The CGL Application
Do your duty in all things; you cannot do more and should never wish to do less. To perform one’s tasks as promised and expected is not exemplary, but required.
When a duty is owed (an obligation to either act or not act) and that duty is breeched (the obligation was not reasonable fulfilled) and harm or damage occurs as a result, a Liability claim is not far behind.
Negligence is one of the key sources of Liability and the primary cause of loss we will focus. Our client/Named Insured, no matter their occupation has a duty to others. Businesses charge money for goods or services and their customers expect those goods and services will at the very least not cause them harm. The commercial General Liability policy is designed to protect our client/Named Insured from the unintentional acts: the accidental actions that cause bodily Injury or Property damage to others. The customers of our insureds are not the only party exposed to the Products or acts of our Client/Named Insured. Others may also be harmed by the operations of our insured.
“The importance of a well-constructed application cannot be overstated when it comes to the Underwriters’ perspective. Oftentimes it is an Underwriter’s first impression of the account itself, but it is also a first impression of the Agent’s work as well. It is important to understand what an application submission represents to an Underwriter. It is a request for a dedication of time and effort; it is a request to be prioritized above other tasks; it is a request for a commitment. Thus, what is an Underwriter’s perception if that submitted application is haphazard, incomplete, and appears to be thrown together in a lackadaisical fashion? If your representation to me is one of being unprepared and uncommitted, then why should I feel my time would be usefully spent working to underwrite your risk? Conversely, a well-constructed and completed application shows the Agent has made a commitment of time and effort, be lieves in their opportunity, knows the risk and will be able to speak authoritatively about the operations of the prospective insured. This effort will quickly elevate an application to the top of the Underwriter’s workload: gain priority.
“Make no mistake, it is abundantly clear to an Underwriter when an application has been put together with time and effort. When effort is there from the Agent, then so too will the effort be returned by the Underwriter. We will mirror your dedication and commitment to an account, and it all starts with the application.” (Kyle M. Fry is a commercial lines Underwriter with a national property and casualty insurer. Kyle has 12 years’ underwriting experience and is a contributor to this text.)
The focus of coverage offered by the Commercial General Liability (CGL) policy are unintentional acts for which our client/Named Insured is responsible or held responsible. Criminal or intentional acts intended to cause harm are not covered by the CGL. Furthermore Acts by the Named Insured involving a faulty product or faulty workmanship are also not covered by the CGL.
The Insured’s Duty requires the insured to operate their business in a manner and to the full expectation of the value of their field. That’s to say, if the insured is a plumber, then the insured is held responsible to know how to perform the proper tasks as a plumber, to act within the normal expectations of the field or discipline. Let’s say for example, I decide I want to be a plumber because I heard plumbers make a lot of money. I have no training what so ever as a plumber, but I did buy a book on plumbing and I’m pretty sure I can do it. I get my first call to fix a toilet. I have never done this before but I have my book and a wrench and I’m going to charge $50 per hour, so I’m going to make some money. Because I have never fixed a toilet before, it takes me 4 hours to, well, give up. I charge $200 for my work and leave with my money before the client has a chance to test my work. Luckily for me, I bought a General liability policy before I started my Plumbing business. So when the toilet leaks water everywhere (Because not only did I not fix the toilet, I made it worse.), the Insurance Company can pay to have the work corrected and I get to keep my $200. The CGL will not pay for faulty workmanship that could have been avoided by simply performing tasks correctly. The point is the CGL is not meant to support a business or persons who don’t know what they are doing. The CGL is not a crutch for poor performance, slipshod procedures, bad products, or reckless work.
The Commercial General Liability Policy is designed to pay for damages for bodily Injury (harm to someone’s body) and/or Property damage caused by an Occurrence. An Occurrence is an Accident. An accident is not defined by the CGL policy. Several State Supreme courts have thus deliberated an interpretation or definition of what an accident means. An accident has been considered by these Supreme legal bodies to include two defining parts. First, that the act was unintentional, this is probably what we all think of when we hear “accident.” I didn’t mean to do it; it was an accident. The second part of the court’s definition is a bit stricter: an accident must also be beyond the control of the party. That’s a lot different. Not only must an accident be unintentional, it must also be beyond the control or care of the injurious party.
The General Application section of this text applies to the General liability section as well. You will recall from the earlier text the importance of correctly and thoroughly identifying the names insured(s). Property policy’s respond to the “Described Premises” Inland Marine policies likewise focus on property items at a Described Premises or Scheduled Items. Location is key.
The Commercial General Liability Policy focuses on coverage for the Named Insured with very little (the United States, its possessions, Canada, and Puerto Rico) requirement to location. Named Insureds, Insureds, and Additional Insured are the Key to the CGL. The very first paragraphs of Commercial General Liability policies identify who the CGL coverage protects. The most important and broadest coverage is given to a (the) Named Insured shown in the declarations section of the policy.
The correct listing of Named Insureds and Additional Insureds (we will discuss later and whom are added by an endorsement) is the first important task in completing the General Liability Application. The CGL responds/ Provides coverage for the specific Named Insured. Other parties, like employees acting on behalf of the company, are insured in that they act or their actions are on behalf of the Named Insured, and defined later in the policy as “who is an Insured.” But coverage for all persons, all types of Insureds, relate specifically to the Named Insured.
Classification and Classification code to use for the application
Before now you should probably know what your client/Named Insured does for a living. Hopefully the whole reason you called on this client is because you had some idea of their occupation. Perhaps the business name tipped off what the client does, like “Pinkies sofa sales, Inc.” I bet Pinkie sells Furniture. Insurance classification is specific. Each type of operation is divided into separate Hazard or Class codes and all carry their own rates. The classification manuals contain more than a thousand classification possibilities; our job is to choose the correct codes that describe the operations of our client. Sometimes that’s very easy and sometimes it’s difficult, but it is always important we are correct.
Commercial General Liability class code are shown as a number, usually a 5-digit number with a brief description. These Numbers and titles are published by Insurance Services Office (ISO) as part of Premium Audit Advisory Service (PAAS). The Class codes we use are part of the Insurance Premium Auditors handbook. The CGL policy is subject to Audit. Found in the conditions section of most Commercial General Liability policies is a provision for Audit or Premium Audit. The Audit condition or provision of the policy informs the client named/ insured that the premium shown for the CGL policy is in fact an advance or deposit premium, an estimated amount or charge and that after the policy is over, the Insurance carrier has the right to examine the books and records of the insured to discover what the actual incurred charges should be. Audit may change class codes and premium basis based on what the client/Named Insured actually and factually exposes the Insurance carrier to risk during the year. In other words, we need to get the codes correct up front. The codes determine the rates and depending on the code, the rate could be greatly different. If at Audit it is found the class code used was incorrect and is thus changed to the correct code which perhaps carriers a much higher rate, our client/Named Insured is going to get a bill. The policy requires the client/Named Insured to not only comply with audit but keep records and provide them to the Insurance carrier’s auditor when requested.
Generating the correct class code is very serious business and your work will be checked. The consequences of incorrect classification can be devastating to your client’s wallet. Likewise, using the wrong code when the correct class code is cheaper will probably mean your premium quote will be higher than better Agents and you likely won’t write the account to begin with.
Intentionally misclassifying a client is fraud. Intentionally using an incorrect classification code because it generates a lower premium or because the correct code is unacceptable to an Insurance carrier is a material misrepresentation of the truth. Fraud also requires harm. An Insured may well feel harmed when they get a large bill at Audit. The Insurance carrier may feel harmed when a claim is presented based on an operation of the insured they didn’t know the insured performed. The client has little defense from a material misrepresentation made by the Insurance Agent when it comes to the CGL policy. They will have to sue their Agent most likely for remedy. Fraud is a serious crime.
Fraud is not the only concern. Your Insurance carrier may wish to terminate your and/or your Agency’s relationship if it is found that you have intentionally lied to them. Trust is a nonnegotiable tenant of the Insurance Company–Agent relationship. An Agent without an Insurance Company is not an Agent. The Client/Named Insured may well not wish to ever do business with you again, and tell all their friends your bad news as well. Loss of your reputation can be devastating. Fraud can cost you your job, Insurance Company Partnership, clients, penalties, and fines, revocation of your Insurance license and even Jail time. Some or all of these nasty outcomes may occur.
Correctly classifying your clients’ Named Insured is serious business.
Reading and understanding the Class code descriptions
Oftentimes mistakes are made in regard to class code assignment when the Alphabetical guide alone is used for determining a classification code. The class code manuals often contain an alphabetical guide which should be used to search for the class code and then use the manual to find the description to read.
A keyword search of online databases often produces the same level of information. Always read the full description and do not rely on the class code title as information to determine if the code fits our client’s operations. Each classification code reference contains far more than just a Number code. The class code contains a definition.
The definition describes what operations are assigned or covered by this code and many times what operations are not. The Code description includes the premium basis used for the particular code. Premium basis can be either, payroll, Cost, Sales, Area, or number of units. We will discuss premium bases in more detail shortly.
Finding a class code that sounds like what the client does is simply not enough. You should understand by now that Insurance uses its own specific definitions for terms. It is always a mistake to not read fully, and understand what the policy specifically means. Class code are then just more of the same.
There are 6 different class codes for Apartment buildings, and 4 separate Condominium class codes. There are 5 different codes for Carpentry work. There are 19 different codes for Gas or Oil well businesses. There are 7 different codes for painters and 5 different codes for Silo erectors. Restaurants are classified by 14 different possible class codes. For Pet stores, there is only one class code, let’s discuss what we find when we read the Classification description.
Indemnity or indemnification section of the contractor’s contract
(Also known as Hold Harmless clause)
The Subcontractor (our client/Named Insured) shall protect, defend, and hold harmless and indemnify the contractor (and/or owner) and their respective officers, Agents, and employee from and against any and all claims, demands, losses, fines, penalties, expenses, including attorney’s fees, injuries, liens, damages, and liabilities of every nature, including contractual liability losses, arising from or relating to the subcontractors (our client) acts or omissions, or work performed by the subcontractor, its employees, other subcontractors (hired by our client) or Agents, regardless of whether the contractor (or owner) was negligent, unless the contractor (or owner) was solely negligent. Without limitation, this indemnification shall extend to all losses arising from the Subcontractors (our client) violation of any local, state, or federal laws, regulations, code, statues, or ordinances. All parties waive all rights against each other of subrogation. (This means both the clients right and their Insurance carrier’s right of subrogation as well as anyone else).
This is a basic section which can be found in every contractor agreement. The one above is pretty standard; some are even more aggressive. The question for us as an Insurance professional is; can we provide coverage to our insureds who sign this contract and are bound by this agreement? The answer is no, not all of it.
Oftentimes, these sections will conclude with a request for a specific Additional insured and waiver of subrogation form number. This information also may appear on the Insurance requirements sheet, which at this point you should start to realize doesn’t fully protect our client, but rather should be considered as the minimum proof of coverage which needs to be provided, not the full amount of coverage that is required by the contract. All too often, Agents assume all they need to do is meet the Insurance requirements on the certificate of Insurance request form and they have done all they need to do. They are wrong. While it is true, we cannot hope to provide all the coverage required, we need to independently seek to add endorsements whether requested or not to protect our subcontractor client/Named Insured. Let’s break down the requirements as given above one by one.
First problem: against all claims and liabilities of every nature. Two components to this requirement, the perils (any and all claims) and the policy limits. No CGL provides coverage for everything, but this phrase isn’t just talking about the CGL, this wide statement would include auto related claims, and worker’s compensation claims.
As for limits, the above agreement states, “without limitation.” Furthermore, any subcontractors hired by our client subcontractor are now our client’s problem as well. We need to address this to protect our client as best we can. But we need to make sure our client understands their Insurance policies don’t cover everything. Now is a good time to discuss what the policy does and doesn’t cover.
The biggest hole in the CGL, or exclusion is “your work.” The GCL will not cover faulty workmanship, but rest assured, the contract expects the subcontractor our client/Named Insured to absolutely cover the cost to repair or replace their faulty workmanship. This requirement is often found in another contract section entitled Warranties and Guarantees.
Certificates of Liability Insurance
Talking about the need to read Insurance policies and forms, the place we see the most persistent problems /mistakes made by Insurance professionals (don’t read the forms and make mistakes) are when we look at the certificates of liability forms that get presented to our clients by their subcontractors’ Agents or account managers.
The Certificate of Liability Insurance (COI) is meant to only be a snap shot of coverage the day the COI was issued. The certificate itself, in the very first box, at the top of the form, in bold type, explains that the certificate is for information purposes only and is not an Insurance policy and provides no protection. Some States Directors of Insurance have gone so far as to produce directives, or office statements that they, the state’s Departments of Insurance will not enforce a certificate of Insurance. The first box clearly states that items shown on this form do not alter the Insurance coverage. Adding an Additional Insured is done by endorsement which is an alteration/modification/change of the Insurance policy.
The second box at the top of the form is more specific to our discussion. This box in bold caps starts with the word IMPORTANT. What follows next is a warning and directive to the reader of this form (Certificate of Insurance) that tells the reader that if they have been listed as an Additional Insured or promised waiver of subrogation, those are policy modification which may require an endorsement.
Furthermore, the statement continues, that a statement on the certificate of Liability Insurance as to Additional Insured or waiver of subrogation does nothing and thus may or may not be true. I paraphrase, the actual language to illustrate what anyone who read this should come to realize. If I’m supposed to be an Additional Insured, I need a copy of that Additional Insured endorsement and not this piece of paper!
Typing someone’s name as an Additional Insured on the certificate of Liability Insurance (COI) means nothing, is not the correct procedure. Per the certificate of Liability itself, it tells us: IMPORTANT, don’t do that. How can this happen? Well, because our clients are asked by the Contractor or Owner to provide that information on the certificate of coverage form and so that’s what gets done. Does that make it right? No! Have I ever done this or the account managers I work with? Yes, but not in the last 10 years or more. I know this happens and why it happens because I have done it. I will say, however, I did always add to the policy the Additional Insured endorsement form like I was supposed to, I just flubbed on the certificate. But how would anyone know that was true?
Without providing the correct form, I have not provided any proof I did what needed to be done correctly. I tell my contractors who use subcontractors the correct certificate of Insurance procedures, specifically to require the endorsement forms to be attached and sent along with the certificate (COI). What happened next is why I have spent so much time talking about Additional Insureds.
Most of the Certificates of Liability forms my contractors were getting from their subcontractor had at least one major error and many were completely incorrect! Problems include: blanket forms which may omit Ad ditional Insured coverage after the sub has left the work site (contract Warranty section). The contracts often require coverage to continue after work is completed and often times up to one year after all work is completed. Incorrect form additions or only copies of forms which have not been executed (policy number should be typed at the top left corner of the form) properly, and on and on. I just couldn’t believe so many Agents were not paying attention to this important coverage for their insured!
My Insured has an enforceable contract. Is there proper Insurance in place to meet the terms of this contract? Certainly, my client (the Contractor or Owner to be named as an Additional Insured) has a vested interest in the subcontract providing the correct financial instrument (Insurance) to back up their promises found in the contract they signed as well.