You’re reviewing a nonstandard general liability policy for a commercial insured. At the bottom of the first page is a notice that reads: “Includes copyrighted material of Insurance Services Office, Inc., with its permission.”
Sounds like a good thing, right?
Wrong. “When somebody sends you a policy and it says ‘includes,’ you need to take a very careful look at what’s been taken out,” warns risk management consultant James R. Mahurin, CPCU, ARM, who has provided fee-only risk management and insurance consulting services to insureds since 1984. “The word ‘includes’ does not mean ‘improves.’”
Mahurin calls them “lookalike” and “soundalike” policies: “You pick it up and the print is the same, the top of the page is the same, everything looks the same, except that footer. When it says ‘includes,’ you have to ask, what does it include and what does it not include? I would say 99% of it involves reducing coverage.”
Whether it’s the absence of an important word, line or sentence from the policy, or a seemingly innocuous shift in the location of a definition or coverage item, here are four scenarios in which nonstandard policies labeled with that copyright could contain dangerous gaps:
Scenario 1: Mahurin recently reviewed a lookalike CGL policy that had two changes: The last sentence in the Employer’s Liability exclusion was deleted, and item (f) in the definition of “insured contract” was removed. The policy, widely sold to contractors, lacked coverage for contractual liability.
Imagine the tenant signs a lease agreeing to defend and indemnify the building owner for claims arising out of their occupancy. “In the course of the tenant’s occupancy, an employee is injured in the building and sues the landlord based on a condition of the premises,” Mahurin says. “The tenant’s CGL insurance is not going to respond because the last sentence in the Employer’s Liability exclusion was removed.”
The result is breach of contract, which may result in serious consequence. “Here’s an insured doing work, signing contracts, leasing premises, and they are in breach of contract because they don’t have contractual liability insurance,” Mahurin says. “Contractual liability is part of their agreement with the landlord and part of the agreement with the people for whom they are working.”
Scenario 2: Mahurin recently reviewed a “plain vanilla, cut-and-dry” church account with a premium around $35,000 a year—the kind of risk that’s “considered small, but everybody would like to have several,” Mahurin says.
The nonstandard GL policy featured the copyright notice at the bottom of the page, and the first thing Mahurin noticed was a pollution exclusion. “You typically have a church that owns the manse or the pastor’s residence. When you have a gas leak that kills a family, you’ve got a real problem on your hands,” he points out.
This church had a preschool in their educational facility five days a week, hosting numerous activities on the campus, including adults and youth staying overnight. “That exclusion wasn’t disclosed—they didn’t tell anybody they had removed important coverage,” Mahurin says.
Scenario 3: In another CGL policy Mahurin reviewed, one of 23 pages of endorsements changed the wording of the automobile, aircraft and watercraft exclusion. Whereas the standard form excludes losses arising out of the ownership, maintenance, use or entrustment to others of any aircraft, auto or watercraft, this particular company also added the word “non-ownership” to the list.
“That means it excludes coverage for anybody else using a vehicle on the premises, so coverage for ingress and egress is out, or vehicle movement on the grounds is out,” Mahurin explains. “And guess who they were selling it to? Industries that had lots of traffic in and out of their premises—quarries, timber harvesters, large land owners that have equipment and trucks going in and out. I thought, ‘This is the most flagrant case of deception I’ve ever seen in my life.’”
Scenario 4: In another instance, Mahurin reviewed a policy that removed “machinery and equipment” from Building coverage provisions and placed it instead in the Personal Property section, using the words “permanently affixed machinery and equipment” so that all coverage for permanently affixed building and equipment fell under Personal Property.
“If you’re insuring a landlord with power distribution boxes and roof-mounted HVAC systems, it’s a big deal,” Mahurin points out.
Or assume a landlord leases out a building that has a replacement cost of $4.5 million. “The tenant is responsible for all their own personal property, so as the landlord, I’ll insure the building for $4.5 million,” Mahurin says.
But that building has elevators, power distribution boxes, a gas boiler, roof-mounted HVAC equipment—"all of a sudden here’s hundreds of thousands of dollars or maybe a seven-figure sum of money that is normally covered under Building, and this particular carrier is requiring that value be recognized as personal property,” Mahurin explains. “People automatically assume that machinery and equipment is included in the Building section.”
For Mahurin, the question is: Where is the industry’s focus on product quality? “What does an agency do within their office to represent carriers that use credible forms, and make sure they have somebody who’s gone through the policies to understand why one company’s price is lower? And what do we do in marketing this product to make sure we don’t bankrupt the young person in their first job who bought affordable insurance?”
“The low bid on insurance is the most expensive decision you’ll ever make in your life,” Mahurin continues. “It’s fine to find a competitive price, but the first decision you make should be based on the quality of the product and the quality of the program.”
When insurance is done right, Mahurin says, “it’s the difference between continuing a normal life or not. It’s an extremely important decision-making process to engage in. To have a segment of the industry crawl up the table leg and stick their inferior product on the table is something I find appalling.”
The upside? According to Mahurin, “There is a tremendous opportunity for independent agents to sell quality products.”
Jacquelyn Connelly is IA senior editor.