These topics are examined in Automatic Coverage article, which discusses coverage for newly acquired autos, coverage for trailers, ownership of a stolen auto, and replacement versus additional automobile. Court cases are duly noted.

Products and Completed Operations Coverage Automatically Included

This article is the second part of one written by Don Malecki on the subject of the ISO commercial general liability manual rules dealing with those classifications that automatically include products and completed operations liability coverage. The first part appeared in the October FC&S Issue.

The idea that the definition of products-completed operations hazard does not include bodily injury or property damage arising out of products or operations for which the classification listed in the declarations or in a policy schedule states that products-completed operations are subject to the general aggregate limit can be confusing to insureds and insurers alike. Sometimes, there may cases where insureds can confuse the courts to the point where insureds are able to obtain coverage even when it should not apply.

An example of such a case is Little v. American States Insurance Company, 179 S.W.3d 433 (2005). The issue here was whether the insurer's CGL policy provided coverage for damages sustained by the plaintiffs when their dairy cattle consumed contaminated feed sold by the named insured. Certainly, damage or destruction of someone's animals by the named insured's contaminated feed should be covered by a CGL policy when products and completed operations liability coverage is included. But this case involved a CGL policy that excluded the products and completed operations liability coverage, and classification shown in the named insured's policy declarations was not one of those that automatically included coverage for the named insured's products.

Under the limits of liability section of the policy, it stated that for commercial general liability, the general aggregate limit (other than products-completed operations) was $750,000; below that appeared the code number 12583, the classification: Feed, Grain or Hay Dealers, the rate, and the estimated gross sales per $1,000. (This classification is one of those that automatically included products and completed operations coverage.) The policy also stated that one of the forms applicable to the CGL coverage part was CG 21 04 11 85—Exclusion—Products/Completed Operations Hazard. This stated: This insurance does not apply to bodily injury or property damage included within the products-completed operations hazard. The definitions in the endorsement also stated that the products-completed operations hazard did not include BI or PD arising out of products or operations for which the classification in this coverage part or in the manual of rules includes products or completed operations.

A similar policy was issued for the second year, except that part of the definition under products-completed operations hazard (PCOH) was changed. Instead of providing that PCOH did not include bodily injury or property damage arising out of the products or operations for which the classification in the coverage part or in the manual of rules includes products or completed operations, the definition provided that PCOH did not include bodily injury or property damage arising out of products or operations for which the classification, listed in the declarations or in a policy schedule, states that products-completed operations are subject to the general aggregate limit. This second policy also included a notice to policyholders clarifying coverage. It stated that the definitions section has also been amended in these policies to more clearly state that products or operations that are subject to the general aggregate limit are excluded from products-completed operations coverage.

The plaintiffs filed suit against several entities based on varying theories alleging damage as a result of their dairy cattle consuming feed purchased from the defendants, including the named insured. The trial court entered a judgment in favor of the plaintiffs finding that the feed was contaminated with urea and non-protein nitrogen in the form of chicken litter or manure, arsenic and aflatoxin, which was unfit for consumption by the plaintiffs' dairy cattle.

The insurer took the position that since the policy excluded coverage for the PCOH, there was no coverage for the damage presented by the plaintiffs. The plaintiffs, on the other hand, took the position that the two policies included general liability for injuries or property damage to third parties and that the insurer was obligated to pay those sums that the insured became legally obligated to pay as damages for bodily injury or property damage to which this insurance applied. They pointed out that in both policy periods, the definitions of PCOH included exceptions to that coverage and, thus, exceptions to the exclusion of PCOH coverage. They also pointed out that in the second of the two policies, the definitions were amended to more clearly state that products or operations that were subject to the general aggregate limit were excluded from the products-completed operations coverage.

The plaintiffs argued that because the definition of products-completed operations hazard by its plain language removed products defined in this classification part from the PCOH, neither that coverage nor the exclusion stating that the policy did not apply to bodily injury or property damage included within the PCOH was relevant. Coverage, the plaintiff said, was under general liability, subject to the general aggregate limit. Furthermore, the plaintiff said, the notice to policyholders stated: “the definitions section has also been amended . . . to more clearly state that products or operations that are subject to the general aggregate limit were excluded from the products completed operations coverage”. What did that mean, the plaintiff asked, if not that products such as the bulk feed and retail feed added by the policy change worksheet (and by implication included in and subject to the aggregate limit) were covered then, and were thus excluded from PCOH coverage and, therefore, not subject to the exclusion from coverage by the exclusion attached to the policy?

The trial court concluded the following.

The phrase “classification in this coverage part”” was not further defined or referenced, and an ordinary person of average intelligence would not know where else to look or what other classification(s) (or to be precise which items within what undefined and non-specific classifications) were or were not exempted under the definition of the PCOH and, thus, unaffected by the exclusion. Because the exclusion/endorsement eliminated insurance only for what was within the PCOH, it was likewise indefinite, uncertain, and, thus, ambiguous. That ambiguity has to be construed against the insurer.

Absent the PCOH and exclusion, the general liability form insuring “those sums the insured becomes legally obligated to pay because of bodily injury or property damage to which this insurance applies” covered the claims here and the insurer, said the court, conceded as much.

In sum, the court found that the phrase “classifications in this coverage part” was indefinite and uncertain, creating ambiguity first in the PCOH and then in the exclusions/endorsement. Without the PCOH, said the court, (and, thus, the exclusion/endorsement), there would have been coverage and that is why there was coverage in this matter.

Not surprisingly, the court of appeals stated that it was unable to conclude that the trial court erred in entering judgment, so it was affirmed. The moral of the story here is that when there is no coverage, it may be possible to confuse the situation and the court to the point where coverage may apply.

As another example in trying to understand products and completed operations coverage, assume that a property owner asks a landscape gardener, hired to lay out the grounds and vegetation, to be an additional insured for both ongoing and completed operations. The producer, noting that the landscape gardening classification automatically includes the products and completed operations (PCOH) coverage as part of the gardener's premises and operations simply issues Additional Insured—Owners, Lessees or Contractors—Scheduled Person or Organization endorsement, CG 20 10 07 04 (or the latest edition, CG 20 10 04 13). Will either one of these endorsements qualify for that request since PCOH is included as part of the gardener's premises and operations? Since these endorsements are limited to ongoing operations and say nothing about the classification including products and completed operations as part of the premises and operations coverage, it appears that the request falls short of the mark. One needs to remember, furthermore, that not all classifications of a given business or occupation automatically include the products-completed operations hazard.

Assume, on the other hand, the producer not only requests a CG 20 10 endorsement but also Additional Insured – Owners, Lessees, or Contractors—Completed Operations CG 20 37. Is this overkill? Not really, since it can apply to other insurable exposures that may arise during the policy period. How the situation would be handled if a claim involves a classification that includes completed operations is uncertain. With both endorsements issued, coverage should be present within them. It is not the intent to point fingers at anyone, but underwriters should be cognizant of what they are covering. In fact, all parties should be alert to what is requested and actually issued because to err is human and occurs often in the insurance business.

Based on this discussion of those CGL policy classifications that automatically include products and completed operations liability coverage, the following conclusions can be made.

Both standard and independently filed liability policies have long had a wide variety of classifications that automatically include products and completed operations liability coverage.

For the most part, these classifications deal with businesses and occupations whose products and completed operations exposures are relatively insignificant and where the charge for such coverage is negligible.

To see what classifications automatically include products and completed operations liability coverage requires a review of each such classification to see if the classification has an accompanying statement stating that “products/completed operations are included.”

Both insurance people and policyholders are confused about this procedure that certain products and completed operations exposures are automatically provided without additional charge but not viewed as products and completed operations liability coverage, subject to the products and completed operations aggregate limit.

What can be doubly confusing is when a CGL policy has one or more of these classifications that include products and completed operations and the policy also is amended with Exclusion—Products and Completed Operations endorsement, CG 21 04. What can complicate matters is when claims personnel deny coverage based on that exclusion not realizing that certain coverage dealing with products and completed operations still applies. Moreover, a CGL policy modified with CG 21 04 actually is unnecessary, unless the intent of the underwriter is not to provide any products and completed operations coverage other than what is given automatically through these special classifications. This exclusion actually dilutes the impact of the CGL form, since there is no coverage for new exposures that may arise during the policy period.

Since exclusion (l), damage to your work, only applies to property damage within the product and completed operations hazard, none of the classifications that include products and completed operations coverage are subject to that exclusion. Whether that is significant depends on the facts of the situation.

What also can be troublesome is when the named insured on a CGL policy has to provide additional insured status to a person or organization that wants products and completed operations coverage when the classifications include such coverage as part of the premises and operations liability coverage and the general aggregate limit.

Underwriters need to be very careful that they follow the dictates of what the policy must say when classifications automatically include the products and completed operations liability coverage.

Producers likewise must be careful that their insureds are not being charged for those products and completed operations exposures that are automatically included within the classifications. What policyholders may find to be offensive is when a charge is made unnecessarily for the coverage, and a commission is paid for that charge.