Insurers traditionally compete on price, service and products. Service, unfortunately, often wanes and price competition often is more destructive than helpful. What is left is product development.

The problem here is that if it is an appealing and workable product at an acceptable price, its exclusivity to the one insurer will be short lived. Traditionally other insurers will quickly adopt similar provisions, regardless of any copyright measures.

Nonetheless, producers look for insurers to represent that are mavericks, flexible and characteristically seeking to develop competitive products. They must be careful, however, not to be duped into thinking that new products are just what consumers want and need. History tells us that some products are not worth the paper they are printed on.

Here is a novel idea for product development by insurers involving a three-step process:

(1) Deny a claim under a liability policy where coverage is clearly intended.

(2) Employ the services of an independent attorney who, by way of smoke and mirrors, convinces a court that coverage denial is justified.

(3) Sell the coverage back by endorsement—but not all the coverage that is originally intended to be provided.

Growing numbers of insurers are beginning to market a type of coverage that falls into the above category—broad form property damage for completed operations. This coverage was first introduced on a standard basis in 1968. Because its scope was widely misunderstood among the insurance community, not to speak of consumers, the Insurance Services Office (ISO) and its predecessors issued memoranda explaining this coverage’s application for both ongoing and completed operations.

For purposes of completed operations, it is the exception to the “your work” exclusion (l) of the standard ISO CGL policy that is important. Briefly, this exclusion precludes coverage for “‘property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’”

This exclusion then makes an important exception if the damaged work or the work out of which the damage arises was performed on the named insured’s behalf by a subcontractor. The effect of this exclusion and its exception is that, while damage caused by the named insured (a general contractor for example) to its own work is excluded, coverage still applies for damage to work of the named insured caused by a subcontractor, as well as damage to the work of subcontractors for which the general contractor is liable.

While contractors came to learn somewhat slowly about the advantages of broad form property damage with completed operations coverage, the demand for coverage mushroomed once it was understood.

Rampant defective workmanship eventually was too much to bear for many insurers. So ISO introduced two optional endorsements for use by underwriters beginning in 2002 to eliminate coverage for broad form property damage including completed operations. The first endorsement is Exclusion - Damage to Work Performed By Subcontractors On Your Behalf CG 22 94, and Exclusion - Damage to Work By Subcontractors On Your Behalf - Designated Sites or Operations CG 22 95. The latter is a scheduled type to be used on a more discretionary basis.

Instead of using one of the above exclusions, some insurers are willing to provide some coverage on a limited basis. What may beg a question here is why insurers would be willing to sell some coverage back when it can be eliminated entirely through the use of the above two endorsements. The answer is easy. To make money, of course, through a somewhat unorthodox method.

Absurd as the three-step process may seem, this situation is not an isolated one limited to one insurer or state. In fact, the first ruling against coverage has caused a number of courts in other jurisdictions—through the “monkey-see-monkey-do” process—to likewise rule against coverage.

The reasons used by insurers to deny coverage for broad form property damage including completed operations, incidentally, are (1) that defective work is not considered to be property damage, but rather a breach of contract, and (2) the work performed is not an occurrence no matter who performed it!

In other words, an insurer, in its sales pitch for this extra coverage, may explain—through the carrot and stick approach—that a named insured cannot rely on the exception to exclusion (l) of the policy until there first is “property damage” caused by an “occurrence.” The key to obtaining coverage, therefore, appears to be the purchase of the special endorsement.

What must be understood here is that it is not the courts that are fostering this trend. An insurer has to first deny coverage before litigation ensues. For insurers to therefore maintain that what they are promoting is a new product brought about by case law is to insult the intelligence of its producers among others.

It is difficult to discern how many insurers currently are offering this special coverage since the numbers are likely to increase rapidly. With a couple of these endorsements, however, it is necessary that the contractors’ CGL policy not be endorsed with either one of the two endorsements (CG 22 94 or 22 95) eliminating broad form property damage including completed operations.

The reason is that these special endorsements specifically reference the exception to exclusion (l) so that it can be replaced and amended by the provisions of the endorsement. With a sleight of hand, however, the coverage purchased can be somewhat less than what the exception to exclusion (l) provides.

More specifically, what may not be provided, depending on these endorsements, are coverages for (1) damages because of loss of use whether or not property is physically injured, and (2) sums required to repair or replace the defective work performed on the named insured’s behalf by a subcontractor.

Considering that the CGL policy does not cover property damage to work performed by the named insured and two of these special endorsements also preclude coverage for sums required to repair or replace the defective work performed by a subcontractor, the question is: what coverage remains? Not much, that is for sure.

Before producers jump at the oppor­tunity to sell these endorse­ments, despite the marketing efforts of insurers, they have a lot to consider and, in fact, may find themselves in a Catch-22 situation.

First of all, producers need to ascer­tain the states that have ruled against coverage for work performed on behalf of the named insured by a subcontractor because defective work is not property damage or caused by an occurrence.

While there are a limited number of sources to determine the status in a given state, insurers offering this special endorsement should provide the status. It is difficult to be definitive and provide a list of states that have ruled against coverage in this column.

Although not to be relied on but mentioned for purposes of illustra­tion, there are currently 14 states where the courts have ruled against coverage in favor of insurers. These are Arkansas, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Maryland, Massachu­setts, North Carolina, Pennsylvania, Virginia, West Virginia and Wyoming.

All other states have ruled for cov­erage with the exception of Colorado, District of Columbia, Kentucky, Missouri, New Jersey, New York, Ohio, Oklahoma and Rhode Island. These are jurisdictions where case law differs and where the state’s highest court has yet to rule on this issue.

The dilemma for producers is whether to sell these endorsements because there may appear to be situations where producers may be blamed for not suggesting the endorsement while in other cases where the endorsement has been sold even though it was not needed.

The following are some points to consider in practicing good risk management in the agency:

• If a special endorsement is sold in one of the states where a question of coverage is pending or has not yet been subjected to court rule, consider it a gamble. Is an insured willing pay for an endorsement that may or may not be necessary?

• If a special endorsement can be issued only if the exception to exclusion (l) remains intact and not excluded by one of the two endorsements available for that purpose, can the producer be blamed for selling an endorsement that provides less coverage than the policy provides?

• If the special endorsement does not pay sums to repair or replace the subcontractor’s work which causes the physical injury to tangible property, and loss of use of tangible property is not covered whether or not resulting from physical injury to tangible property, what is covered?

• Is there any alternative to these special endorsements? If so, producers need to consider them, since some of these special endorsements may cause more trouble than the extra commission is worth.

To the extent admitted insurers are offering these endorsements for an additional premium, one has wonder what insurance departments did in approving them, given that standard CGL policies are priced to include broad form property damage including completed operations coverage, and special endorsements also are subject to additional cost. n