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Risk Management A disturbing trend Some insurers are offering products of questionable value By Donald S. Malecki, CPCU Today, more than ever, state regulation over approval of forms and endorsements can be a challenge. Many states allow file-and-use as opposed to prior approval. With file-and-use, the form can be used, unless there is an objection to it by the insurance department. Producers, however, cannot assume that new products, whether standard lines or excess and surplus lines, have been thoroughly reviewed prior to approval. It therefore would be safer for producers to assume that many products, while approved, have not been tested. In other words, caveat emptor or let the buyer beware. Something old, something new For many years, some umbrella liability policies have contained what is commonly referred to as a “prior insurance and non-cumulation of liability,” “pyramiding,” “telescope” or a “non-cum” clause, for short. A typical clause reads as follows:
In simple terms, this “non-cum” clause seeks to curb coverage to the limits available under any one policy, even where there are progressive injuries or damages over multiple periods. This “non-cum” clause has nothing to do with the so-called “Montrose” provision found in standard and nonstandard CGL policies. “Montrose” was added to standard policies in 1999 in an attempt to limit the application of the continuous or progressive injury concept, too. When an insurer has both a “non-cum” clause and “Montrose” provision, they should serve as a “double whammy”! As a matter of interest, the January 1960 edition of the Lloyd’s umbrella policy contained a “non-cum” provision. The February 1961 umbrella policy of Employers Surplus Lines Insurance Company also had it. Courts have not enforced the “non-cum” clause with any regularity. Those courts not approving of the “non-cum” clause have taken that position because insureds purchasing successive policies from the same insurer would be paying for protection they cannot receive. Interestingly, the Joint Forms Committee, comprised of the National Bureau of Casualty Underwriters (predecessor to the Insurance Rating Board and Insurance Services Office) and the Mutual Insurance Rating Bureau, contemplated introducing a version of the “non-cum” clause for general liability forms in the early 1960s. This was a period when there was concern over long-tail exposures and the Joint Forms Committee was contemplating making property damage liability coverage applicable on an occurrence basis. This committee, however, decided against including a “non-cum” clause in earlier general liability forms. The reason for their decision was that they doubted it would be enforced if the successive policies were issued by different insurers. If, on the other hand, the provision were limited to successive policies issued by the same insurer, the Committee said it would encourage policyholders to switch insurers so as to break the chain of successive coverage. It is good to know some insurance history. It sometimes can give people—particularly drafters of insurance provisions—advanced warning about past, potentially troublesome policy language. An example is the products liability “batch” clause that was included in the standard general liability policies when introduced in 1941. The “batch” clause was intended to serve as an aggregate limit. Unfortunately for many insurers, the batch clause was found to be ambiguous and therefore was removed from general liability forms in 1966. Those who apparently are not aware of this bit of history are probably the same people who are now using “batch” clause endorsements with identical wording, not realizing that the ambiguity consequences may befall them! Just recently, an insurer produced an endorse-ment to its liability policy titled “Amendment - Non Cumulation of Each Occurrence and Non Cumula-tion of Personal and Advertising Injury Limit.” The provisions are not repeated here, but they are quite similar to the typical provision noted above. Briefly, in order to make a point, this provision, dealing with bodily injury and property damage, states that if one occurrence causes bodily injury or property damage, during the policy period of one or more prior or future policies that include commercial general liability coverage, the Each Occurrence limit will be reduced by the amount of each payment made by this insurer or an affiliated insurer of other policies. The point here is that this “non-cum” clause will not work if coverage is not renewed with the same insurer. Breaking the chain of successive coverage years, in other words, makes the clause non-operational. This was one of the reasons the Joint Forms Committee did not incorporate it in general liability forms. (Another concern of the committee was that policyholders might not understand the “non-cum” clause’s purpose and function.) In this era when only one court decision creates the knee-jerk response of another policy exclusion or limitation, policyholders are beginning to get the drift that the broad coverage of years past is evaporating. Fortunately, knowing that it takes successive policies from the same insurer to make the “non-cum” clause work, it would be advisable, if possible and practical of course, to change insurers to break the chain. Another questionable product development The current trend of some courts is that the performance of defective work is not considered to be an occurrence, regardless of who performs such work. Many producers do not follow changes in legal precedence and may not notice this development. Standard CGL policies are structured so that the named insured is supposed to be given coverage for defective work performed on its behalf by a subcontractor. It is the exception to Damage to Your Work exclusion (l) that makes this clear. This exclusion precludes coverage for work performed by or on behalf of the named insured, but then makes an exception which states that exclusion (l) does not apply to work performed on the named insured’s behalf by a subcontractor. Despite this exception to exclusion (l), some insurers are still denying coverage, arguing that defective work, even when performed on the named insured’s behalf by a subcontractor, is not considered to be an occurrence. The idea here is that if a court upholds that argument, the exclusions become moot. Unfortunately for some insureds, some courts are upholding these insurer denials based on a lack of an occurrence. In other words, the courts are saying that defective work is not fortuitous regardless of who performs it. So, when a CGL policy includes “broad form property damage for completed operations,” [with that exception to exclusion (l)], it is difficult to understand how the courts are being “hoodwinked” into this argument. With the courts in a growing number of jurisdictions upholding these arguments of insurers, the opportunity has arisen for the development of yet another product—not to limit coverage—but, for a price, a promise not to raise the occurrence issue. Considering this new trend of denying coverage based on a lack of an occurrence, one insurer has dreamed up a product that may be unethical. The endorsement is misleading, since it looks like an ISO product, based upon its appearance and endorsement number. It is titled “Property Damage to Your Work,” and it could lead someone to believe that coverage now applies to what is commonly considered a business risk and commonly excluded. This endorsement states succinctly that in consideration of the premium charged for this endorsement, damage to “your work” shall be construed as “property damage” caused by an “occurrence.” The way this can be interpreted unambiguously is that the insurer will not deny coverage based on the lack of an occurrence when a claim is made for defective construction performed on behalf of the named insured. Since defective work performed by the named insured is excluded and would not be an occurrence in any event, this endorsement appears to be aimed at defective work claims created by those employed to do work on behalf of the named insured. As mentioned above, coverage for this type of claim should apply if the CGL is not modified with a limiting endorsement. There is only one way to read this endorsement: If the named insured purchases this endorsement, the insurer promises not to deny coverage based on a lack of occurrence. If the named insured does not purchase it, then the insurer can maintain that defective work performed on behalf of the named insured is not an occurrence. In a state where the courts have held that defective work is not an occurrence, regardless of who performed the work, the failure to purchase this endorsement could serve to the named insured’s detriment. The construction industry is not one of the markets in which insurers are vying to compete. But if an insurer were serious about competing, one way for it to do so would be to offer the above endorsement without charge. As long as a charge is being attached to this kind of endorsement, producers should avoid this endorsement and the insurer that is offering it. One has to wonder if an insurance department would approve such an endorsement, if it knew what its purpose was. It’s offensive to those who may be coerced into purchasing it, and it might be risky for producers to recommend its purchase. Conclusion Space limitations preclude discussing the many products of questionable use being offered by some insurers. Over the years, this column has highlighted some of them and this will continue into the future. There is not much one can do when insureds have their liability insurance portfolio with an excess and surplus lines insurer because many of its policies are endorsed with exclusions and mandatory forms which are manuscripted and contain coverage limitations and warranties. This is not saying anything derogatory about this market, which does serve as a valuable “relief valve” to those who cannot find coverage with an admitted insurer. It is unfortunate, however, when admitted insurers can introduce almost any kind of coverage limitation, leaving its questionable value up to producers and policyholders who may not realize the impact until after these products generate costly litigation. Perhaps the brief descriptions of questionable products in this column may be of some assistance and warning for the unwary. * The author |
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