Beware of limiting endorsements in the CGL
Make sure the underwriter grasps the nature of your client's operation
By Donald S. Malecki, CPCU
With the introduction of numerous limiting endorsements to the commercial general liability (CGL) policy over the years, many people in the insurance business undoubtedly will agree that the only liability coverage provided is for slip-and-fall cases.
Many producers know from experience, however, that nothing is guaranteed, not even coverage for slip-and-fall cases, despite its being traditionally the core liability coverage. In fact, some insurers have policy provisions or endorsements that make it difficult for insureds even to obtain defense in suits that allege they are liable for slip-and-fall accidents.
Under one such endorsement, the insurer limits its liability coverage to the classifications noted in the policy. The insurer may agree to pay all sums the insured is legally obligated to pay as damages, but coverage applies only to those occurrences having to do with the classifications named in the policy.
There are hundreds of classifications. They are designed to represent the operations common to specific businesses. The standard ISO manuals not only show the classifications (often with notations) but also contain a list of operations to be included automatically or to be rated separately. Escalators and elevators, for example, are hazards or operations automatically included within the classifications (and coverage) of the CGL policy. Years ago, these hazards had to be insured separately.
Although classification and pricing are determined by the underwriter, the producer must make sure that the underwriter has an accurate grasp of the insured's business activities so as to prevent later misunderstandings. (The common misunderstanding has to do with pricing.)
Ordinarily, the producer's role is simply to be certain that the insured's business activities are appropriately classified and rated. The reason is that, at least under standard policy forms, coverage likely will apply even when there is a misclassification, unless the insured or producer has in some way misrepresented the nature of the insured's business.
Problems arise, however, when insurers begin to tinker with the coverage, sometimes giving the appearance of taking unfair advantage of insureds.
Classification limitation endorsement
A good example of this tinkering is the classification limitation endorsement that some insurers add to their liability policies. A typical endorsement reads:
Coverage under this policy is specifically limited to those classification codes listed in the policy. No coverage is provided for any classification code or operation performed by the named insured not specifically listed in the Declarations of the policy.
Clearly, the designated classification(s) is/are of utmost importance. In fact, the designated classification must match the nature of the activity or the insurer is likely to deny defense and coverage.
A case in point is Essex Insurance Co. v. Michael E. Foley, et al., Civil Action 10-0511-WS-M (U.S. Dist. Ct. So. Dist. AL, 2011), which involved a slip-and-fall accident at the business premises of the insured's marina. Although this case, as reported, was still in the midst of discovery, the insurer nonetheless moved for summary judgment on the question of whether it owed a duty to defend its insured.
In early 2009, the insured began remodeling a parking lot on its premises for a restaurant operated by another entity. In the course of this activity, an employee of the restaurant was severely injured and later alleged that it was because of the insured's negligence in building a makeshift plywood ramp specifically for use by the restaurant employees.
The insurer denied both defense and indemnity (but later provided a defense) based on its classification limitation endorsement. This endorsement stated that coverage was provided only for those operations specified in the application and described in the policy's declarations page.
Interestingly, in the application, under the heading "nature of business/description of operations by premises," the insured's business was described with the single word "marina." The supplemental declarations page of the policy, on the other hand, listed under the heading "description of hazards" the following: "boat moorage and storage"; "vessel fueling" and "store sales."
The question for the court to decide was whether the injured worker's claim fell within the insured's operations as described in the classification limitation endorsement. The court held that it did because the endorsement could be reasonably understood in more than one way and therefore was ambiguous.
From the court's perspective, the endorsement's language that coverage applied "only to those operations specified in the application for insurance and described on the declarations page" could be reasonably read either as (1) fixing two prerequisites for coverage (such that coverage would apply only to an operation that is stated in both the application and the declarations, or as (2) identifying two sets of documents where covered operations may be listed (such that coverage would apply to any operation that is either specified in the application or described in the declarations).
Accordingly, so long as the plaintiff's claim related to the insured's operations either specified in the application or described under the classification in the policy's declarations page, the insurer had a duty to defend.
Obstacles for producers
These kinds of court cases involving classification limitation endorsements are common. It also should not come as a surprise that some insurers use them with applicants that are likely to be below-average risks and unable to obtain insurance in the standard market.
To see what insurers have used these endorsements, the producer need only check court cases that have dealt with arguments over these classifications. Among the insurers that have used classification limitation endorsements are Atlantic Casualty Insurance Company, Burlington Insurance Company, Essex Insurance Company, First Specialty Insurance Corporation, and United States Underwriters Insurance Company.
One of the points raised by the court in the above-cited Essex Insurance Company v. Foley case was that because the classification limitation endorsement intentionally narrows the scope of coverage, it serves as an exclusion. While an exclusion, in general, places the burden of applicability on the insurer, producers must keep in mind that an insured's operations should be stated broadly.
In doing so, producers should not think of classification limitations as exclusions of coverage. The classifications instead should be as numerous, or stated as broadly, as possible. The reason is that those operations not declared or not falling within the noted classifications could serve to limit coverage.
Another point for producers to remember is that insurers that use classification limitation endorsements with liability also are likely to issue other limitation endorsements, such as the designated premises endorsement. This endorsement, combined with the classification limitation endorsement, might have the effect of limiting coverage to the named insured's premises and not extend coverage to operations away from premises even if they are incidental to the covered premises.
Sometimes insurers that issue classification limitation endorsements also use the classification and rate codes of ISO. To the extent this occurs, producers may be able to check out the classification and see what is or is not included. This also could be valuable evidence even after a dispute arises.
For example, one of the issues in the foregoing Essex v. Foley case was whether a marina included any on-site restaurant. The court stated that many marinas have restaurants and that, in the common and usual understanding, the term "marina" may include on-site restaurant facilities.
Interestingly, the ISO classifications manual does not list marina. But under classification: Boat Yards or Marinas—public, code 10107, restaurants are to be separately rated.
Actually, this argument over restaurants and marinas appears to have been irrelevant because the insured did not own or operate the restaurant where the accident occurred. The insured constructed a temporary wood ramp on its premises only to assist employees of a restaurant that was owned and operated by someone else.
In a coverage dispute, an insurer that relies on a classification limitation endorsement might have difficulty introducing a classification manual, such as the one issued by ISO, simply because it is not available to insureds. Even if it were, there is some question whether insureds would understand its rationale.
On the other hand, a producer's reliance on the ISO classification manual could be invaluable because the classifications list the operations included, as well as hazards that require separate consideration. This manual therefore may enable the producer to determine whether the description of an insured's operations represents the kind of activity the insured commonly undertakes in the business activities to be insured.
It is difficult to ensure that insureds are properly protected when their liability policies are made subject to the classification limitation endorsement. At each renewal, the producer might want to see if the insured can be written in the standard market where these kinds of endorsements are less likely to be issued.
Donald S. Malecki, CPCU, has spent more than 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.