Two days ago we posted the first in this two-part series on limited designated operations endorsements. Discussed and corrected were the assertions that:
Two more myths are reviewed in this post. The series concludes with the reasons for and the realities of the Limitation of Coverage to Designated Operations (or similarly titled or purposed) endorsement.
Myths Continued
The insured does not have access to the CGL code descriptions to make sure all their operations are covered. That's right, and they shouldn't. It really should not matter what the codes say, the duty of the insured and the agent/broker is to provide all material information to the underwriter. If the underwriter is aware, there is little chance any claim can be denied (outside of specific exclusions). Also, the agent and underwriter are the only parties that need the codes as those numbers mean nothing to the insured.
"Material information" is information that would cause the underwriter to charge a different premium, apply different terms and conditions or change their decision to provide coverage. All material activities should be reported to the underwriter. Remember also, as stated previously, unless the activity is a significant departure from what the underwriter could reasonably contemplate, the lack of listing a related activity should not be a concern, but provide the information anyway.
Lastly, not all carriers list the CGL codes on this endorsement, some specifically name the activities covered. Any insured engaged in an activity not specifically spelled out should know to notify the agent/broker or the insurance carrier immediately to avoid any unintended gaps.
Coverage provided to the additional insured is compromised. Protection granted to additional insureds (AI) by the CG 20 10 is limited to the AI's vicarious liability for and shared liability with the named insured; some state laws limit the breadth of protection to only the AI's vicarious liability for the actions of the named insured. As long as the named insured is doing what they told the insurance carrier they would be doing, there is little chance that the additional insured will be affected. In fact, what the insured told the carrier it does should be all the additional insured would hire the insured contractor/subcontractor to do anyway.
If the insured subject to the limited operations endorsement contracts to do work outside of what it has told the insurance carrier it does, then, yes, there may be problems for the additional insured from the perspective of insurance coverage. However, insurance is not the only means the AI has to protect itself, there is also contractual risk transfer (insurance is essentially a financing mechanism).
Discussing the nuances of contractual risk transfer is outside the scope of this article; but the indemnification and hold harmless requirements found in most construction documents accomplish the same basic goal as the additional insured endorsement. If the additional insured is concerned that without insurance the contractor/subcontractor would not be able to live up to the contract, that may not be the best contractor/subcontractor with whom to establish a business relationship.
If nothing else, the use of this endorsement will require the additional insured contractor to confirm that the subcontractor is qualified to do what they have been hired to do. Additional insureds may want to ask if this endorsement exists; and if it does, they can compare the limitation to the work they are hiring the independent contractor/subcontractor to perform.
Plain to See (Or at Least Should Be)
Operations limiting endorsements are listed on the quote (or should be) and are always shown in the form listings of the policy. The endorsement is not hidden and should not be a surprise to anyone that is part of the insurance buying process. A duty is placed on agents and brokers to explain any policy limitations to the insured, how they may affect the insured and how any gaps (real or perceived) in protection might be closed (or why they can't).
If the insured provides all material information to the agent/broker, and that information is subsequently passed along to the underwriter, there is no protection issue over which any insured needs to be concerned. Fear of this endorsement is largely a function of transparency.
Reasons This Endorsements Might be Used
Not all excess and surplus lines carriers use the limitation of coverage to designated operations endorsement. "Only about a quarter of my markets use this or similar endorsements," reports Zach Mather, a specialty general liability broker with CRC Insurance Services in Birmingham, Ala., "and then only in cases of very high-hazard risks and some construction related risk classes."
Of the carriers that do, Mather states that the most common reasons are:
It may sound harsh, but until the underwriter is comfortable with the risk, the endorsement may be used. The good news is that the more comfortable the underwriter is with the insured and its operations, the more likely he is to remove the endorsement. DiBiasi said that underwriting is individualized and this endorsement is not a wholesale requirement; if asked, many underwriters will remove this limiting endorsement.
Mather concurs and further states that he is often able to get the endorsement removed in cases where the application is supplemented with relevant, supporting underwriting detail and documentation (i.e. a written description of operations, financials, loss runs, loss control plans, etc.). Again, the more comfortable the underwriter, the less likely he is to attach the endorsement.
Realities of the 'Limitations of Coverage to Designated Operations'
Factually, the endorsement is not nearly as ubiquitous and ominous as some want to make it seem. Relatively few carriers actually use the endorsement, and those that do use it only in rare circumstances. Plus carriers seem willing to remove the endorsement when asked, if the underwriter is comfortable with the risk and its removal seems reasonable.
With this endorsement, the insurance carrier and underwriter can:
An additional duty is placed upon the agent as a result of this and any other endorsement – knowing and understanding what is being proposed to the client by the carrier. Agents cannot simply accept the quote from the broker or carrier and present it to the client without first reviewing it and its provisions to assure full understanding of what is being offered.
Estimating the percentage of insureds subject to this operational limitation endorsement is almost impossible, but it is likely FAR LESS than 1 percent of all insureds; and probably not as many construction-related insured's as some media want readers to believe.
In reality, there's nothing to the hype.
A New Charge and a Survey
The Limitations of Coverage to Designated Operations and similar endorsements have historically been sequestered to the realm of excess and surplus lines insureds. However, some insurance and risk management professionals claim that similar endorsements have been popping up in admitted carrier's policies. Last year MyNewMarkets.com surveyed agents regarding which standard carriers they have seen use this endorsement. Some of the standard carriers previously reported to make use of this endorsement includes: Ace RLI, Dallas National, Zurich, Safeco, Hartford, Selective and Travelers.
There are only 15 states that have file-and-use laws related to coverage forms. In most states, these endorsements would have to be approved by the departments of insurance prior to being used. And even file and use states generally have the option of withdrawing the form.
Are these designated operations endorsements being used by any of your admitted carriers. Click here to take the survey. There are only six questions and the information you provide will be very valuable to the industry as a whole. If you are not seeing these endorsements, tell us; if you are, tell us.
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To be material the insured must know or should have known those activities that would significantly effect the premiums. Without the underwriting requirements (classifications, footnotes, rates etc.) the insured would have to be clairvoyant to know what is material and what is not. Only those in the insurance industry posses those technical abilities.
If these limitation endorsements were ever adjudicated I doubt that they would hold up.
This raises the real question. Why are limitation endorsement used in the first place?
If the insured does not posses the ability to determine what is material the endorsement is meaningless.
No there must be another reason.
Steve Petrik
A framing contractor does not have have any idea what the GL code is for framing (nor do they have to) to know that blasting is outside any reasonable contemplation of the activities that were underwritten.
Face it, this is about agents being lazy; and sometimes about them being less than completely honest.
Does the insured know what they do? Were they truthful in telling the agent what they do? Was the agent honest with the insurance carrier? Did the agent explain the policy provisions to the client? Does the agent do the proper job at renewal?