Improper application of insurance terminology by some insurance news sources has created a wave of worry over an endorsement these media outlets assert severely limits the protection provided by the commercial general liability (CGL) policy . Readers are even warned that attachment of this endorsement is antithetical to the foundational principles of the CGL.
This "new" controversy centers 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 as a result of Insurance Services Office's (ISO's) sweeping 1986 CGL form changes, these manuscripted, non-ISO endorsements are designed to limit the insurance company's loss exposure by extending full protection to only those operational activities reported to the carrier by the insured and its 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."
The endorsement simply 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 in 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 that 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 underwriting intent; the claims department generally checks first 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 likely paid if the activity can be reasonably anticipated even if not specifically delineated in the endorsement.
DiBiasi related a real life example from several years ago of a "significant departure" by which he was impacted as the 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.
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.
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.
Following
Two more myths will be dispelled tomorrow. Reasons, advantages and realities of the limited operations endorsement will also be discussed. Upon the conclusion of this series, readers will have the opportunity to participate in a short, six-question survey about 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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