624 (Sup. Ct. DE 2003), both the lower and high courts held that the term "practicing," as included in an athletic activity exclusion, was ambiguous, since there are at least two reasonable interpretations. The court's ultimate decision was that horse track riders were not participating or practicing in horse racing when injured while exercising the horses in close proximity to one another.
Contractual liability coverage
When the 1986 CGL forms were introduced, one of the significant additions was to automatically include blanket contractual liability coverage for what the contract prescribed, subject, of course, to what otherwise is permitted by state statutes. If, for example, a contract required coverage for acts which arise out of the sole fault of the party seeking coverage (indemnitee), and the state law did not preclude it, the policy would automatically include that coverage.
It was not long after this policy was introduced that ISO introduced an endorsement that took away that broad coverage feature and left the named insured with coverage limited to the five so-called "incidental agreements." Thus, when the Contractual Limitation Endorse-ment CG 21 39 is issued, the coverage provided is limited to agreements referred to by the acronym L-E-A-S-E: (L)ease of premises; (E)asements; (A)greements required by municipalities, except for work done for them; (S)idetrack (railroad) agreements; and (E)levator agreements.
The latest change is to provide an endorsement that takes away more coverage than what is provided by an unendorsed CGL policy, but gives a little more back compared to the Contractual Limitation endorsement. This new endorsement is titled Amendment of Insured Contract Definition CG 24 26.
The rationale for this new endorsement is to not provide any more contractual liability coverage than what an additional insured is intended to receive under some of the new additional insured endorsements also being introduced. With a few exceptions, most apply to situations involving construction contractors and leased equipment.
These additional insured endorsements are structured in such a way as to no longer give coverage for an additional insured's sole fault. Thus, unless the named insured is only partially at fault, the additional insured receives no coverage. The foregoing new contractual liability endorsement is supposed to mirror what the additional insured endorsements provide.
Mass confusion on horizon
Unfortunately, they will not be the same. For example, insofar as contractual liability coverage is concerned, the ISO version of CGL forms view defense costs to be reimbursed by the insurer as being within limits, unless 12 conditions (destined to fail) are met. When these conditions are not met, the insurer not only will provide a defense, but also will pay the defense costs in addition to the policy limits.
Considering that the ISO additional insured endorsements limit coverage to ongoing operations, there may be instances where the additional insured endorsement applies and defense costs are covered in addition to the limits. However, if no completed operations coverage is added to an additional insured endorsement, it will be the contractual liability coverage that will apply instead.
The confusing part of these changes is that the ISO Commercial Lines Manual does not specifically require that the new Amendment of Insured Contract Definition endorsement be issued with the new additional insured endorsements. What could happen is that the new additional insured endorsements could be issued at the same time a Contractual Limitation endorsement is issued instead.
One would be surprised how many CGL policies are being issued today with the Contractual Limitation endorsement. It is doubtful that an underwriter is going to issue the new contractual endorsement providing more coverage when an underwriter has been issuing the more limited version.
Other changes
In light of space limitations, other changes requiring more extensive explanation will be discussed in future issues. However, among the changes comprising the 2004 CGL amendments are the following:
* An exclusionary endorsement is available to eliminate coverage for volunteers.
* An exclusionary endorsement eliminates coverage on newly acquired organizations.
* A broader war exclusion is introduced.
The pollution exclusion was amended in the CGL forms so that coverage includes cooling and dehumidifying equipment in the building heating equipment. This is said to result in a broadening of coverage. It is more of a clarification than a broadening, because it can be argued that building heating equipment normally includes cooling and dehumidifying equipment. This change, however, eliminates having to argue that such coverage applies. *
The author
Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, serves on the Examination Committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.