Improper application of insurance terminology by some insurance news sources created a wave of worry last year over an endorsement these outlets asserted severely limits the protection provided by the commercial general liability policy (CGL). Readers were even warned that attachment of this endorsement is antithetical to the foundational principles of the CGL.
The "new" controversy centered on an endorsement actively used since the mid-to-late 1980's: the Limitation of Coverage to Designated Operations (or similarly titled) endorsement.
Likely created about the same time as Insurance Services Office's (ISO's) sweeping 1986 CGL form changes (but no one is sure), these manuscript, non-ISO endorsements are designed to limit the insurance company's exposure by extending full protection to only those operational activities reported to the carrier by the insured and its agent/broker. The true nature, purpose and use of this endorsement have been masked by previously published misinformation, bias and myth.
Myths Surrounding the Endorsement
Coverage is reduced by attachment of the endorsement. Some insurance media outlets have propagated the idea that attachment of this endorsement somehow reduces the coverage available to the insured. This is a patently false assertion according to John DiBiasi, president, XL Excess & Surplus Lines. "The form does not limit coverage, it only limits the range of activities protected," according to DiBiasi.
While this may sound semantic, it's not. "Coverage" relates to the breadth of protection provided in the policy while "activities" (as the name suggests) relates to what the insured does. All usual and expected CGL coverages are available to protect the insured against bodily injury or property damage claims resulting from any and all activities engaged in by the insured - provided the underwriter is aware of the activities. There is NO reduction in "coverage."
In the simplest terms, the endorsement does requires the insured (and broker) to be up front about ALL the activities in which they are currently engaged and in which they may engage. "Underwriters will generally schedule any potential known or related exposures on an 'if any' basis when necessary," says DiBiasi, removing any potential gap activities protected.
The endorsement limits the activities in which the insured can be involved. No, it only limits the activities that are insured to those of which the underwriter is aware; and the underwriter will usually add any new activities undertaken by the insured during the policy period. "This is an almost daily occurrence," states DiBiasi. "Our underwriters add new activities to the insured schedule all the time."
Again, the underwriter simply desires to have as much information as is reasonable about the risk they are being asked to insure. Insureds who fully disclose their operations and then limit their activities to their area of expertise enjoy the full breath of the CGL's protection. If any new activities are begun, a phone call to the agent/broker is all that is required to assure protection is extended. If concerned, call and add the activity DiBiasi advises.
Coverage will be denied and defense will not be provided if a non-listed activity causes a loss. "Insurance carriers have to be very careful how they deny a claim and why," says DiBiasi. Bad faith findings against insurance companies can be costly, thus carriers tend to avoid them when possible.
DiBiasi stated that rarely is a claim and defense denied if there is any question of the underwriter's intent; the claims department generally first checks with the underwriter to confirm his intent to provide or exclude coverage for the activity that caused the loss. "We have a high duty to investigate claims and defend," says DiBiasi.
Unless the activity is a "significant departure" (one that is not contemplated by reason) from the activity the carrier was asked to insure, a denial of protection and defense is rare and the claim will likely be defended and even paid if the activity can be reasonably anticipated according to DiBiasi.
DiBiasi related a real life example from several years ago of a "significant departure" by which he was impacted as an underwriter. An insured was submitted and written as a "carpenter." During the policy period the insured began working as a general contractor managing earthquake mitigation construction at a major international airport in the US. Increased exposure such as that could not be reasonably contemplated of an individual that is supposed to be just a carpenter.
Gathering from the insured and relating to the insurer (or broker) all activities in which the insured is involved will avoid the problem of "significant departure." If the insured purchases a new entity or expands the nature of their operation, the underwriter needs to be made aware. Notify the insured of this need in writing.
The insured does not have the opportunity to add exposures at audit. Well this one is partially true; but there should be no new exposures to add at the time of the audit (as detailed above, the insured should report new operations during the year). Any new operational exposures found during an audit will likely be added to the current policy year but will not be retrospectively added.
The audit argument is fallacious at its very core for those insureds required to complete a renewal application; and any insured that would be subject to the attachment of this endorsement would almost certainly be required to complete a renewal application every year. The opportunity to simply say, "Renew as is," no longer exists.
Renewal packets generally include (or should include) a copy of the existing declarations page showing all the activities currently covered; the insured knows if they have done, have begun or will begin operations or activities not on the schedule. New activities should be reported as part of the renewal application; if they are not, the insured is guilty of misrepresentation or concealment (both can result in the entire policy being declared void even in a non-endorsed CGL). Since the insured will be reporting the activities at renewal, why not just go ahead and add them to the current policy?
Insurance carriers have the right to and are due current and correct underwriting data. If material information is withheld, the carrier is being robbed of the opportunity to make an informed underwriting decision. If the carrier has to wait until audit to learn of new exposures, they are also forced to make underwriting decisions without all the necessary details. Once a policy renews, most states limit a carrier's ability to cancel a policy to only a short list of acceptable reasons.
Following
Two more myths will be dispelled in the next post. Reasons, advantages and realities of the limited operations endorsement will also be discussed. After the conclusion of this series, readers will have the opportunity to participate in a short, six-question survey of this and similar endorsements; your participation is much appreciated as the findings will be beneficial to the industry as a whole.
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As the article states, coverage is not reduced or limited, only the activites that are covered are limited. The full force of the CGL is provided, but only for the activites listed.
Limiting "coverage" means that a loss that might have been covered by the CGL isn't. Limiting the activities covered means that nothing about the CGL COVERAGE changes, only the activities to which the CGL responds is altered.
So to your example, you are correct. All coverages provided by the CGL (unless there are other limiting endorsements) apply to the boat rental but not the tatto operation. See the difference - no coverage is lost, only the activities to which coverage applies is limited.
While one might say semantically that there is not a coverage reduction, coverage only for identified activities is a HUGE limitation. It's like saying that an auto policy that excludes losses arising while the vehicle is moving is not really a coverage reduction.
It is VERY common for agents to not always be fully aware of an insured's complete gamut of services and activities. And insureds sometimes expand operations without notifying their agents. With these endorsements they risk potentially catastrophic uncovered losses and, as a result, agents expose themselves to an increased E&O exposure.