Yesterday was the first in this two-part series on limited designated operations endorsements. Discussed and corrected were the assertions that:
• Coverage is reduced by attachment of the endorsement;
• The endorsement limits the activities in which the insured can be involved;
• Coverage will be denied and defense will not be provided if a non-listed activity causes a loss; and
• The insured does not have the opportunity to add exposures at audit.
Two more myths are reviewed in this post. The series will conclude with the reasons for and the realities of the Limitation of Coverage to Designated Operations (or similarly titled) 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).
"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 is limited to their 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 sub to do.
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 contractor is concerned that without insurance the subcontractor would not be able to live up to the contract that may not be the best 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.
Plain to See
Operations limiting endorsements are generally listed on the quote and are always shown in the form listings. 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 to the insured exactly what the limitations are, how they may affect the insured and how to fill any gaps (real or perceived) in protection.
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:
• To protect the insurance carrier from an unknown and unwanted risk;
• To flesh out what is really there; and/or
• To cut down on fraud, misrepresentation and concealment.
Although it may sound harsh, 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; when asked a lot of 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 backed up with relevant, supporting underwriting detail and documentation (i.e. a written description of operations, financials, loss runs, loss control plans, etc.). 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 removal seems reasonable.
With this endorsement, the insurance carrier and underwriter can:
• Offer much better terms, conditions and PRICING than might be available to these high-risk insureds if the underwriter had to price for unknown exposures;
• More effectively get his arms around the risk to provide a more competitive program; and
• At times, make what would otherwise be an uninsurable risk, insurable according to DiBiasi.
Estimating the percentage of insureds subject to this limitation would be 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.
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.
We look forward to publishing the results.
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At a minimum, certificates of insurance covering such policies should prominently state that the policy is subject to a limited operations endorsement and list the exact operations that are covered. It might be helpful to insureds if that information is also prominently stated on the declarations page of the policy.
In one case a contractor was hired to do interior demolition work. The declarations page described the insured's operations as "Interior Reno. Contractor." The classification page showed the classification as "Painting - interior buildings or structures." The insurer denied liability for a claim arising from interior demolition work. Arguably, that work would be encompassed by "Interior Reno. Work;" the insurer said that it was the classification wording that prevailed, not the description if business on the declarations page.
Incidentally, it's not correct to say that the limited operations endorsement was a response to the 1986 changes in Commercial General Liability coverage; the Commercial General Liability policy, which preceded the 1986 form provided just as broad coverage for insured's operation that differed from those listed in the classification section of the policy.
Please keep them coming.
First, what I don't disagree with. I don't disagree with the clarification that broadness of coverage, that is, bodily injury, property damage, operations, products/completed operations and personal & advertising injury, medical payments, contractual liability and fire damage liability are the same whether the Limited Designated Operations Endorsement is added to the policy or not.
However, that said, what the endorsements effectively do is turn the policy into an old fashioned M & C policy endorsed to add Products/Completed operations, personal injury, contractual and premises medical.
What has been taken away is new operations started during the policy term and newly acquired entity coverage. Now, while I suppose that if an entity acquired another entity with exactly the same operations, there would likely be coverage for the newly acquired entity, it is frequent that newly acquired organizations have different operations from the acquiring entity.
I also disagree with the premise that these forms, while primarily used by Surplus Lines Insurers. don't materially affect the coverage. My experience is that CGL policies issued through Surplus Lines Brokers have so many added exclusions and limitations that they often emasculate the coverage so much that it bears no resemblance whatever to the standard CGL.
This creates an especially difficult situation for additional insureds, who often get no copy of the policy to review and who often wouldn't know the implications of all the added exclusions even if they did get a copy of it.
Now I realize that such forms may be necessary to convince underwriters to provide coverage for particularly difficult exposures or even to isolate one particularly difficult exposure for which a higher price is needed from more sedate exposures for which an insured may qualify for a preferred policy. My objection is to protraying such endorsements as no big deal. They are a big deal and insureds need to be fully aware of the implications of such endorsements, especially if they have no other broader CGL policy includes coverage on new operations and newly entities but which excludes the operation covered by the policy on which the limited Designated Operations Endorsement is placed. They also need to be careful if they have umbrella coverage because umbrella applications request details of non-standard endorsements on underlying policies.
Sincerely,
Thomas E. Nelson, CIC, CRM, ALCM