A report appeared last week of an trend in the commercial general liability market that could spell trouble for many policyholders. Dave Lenkus reported in Business Insurance magazine that endorsements with "classification limitations" were appearing for the first time in CGL policies issued by admitted insurers. A "classification limitation" limits coverage only to specifed categories of the insured's operations. See Curb on CGL Coverage. More alarming, the policyholder may not know what "classification" the insurer has imposed to limit coverage because the endorsement does not identify covered operations but instead provides a number coding the classification whose description resides in an insurance industry database that is both subject to change and not directly accessible to policyholders and their risk managers.
What's going on? Traditionally, a company seeking liability coverage completes an application describing what the business does -- builds house, makes widgets, whatever -- and the insurer decides if it wants to issue the policy. If the policy issues, then the policyholder is covered for whatever it does subject to the scope of the insuring agreement, the exclusions, and other terms and conditions. Perhaps the policy states the the general type of operations the policyholder engages in, and the policy may allow the insurer to readjust the premium if the company goes in a different direction or adds new and different operations.
Within the last decade or so, more specific classification restrictions started appearing in policies issued in the surplus lines market, those insurers not admitted to issue insurance in particular states whose policies are not subject to the same regulations imposed on admitted carriers. For example, polices out of the Lloyds London market are typically issued on a surplus lines basis. Policyholders purchasing surplus lines insurance are on notice that the polices may have non-standard and unusal provisions which would not pass muster with state's department of insurance. Policy forms and endorsements issued in Texas by admitted carriers must be approved by the Texas Department of Insurance.
Enter ISO, the Insurance Service Office, that perfroms a number of functions for the insurance industry, including promulgating standard insurance forms for admission by state regulators. Some states automatically admit ISO forms. Some, like Texas, admit forms only after review, but routinely accept ISO forms. Now, we are seeing classification limitations endorsements appearing in ISO policies issued by admitted carriers.
Why should this be a concern to policyholders? For one thing, the operations classifications are becoming more specific and narrow. The company is no longer just in the contsruction industry; it builds only residential buildings, or only single family, or only -- who knows? The classifications themselves are periodically revised and so become a moving target. If the company engages in operatons that do not precisely fall within the classification stated in the policy, the insurer may deny the claim.
Add to that, the problem that the policyholder may not know that its classification has changed or even what classification restricts coverage. The ISO database with the classification matching the number in the endrosement is not available to non-insurance professionals. Yikes.
Everyone agrees with the principle that insurers are entitled to select what categories of risk they are willing to insure. But the process should be subject to fuller disclosure than is now apparent. Policyholders, particularly in certain industries, like construction, need to be vigilant and watch for classification limitations. The insured's agent should be able to access the database and decode the classification.
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