October 25, 2013

While there are many classifications that automatically include products and completed operations liability coverage, they appear to apply to largely insignificant exposures. This does not mean that some significant claim could not arise since it is possible, depending on the facts. What can be confusing primarily to the policyholders when a classification includes products and completed operations liability coverage without an additional charge is when the policy is not prepared properly to reflect this automatic inclusion and, instead, the insurer still makes a charge for the coverage which is supposed to be automatically included. What also can be confusing is that underwriters will sometimes add an exclusion for products and completed operations liability so that what the policy covers are only those products and completed operations claims automatically included within the classifications. Unless claims personnel understand what these classifications are that are automatically included, the entire claim could be denied based on the exclusion endorsement.

Of particular note, too, is the question of whether exclusion (l), damage to your work, applies to these special classifications. The reason for this question is that exclusion (l) applies only to the products and completed operations hazard. The definition of the products-completed operations hazard, on the other hand, does not include products or operations for which the classification states that the products-completed operations are subject to the general aggregate limit; in other words, the coverage within these special classifications falls within premises-operations coverage and the general aggregate limit. In light of this fact, exclusion (l) does not apply to those classifications that are not viewed as a products or completed operations exposure. Whether this is important depends on the facts and other applicable provisions of the policy. It nonetheless is important for no other reason than to point this out.

Before delving into the crux of this matter, some introductory information may be helpful.

One of the subjects that can be confusing for buyers and sellers of insurance alike concerns businesses and occupations whose insurance manual classifications automatically include products and completed operations liability coverage.The types of businesses and occupations that enjoy products and completed operations liability coverage, without having to purchase it separately, are many and varied. Among them are banks; bookstores; consulting engineers and architects who are not engaged in actual construction; contractors—executive supervisors or executive superintendents; elevator installation, service, and repair; and office machinery installation.

A primary reason for including this coverage is that for some businesses and occupations, a separate charge for products and completed operations liability coverage would be negligible. An example is a bank where the products liability exposure is likely to be limited largely to promotional materials, such as calendars, pens, and tote bags that do not pose much of a problem insofar as bodily injury or property damage is concerned. Another reason for including coverage automatically is that it is difficult to separate loss data for ratemaking purposes for these types of business or occupations between premises and operations coverage and products and completed operations coverage.

To locate those businesses and occupations within this category of automatic coverage, it is necessary to review the classifications section of the insurer's commercial lines manual. Briefly, a classification is the term used to describe a group of homogeneous businesses and occupations that can be charged the same rate, which is then used in calculating the premium or insurance cost for the applicable coverages. It is not always easy to determine the appropriate classification. The general rule is to select the classification that best describes the operations of the business or occupation in question.

As a matter of interest, 1,147 general liability classifications were contained in the 2003 multistate manual of ISO. Of this total, 459 represented the classifications that included products and completed operations coverage. These were designated with a (+) sign in the premium basis column. (At one time, the symbol was a dagger.) In a commercial lines manual of another insurer, there were 1,337 classifications, 447 of which included products and completed operations coverage. For a number of years, the total of such classifications in the ISO commercial lines manual automatically including products and completed operations coverage was 411. It is doubtful that these figures have changed much over the years.

Those classifications including products and completed operations liability coverage automatically may be viewed as significant to some people, particularly those who are spared from having to pay extra for the coverage. The catch is that no separate products and completed operations coverage and limits are provided. This coverage, instead, is considered to be part of the premises and operations coverage and limits, which includes the general aggregate limit. This intent should be explained in two places within the CGL provisions.

The first place is within the policy declarations page or policy schedule where the appropriate classification is stated to apply or with the list of classifications when more than one is applicable. Thus, when a classification shows that products and completed operations are included, this classification must also be accompanied with the additional statement that “Products-Completed Operations are included.”

The second place where this intent is supposed to be made clear is within the definition of products-completed operations hazard. The second part of this defined term lists three scenarios when both bodily injury and property damage are not considered to be within this hazard. The third one reads: “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.”

When it comes to the actual application of policy limits, standard ISO general liability policy provisions, and many independently filed policies, are subject to separate limits for bodily injury and property damage (coverage A), for personal and advertising injury (coverage B), and for medical payments (coverage C). All three of these coverages, with the exception for products and completed operations liability coverage, however, are subject to a general aggregate limit. Any reduction of the general aggregate limit does not affect the products and completed operations liability coverage because this latter coverage is subject to a separate aggregate limit. This means that if an insured has a general aggregate of $2 million and a products and completed operations aggregate of $2 million, it is possible for one or more claimants to collect a total of $4 million under the named insured's policy.

When a business or occupation is classified as automatically including products and completed operations liability coverage, there is no separate products and completed operations aggregate for this coverage. (As noted, this is made clear by the definition of the products-completed operations hazard, which states that it does not include 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.) What, therefore, may be paid for products or completed operations claims on behalf of an insured within this category are subject to the general aggregate limits, along with coverages A, B, and C.

Given this kind of circumstance where a classification automatically includes products and completed operations liability coverage, some underwriters may attach an endorsement excluding products and completed operations liability coverage. The appropriate standard ISO endorsement is Exclusion—Products/Completed Operations Hazard, CG 21 04. (Underwriters must be careful, too that the declarations page is left blank for the products and completed operations liability coverage or the insurer may be confronted with a problem in the event of a claim involving a product or the named insured's work.)

If issued, endorsement CG 21 04 will not affect the products and completed operations coverage automatically included in those 459 classifications alluded to earlier.

As an example, the insured is a store that rents equipment and the classification is Rental Stores—machinery or equipment—rented to others on a long term basis, Class Code 16723(2). What also can fall into this category is Rental Stores Class Code 16722 NOC, which applies to rental of items to the public for a predominately short-term basis. Because of its products liability loss history, the underwriter is agreeable to continue providing liability coverage for premises and operations so long as the products hazard is excluded.

Even if the aforementioned exclusionary endorsement (CG 21 04) were to be issued, it should have no impact on the products and completed operations liability coverage of this rental store, because both of those classifications automatically include products and completed operations liability coverage as part of the premises and operations liability exposures. In more cases than not, underwriters are likely to avoid the risk entirely whenever a business, whose classification includes products and completed operations liability coverage, is considered to be unacceptable.

Issuance of the Exclusion—Products-Completed Operations endorsement, CG 21 04, however, will affect any other new products or completed operations exposure that arises during the policy period that cannot be categorized within a classification automatically including products and completed operations liability coverage. In effect, the comprehensive nature of the CGL policy, automatically covering new exposures as they arise during the policy period, is nullified—at least for purposes of this coverage.

The fact that certain premises and operations of businesses can automatically include coverage for products and completed operations claims without additional charge can be viewed as being advantageous, but this method of providing coverage is not without its problems to both insureds and insurers alike.

One of the problems confronting insureds primarily is when the classification that automatically includes products-completed operations does not reflect such inclusion. The classification, in other words, does not include the words mandated in the definition of the products-completed operations hazard— that the classification in the declarations or policy schedule states that products and completed operations are subject to the general aggregate limit. If this is not done, how else will the policyholder know this, particularly since the definition of products-completed operations hazard makes reference to the classifications that may be subject to the general aggregate limit?

Yet, one CGL policy was recently reviewed where the classification code 91850, Contractors–Executive Supervisors or Executive Superintendents, was silent about automatically including the products-completed operations coverage and, in fact, specifically made a charge for products and completed operations liability coverage.

Other construction-related classifications were also listed but not subject to the same automatic inclusion for products-completed operations as the earlier one. Adding insult to injury was the fact that this policy's declaration page expressly stated that the general aggregate limit was considered to be twice the amount shown. That is nice if someone realizes that there are classifications on the policy that are subject to that general aggregate limit.

It is not unusual to see some excess and surplus lines insurers use these ISO classifications but not include the accompanying wording along with the classification including products and completed operations coverage. How can insurers use ISO classifications that automatically include products and completed operations coverage and get away with making extra charges for that coverage?

Another related problem affecting primarily insureds is when the CGL policy, which lists one or more classifications including products and completed operations coverage, is amended with Exclusion—Products/Completed Operations Hazard, CG 21 04, and there is a claim. It has not been unusual for claims personnel to deny coverage based on the foregoing exclusion. What these people sometimes fail to understand is that there are classifications that include products and completed operations coverage. These claims people, of course, cannot always be blamed, at least directly, if the classification does not specifically use the words that it includes products and completed operations coverage.

This exclusionary endorsement (CG 21 04) is actually unnecessary since, as mentioned, it eliminates coverage for products and completed operations altogether, even for those exposures that arise during the policy period and whose classification do not include the products and completed operations coverages. If one were to weigh the advantages between a classification that automatically includes products and completed operations coverage against a CGL policy that provides the products and completed operations coverage if an exposure arises during the policy period, this latter approach is better because what coverage is included within certain classifications does not justify a separate, ratable exposure against which a separate premium is calculated. The risk, in other words, of a classification including products and completed operations liability coverage may be minor compared to a new exposure arising during the policy period whose classification does not automatically include that coverage.

What may beg a question about these special classifications that automatically include the products and completed operations coverage as part of the premises and operations hazard and the general aggregate limit is. when is an insured's work considered to be completed? The answer is that it does not really matter nor is it generally important to determine when an insured's work is completed. If bodily injury or property damage results, while the policy is in force, and the claim or suit is not otherwise excluded, coverage should apply, subject to the per occurrence and general aggregate limits.

Here is another question that stumps some insurance people from time-to-time. Exclusion (l) of the CGL policy, damage to your work, is important since it excludes property damage to the named insured's work arising out of it or any part of it and included in the products-completed operations hazard. So, if an insured has a claim dealing with work within a classification that includes products and completed operations coverage as part of the policy's premises and operations liability coverage, is it correct to assume that exclusion (l) does not apply? The answer is yes. That exclusion, which is intended to preclude coverage of business risks, should not apply.

Another example of the named insured classified, in part, is Landscape Gardening. According to this classification, it includes laying out grounds, planting trees, shrubs, plants, and lawns. Assume that after the work is completed, the insured's work is determined to cause rapid and unexpected erosion. Unless there is some other applicable exclusion, coverage would apply not only for the damage to a third party's tangible property but also for damage to the named insured's work, which should otherwise be excluded. Whether this kind of claim is a cause for concern for insurers is unknown; one thing for sure is that these kinds of claims have been rare.

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 be 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 Ins. Co. 179 S.W.3d 433 (Mo. App. 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, and the rate and 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. The form 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 bodily injury or property damage 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 was changed. Instead of providing that products-completed operations hazard 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 products-completed operations hazard 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 nonprotein 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 products-completed operations hazard, 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 in both policy periods, the definition of products-completed operations hazard included exceptions to that coverage and, thus, exceptions to the exclusion of products-completed operations hazard 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 products-completed operations hazard, neither that coverage nor the exclusion stating that the policy did not apply to bodily injury or property damage included within the products-completed operations hazard 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 that “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 products-completed operations hazard coverage and, therefore, not subject to the exclusion from coverage by the exclusion attached to the policy?

The trail court concluded that the inclusions of classifications in this coverage part in 14 (c) rendered 14 indefinite and uncertain as to what classification, products, or operations were or were not covered under the products-completed operations hazard and, thus, excluded by the exclusion.

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 14(c) of the products-completed operations hazard and, thus, unaffected by the exclusion. Because the exclusion eliminated insurance only for what was within the products-completed operations hazard, it was likewise indefinite, uncertain, and, thus, ambiguous. That ambiguity was to be construed against the insurer.

Absent the products-completed operations hazard 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 classifications in this coverage part was indefinite and uncertain, creating ambiguity first in the products-completed operations hazard and then in the exclusions. Without the products-completed operations hazard, said the court, (and, thus, the exclusion), 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 court to the point where coverage may apply.

Additional Food for Thought

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 coverage as part of the gardener's premises and operations simply issues Additional Insured – Owners, Lessees or Contractors – Scheduled Person or Organization, CG 20 10 04 13. Will this endorsement qualify for that request since products-completed operations hazard is included as part of the gardener's premises and operations?

Since this endorsement is 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, as mentioned previously, 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.

Summary

Based on this discussion of those CGL policy classifications that automatically include products and completed operations liability coverage, it can be summarized and concluded that 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 review of each such classification to see if the classification has an accompanying statement stating, “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, 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.

A CGL policy modified with Exclusion—Products and Completed Operations, CG 21 04, is actually 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, since there is no coverage for new exposures that may arise during the policy period.

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

What also can be troublesome is when a named insured of a CGL policy must provide additional insured status to a person or organization who 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 offensive is when a charge is made unnecessarily for the coverage, and a commission is paid for that charge.