RISK MANAGEMENT

THE AGE OF EXCLUSIONS

New liability exclusions affect an array of risks

By Donald S. Malecki, CPCU

At the rate liability policy exclusions are being generated by insurers, there may come a day when some insurance products will mirror those of the past, covering primarily slip-and-fall cases. This may be a slight exaggeration, but it is true that many of the coverages provided since 1986 are fast disappearing; even reference to the "comprehensive" general liability policy is long gone.

While some insurers have manuscripted exclusionary endorsements of the kind discussed here and have been using them for quite some time, ISO is just now introducing them for use with its standard forms.

Some of these exclusions, perhaps the majority, have been targeted at the construction industry, where the quality of workmanship has been slipping to an all-time low and where complaints over construction defects can be expected with some regularity.

Since 1986 - when the easy-to-read commercial general liability policy was introduced, providing automatically many of the coverages that previously had required endorsements - the construction industry has seen an unprecedented number of new exclusionary endorsements.

Among these new endorsements are those that take away coverage for the explosion, collapse and underground (X, C & U) hazards. One endorsement, CG 21 42, takes away coverage for specified locations and operations, whereas the other, CG 21 43, excludes coverage for all locations and operations, except those locations and operations specified.

To restrict coverage for construction defect claims, insurers also began to exclude broad form property damage for the completed operations hazard. These endorsements are known as Exclusion - Damage to Work Performed by Subcontractors on Your Behalf. The endorsement used on a blanket basis is CG 22 94, and the one for site-specific jobs at designated locations is CG 22 95.

More new exclusions

ISO introduced an exclusion effective in December 2004 in most jurisdictions, called Exclusion-Exterior Insulation and Finish Systems, CG 21 86. The subject of this exclusion, abbreviated as EIFS, is an exterior building finish that is composed of layers of plywood, insulation board, reinforcing mesh, and base and finish coats.

This system of EIFS was developed in Europe in the 1950s and introduced in the United States in the 1970s. The problems with EIFS that arise during construction are moisture and water intrusion into these systems, damage to the work itself, and damage to other tangible property, resulting in many construction defect claims.

A lot of chatter is being generated over the new limitation on contractual liability coverage being implemented in December 2004. Referred to as the Amendment of Insured Contract Definition endorsement, CG 24 26, it reduces the policy's contractual liability coverage for incidents that are the sole fault of the indemnitee. For coverage to apply, the liability for injury or damage assumed must be caused in whole or in part by the named insured.

Some agents and brokers may not realize that since 1988 some insurers have been issuing an even more restrictive contractual liability endorsement, known as the Limited Contractual Liability endorsement, CG 21 39. This endorsement completely takes away any coverage for tort liability assumed by the named insured (indemnitor). What is left is coverage for contracts involving leases, easements, agreements with municipalities other than work for them, railroad sidetrack, and elevator maintenance agreements.

No industry is immune from exclusions. Perhaps not widely known is the Silica or Silica-Related Dust exclusion, which is being introduced by ISO with an effective date of March 2005. Silica, said to be the second most common mineral in the earth's crust, has the propensity to produce catastrophic claims comparable to those related to asbestos. In fact, silica and asbestos are similar from the standpoint that both silicosis and asbestosis create a serious health hazard for humans, most notably lung cancer.

Once viewed as an occupational-type exposure, silica now is also seen as a threat to many others in non-work-related exposures. Among the industries that can be affected are glass manufacturing; glass cutting; agriculture; ceramics; manufacturers of soap, paint, rubber and plastics; and medical and dental laboratories.

This new ISO exclusion precludes coverage for bodily injury; property damage; and loss, cost or expense having to do with such tasks as abatement, testing, monitoring, cleanup, remediation and disposal of silica and silica-related dust. It is said to be an optional endorsement to allow underwriters some flexibility when considering business that may have these risks.

A welcome exclusion

Few people besides claims handlers like to see exclusions. One exclusion many people might welcome, however, denies liability coverage to individuals and businesses that send unsolicited faxes or e-mails, as well as telemarketers who have a habit of making disruptive telephone calls, usually at mealtimes.

Recipients of faxes, e-mails and disruptive telephone sales pitches will be pleased to learn that ISO is filing an endorsement effective March 2005 that targets those violators. It is referred to as the Exclusion - Violation of Statutes That Govern E-Mails, Fax, Phone Calls or Other Methods of Sending Material or Information, CG 00 67.

Already in existence are federal and state laws targeted at these violators who, if convicted, are subject to fines. The first such law passed by Congress in 1991 is the Telephone Consumer Protection Act. This law not only prohibits unsolicited facsimile advertisements through the use of any fax machine, computer or kindred equipment, but also subjects the sender to fines.

The second law, the CAN-SPAM Act of 2003, became effective in 2004 and addresses the prohibitions and penalties that can be assessed for transmissions of unsolicited e-mails.

The new exclusion will preclude coverage for any bodily injury, property damage, or personal and advertising injury for any act or omission having to do with these two federal laws as well as any other statute, ordinance or regulation that prohibits or limits the sending, transmitting, communicating or distribution of material or information.

Electronic data liability exclusions

As most insurance professionals know today, liability for injury or damage related to electronic data is not considered to be covered by commercial general liability forms. The 2001 editions of these forms redefined "property damage" to make it clear that electronic data is not tangible property.

At the same time, ISO introduced the Electronic Data Liability endorsement, CG 04 37, to provide a means of buying back liability coverage for damage to electronic data. A condition precedent to coverage, however, is that physical injury to tangible property must occur, and there is no coverage for loss of use of tangible property that is not physically injured (the second definition of "property damage").

As has become evident in other policy changes over the years, it is difficult for an insurer to deny coverage based solely on a policy definition. An exclusion is also needed. To close this potential loophole, a new exclusion (p) is being added to CGL forms effective December 2004 to make it clear that insurance does not apply to damage related to loss of use, damage to or the failure to manipulate "electronic data," a term that also is defined in the exclusion.

Liability for damage related to loss of use of electronic data is a serious exposure that confronts many businesses. The common example in the construction business is the contractor who severs a fiber optic cable. The contractor with a CGL form that includes the X, C and U hazards would have coverage for damage to the cable, but no coverage for the consequential losses arising from loss of electronic data.

Another example is the retailer who sells a computer power strip that turns out to be defective and causes the purchaser to sustain loss of valuable electronic data. Yet another example is the furniture mover who inadvertently strikes a sprinkler head while attempting to carry an object down some steps at a business premises. The water from the sprinklers damages the business's computer system, resulting in the loss of electronic data. No business appears to be immune from the potential loss of electronic data.

Good news and bad news

The good news is that ISO has introduced Electronic Data Liability Coverage Form, CG 00 65, effective December 2004. It is written on a claims-made basis, and coverage is limited to negligent acts, errors or omissions of the insured. If a prospective purchaser has a choice, this form is better than the previously mentioned electronic data liability endorsement because the form includes coverage for both physical injury to tangible property and loss of use of tangible property not physically injured. The endorsement, as mentioned, does not apply when there is only loss of use of tangible property that was not physically injured.

The bad news is that this new form contains many exclusions and limitations that must be clearly understood. How well it will respond to losses remains to be seen. What is probably even worse news is that many insurers are not willing to give purchasers the opportunity to buy back some coverage, with respect solely to this endorsement that has been available for at least one year.

One problem is that it may be difficult to determine just how serious a claim could result from loss of electronic data. Underwriters therefore are normally cautious. They also may have to tread carefully because of reinsurance restrictions. As time progresses, some insurers probably will be willing to sell some coverage, but subject to the same limits applicable to the other CGL coverages or for a separate sub-limit.

Keep up with changes

A lot of changes are being made that may adversely affect purchasers of insurance in a variety of industries; and agents, brokers and other insurance professionals need to keep up with them. In some cases, particularly with respect to mandatory exclusions, there may be no way to prevent their issuance.

It nonetheless is advisable not only to keep track of the rationale behind each of these changes, but also to learn whether, and to what extent, opportu-nities exist to buy back coverage, such as the Electronic Data Liability Cover-age Form, which undoubtedly will be increasingly in demand in light of the enormous growth of automation today. *

The author
Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is an active member of the CPCU Society, serves on the Examination Committee of the American Institute for CPCU, and is an active member of the Society of Risk Management Consultants.