In the event of property damage or personal injury caused by your services, business operations, or employees, a Commercial General Liability policy would protect your business from financial loss. It also includes non-professional negligence. As such, understanding this coverage is an essential part of managing the risk associated with CGLs.
Various costs, including medical and legal expenses, as well as compensation and punitive damages, are just a few examples for which your business might be responsible:
- One of your customers is injured after tripping over loose flooring at your business.
- The customer's home suffers substantial damage as a result of an employee in your painting business leaving the water running after washing their hands
- You are named in a class-action lawsuit alleging misleading statements in your advertisements.
It is standard practice in most commercial contracts for one party to be deemed an "added insured" under the policy of the other party. The problem is that additional insureds are not all created equal. And, an endorsement for additional insureds can be annulled because of classification limitations, which can void the coverage.
Being named as an additional insured on someone else's insurance policy means that your losses are covered through the policy regardless of whether you might be legally liable. In addition to the primary insured (e.g., the owner of a building or business), many "upstream" parties (e.g., tenants, service providers, contractors, and subcontractors) seek to be added to the same policy.
With that in mind, let’s discuss what classification limits are and they can potentially affect your company’s risk mitigation strategy.
What is a Classification Limitation Endorsement?
Classification limitations entitle named insureds to only cover specified operations cited within their policies using specific Insurance Services Office (ISO) codes.
A standard classification limitation endorsement states:
“Coverage under this policy is specifically limited to those classification codes listed in the policy. No coverage is provided by any classification code or operation performed by the named insured not specifically listed in the Declarations of the policy.”
Business insurance policies with a classification limitation endorsement are more common among those whose operations are diverse, such as construction companies. Additionally, they are frequently offered with policies for companies unable to secure regular insurance policies. By limiting exposures, insurers can minimize the risks they bear when pricing and underwriting the policy.
When the coverage for the named insured decreases, the coverage for any additional insureds will also get smaller.
As an example, let’s say that Acme Contractors are constructing a series of townhouses. They hire Smith Painting to take care of all of the interior and exterior painting. During the contract term, Smith Painting added Acme Contractors to its CGL insurance policy as an additional insured.
One day, unfortunately, an employee for the painting company falls off a ladder and is injured. This employee sues Acme for the incident. Acme requests Smith Painting's insurance company to defend the suit as an additional insured. A classification limitation on Smith's CGL insurance policy prevents them from providing coverage.
How do Classification Codes Limit Insurance Coverage?
According to the above scenario, a similar court case actually occurred. According to the court, the insurance company did not need to defend in that lawsuit. Due to the subcontractor's policy, ISO 98305: Painting - Interior Building and Structures is restricted.
What’s more, outside painting is subject to separate codes, including building height requirements:
- 98303 Painting – exterior – buildings or structures – exceeding 3 stories in height – NOC (1721)
- 98304 Painting – exterior – buildings or structures – 3 stories or less in height – NOC (1721)
A court found all insurance companies had no duty to defend because the injury happened while two of the coding codes were not specifically listed on the policy. In other words, classification limitations are used to identify what exactly is included in a policy, while they broaden what isn’t.
What Can Be Done to Manage Classification Limitations?
It is important to ensure classification endorsements are not kept hidden by subcontractors. Make every effort to identify, remove and challenge these exclusions by doing the following.
Review your certificate of insurance.
In the summary of insurance, the named insured will have a section near the bottom where any exclusionary endorsements will be listed. It is Pete's Painters' responsibility to disclose that its insurance policy contains a classification limitation. The particular scope of work that can be authorized should raise a red flag for upstream certificate holders, so they can ask questions and request a copy of the endorsement.
Put safeguards in place.
Training project managers in requesting a COI review whenever the scope of work changes with a subcontractor. Subcontractor duties can include anything that falls outside the scope of their employment, even a simple favor of five minutes. Remember, it’s possible that an injury or damage may occur at any time.
Compliance can also be checked in accounting. You should open an inquiry if subcontractor payments exceed the estimated timeframe. Find out if the subcontractor is doing additional work outside the scope of the subcontractor's contract that could cause the project to be delayed.
Limit classifications in contracts.
The contract should contain a clause prohibiting subcontractors from using CGL policies with classification limitations or specifying the codes needed. A downstream additional insured may sue the upstream company if it fails to disclose or misrepresents its classification endorsement or subcontractor's work within classifications.
Automate Tracking Certificate of Insurance
By using policy endorsements and COIs, you can eliminate the guesswork about coverage. TrustLayer is one of those services.
Tracking and managing COIs is automated with our platform. Automated renewal notices, monitoring of vendor policies, and proactive coverage notifications are also provided. And, as a bonus, our insurance industry experts make sure your projects are protected by reviewing endorsements. Thanks to TrustLayer, you no longer have to worry about underinsured claims, lawsuits, or audit failures.