Imagine that you are reviewing some proposed commercial general liability (CGL) policies for a client, trying to compare the coverage terms. The first CGL policy looks similar to the most widely used standard form in the industry. There are no endorsements. The declarations and attachments appear in order.
*This is the second in a series of articles on inferior "insurance product." You can read the first article, which is titled "Insurance Is Supposed To Protect."
Looking closely at the form, you notice a footer that reads "Includes copyrighted material of Insurance Services Office, Inc., with its permission." This notice or a similar one is present on many insurance policy forms today. It is a red flag indicating that, while this form may look just like the standard policy form and may contain much of its language, it has been modified.
We're looking at an actual example from the author's files. The policy appears identical to the standard Insurance Services Office, Inc. (ISO), CGL policy form. This is the most commonly used standard CGL form. Headings are the same, the print is the same, and the sequence is the same. Outwardly, nothing appears changed.
However, in this policy, two small but critically important items have been removed. A short sentence at the end of an exclusion was removed. Additionally, a single lettered item out of 6 lettered items was removed.
A second CGL policy uses the standard Insurance Services Office, Inc. (ISO), copyright policy form with a combination endorsement attached. The endorsement restates or amends certain sections of the policy. Looking at the changes, the language in the endorsement looks remarkably similar to the standard policy wording. However, the same items have been removed.
A third example is an outwardly appearing standard ISO CGL form with the word "includes" in front of "Insurance Services Office Copyright." This policy has been amended in the same manner as the first two. The word "includes" preceding copyright information is found in many policies; the use of the word "includes" allows coverage to be expanded or reduced.
We have provided three examples of how insurance policies are routinely changed. In each example, important coverage has been reduced through the removal of a small number of words. The critical task in each example is to read the policy and identify the few words that have been removed.
What is the proper approach to read a policy and find the words removed? How does one interpret the missing words? What is the significance of the word "includes" in front of the ISO copyright statement? The policy outwardly appears similar to the ISO form: headings are the same, the print is the same, and the sequence is the same.
In the first policy, there is no indication that the critically important items were removed. In the second policy, there is reference to the combination endorsement; however, there is no communication in the policy transmittal substantively describing the removed items. In the third policy, the word "includes" in front of the words "Insurance Services Copyright" is the only indication of changes to the form.
The removal of essential coverage elements significantly changes the policy. As a result, the named insured may be in breach of its contracts or in breach of its leases.
It Looks Almost the Same
The changes are difficult to find without a sentence-by-sentence comparison to a complete ISO policy. Without such a careful comparison of the form, few experienced practitioners would notice them. After 4 decades in the industry, my first response to any CGL policy amendments is to check the contractual liability coverage.
In this case, the last sentence in the employers liability exclusion and item f. in the definition of "insured contract" were removed. These two changes eliminate or severely restrict contractual liability coverage. Unbeknownst to the named insured, it may now experience a significant uninsured liability loss or be in breach of contract with its customers and service providers and/or breach of its lease agreement with its landlords. It is not uncommon for many named insureds to have multiple breaches.
With few exceptions, customers, service providers, and landlords require contractual liability coverage. Contractual liability is a critical issue for tenants, contractors, and many other concerns. They may have signed numerous hold harmless and indemnity agreements with their customers, suppliers, or landlords, and the elimination of contractual liability coverage may void these agreements.
Contractual Liability Coverage Voided? What?
The last sentence in the employers liability exclusion provides an exception addressing liability assumed by the insured under an "insured contract." This exception extends coverage for the tenant's obligation to protect the landlord from claims arising from injuries to the tenant's employees. The same exception assures that there is coverage for third-party-over claims for employee injuries arising out of the course of work. This exception is critically important for both tenants and contractors.
Item f. in the definition of "insured contract" expands the policy's contractual liability coverage beyond what the industry has typically categorized as the "incidental contracts" contained in items a. through e. The expansion provided by item f. allows coverage for liability assumed in such business contracts as construction contracts, service agreements, and purchase orders. Again, it is critically important coverage.
Contractual liability coverage has been essential coverage provided by the industry for over 100 years. Recognizing how important it is for any going concern, this element was incorporated into the standard ISO policy form more than 30 years ago. Therefore, these changes, which are fairly common, constitute a major reduction in protection.
Many contracts and agreements stipulate that the indemnitee provide CGL insurance that includes contractual liability coverage. Landlords hold tenants responsible for employee injuries through the course of a lease. Insurance providers issue certificates of insurance as if their policies were fully compliant. Unfortunately, in such instances, they are not.
Offending insurance companies with these elements removed in their policies will issue certificates of insurance to Fortune 1000 companies, public entities, utilities, construction companies, energy companies, landlords, etc., nearly all of whom require critically important contractual liability insurance.
Contractual liability claims are complex and expensive. When these insurance companies are called on to respond, they will instead deny coverage based on these restrictions.
Such Deception Is Widespread
The removal of critically important contractual liability coverage may be only one of many reductions found in nonstandard policies, policies with vaguely labeled endorsements, or policies where the word "includes" is added in small print at the bottom of the page. The practice of omitting or changing words, sentences, or paragraphs as a means of reducing coverage is widespread. Unlike endorsements, which are easier to see and research, omitted or changed wording is subtle and far more difficult to find.
Few insurance buyers in America possess reference materials that allow a policy comparison. Few insurance buyers recognize exceptions to exclusions or additions to definitions as grants of coverage. Few will notice an omitted sentence at the end of an exclusion or an omitted lettered item from a list of lettered items in a definition. Fewer still will realize the absent wording may be to their detriment.
The development of standard (and equivalent) policy forms over a period of decades serves to protect the public. The use of forms amended to reduce coverage, in the absence of full disclosure, speaks poorly of those who engage in the practice.
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