WELCOME TO MAY, the month of one of America's great traditional races. As they might say at Indy, “Gentlemen and ladies, start your classifications!”

Ah, general liability, thy heart is classification.

Or at least it should be.

I recently spoke at a Big “I” New Jersey conference, where the conference organizers asked me to participate in a breakout session on contractor issues. The focus was on both state-specific regulations and what could be learned from recent errors and omissions cases. While those points were valuable for the attendees, one side debate intrigued me: Can you trust a contractor to be who he says he is?

The example given was both perceptive and illuminating–landscaping. Consider for a moment the activities that might come to mind when you think of a landscaping contractor: Tree, bush and shrub planting? Trimming and pruning? Sod laying? Lawn seeding, fertilizing and mowing? Of course. And the classification code for landscaping no doubt encompasses all of those activities. In fact, if you look in the ISO classification manual for landscaping, you find code 97047–Landscape Gardening, with the following classification notes:

This classification includes: (97047)
oLaying out grounds, planting trees, shrubs, flowers or lawns.
oInterior landscaping. The following shall be separately classified and rated:
oExcavation.
oRisks providing lawn care services only.

Seems right on target. There may be some need for closely related codes such as 99777–tree pruning, dusting, spraying, repairing, trimming or fumigating–when the contractor also does tree topping/removal and stump removal. But otherwise the contractor is fairly low-risk (at least compared with residential and commercial construction) and life is good.

Ah, grasshopper, but you must know after having been in the insurance industry for over three weeks that seldom is everything as simple as it seems.

I'll give you a couple of hints. Entrepreneurs. America, the land of opportunity. No job is too difficult if the price is right.

Yes, friends, those little landscaping devils are often involved in far more potentially pernicious activities than simply making your lawn green and lush. When I Googled a couple of local landscaping firms, several possibilities turned up on the firms' Web sites under the heading “services,” including:
oComplete landscape construction.
oGrounds & structure cleaning.
oPower washing decks, fences, home.
oStone & brick patios & walkways.
oConcrete driveways & walkways.
oRetainer walls.
oWood fences.
oGutter & downspouts cleaning/repair.
oSnow removal.
oDrainage.
oGeneral construction.
oConcrete work.

Anything jump out at you that seems slightly more risky from a liability viewpoint than lawn care? How about everything!

What type of concrete work might they be doing? Sure, it may be only for a garden path or a sidewalk, but can you sure? Gutter and downspout cleaning or repair isn't necessarily an easy task, especially given the roof design and height of many homes. I hesitate to think what “general construction” entails.

But my favorite probably jumped out at you the same way it did at me. You guessed it–snow removal. Just a little innocent sidewalk shoveling, no doubt. Or could it be our lawn-raking insured is also a roof-sweeping, gutter- clog-cleaning, ice-dam-removing, snow-blower-operating, street-clearing, snow-plowing potential trainwreck of a liability risk?

Underwriters, to your bunkers!

The question before the house is what the CGL carrier to whom you submitted those seemingly innocent classification codes is going to do when it turns out Dr. Jekyll is also Mr. Hyde. Deny every claim that arises under the non-landscaping activities? Will they rush to cancel? Move for dismissal of coverage under a claim of material misstatement? Mark the policy for nonrenewal? Recall your marketing rep for consultations? Have your contingency contract run through a shredder?

While I can't speak definitively to the last two possibilities (although I have definite opinions), let's try to be pragmatic and take the others one at a time.

Determining whether the CGL policy covers claims arising from the contractor's unclassified actions is the easy part. Barring a specific exclusion stating otherwise, the CGL will respond. This is one of the valuable features of the CGL–automatic coverage of the insureds' undeclared activities. No exclusion applies. While the carrier has certainly missed out on getting the proper premium in advance and also was denied the opportunity to properly underwrite the risk, the policy itself does not provide an escape for the carrier to avoid providing the necessary coverage. Indeed, the premium audit provision found in the CGL conditions specifically addresses the carrier's need to determine at expiration the actual classifications applicable to the risk and collect the proper premium for the exposure.

So if the carrier is stuck for the claims, won't they leap at the chance to cut the policy short as quickly as possible? Unless there is some provision in your applicable state laws, rules or regulations, it is doubtful the carrier has grounds for either a mid-term cancellation or a claim of material misstatement. Although I'm unaware of any state that prohibits a carrier from canceling under circumstances of fraud or concealment (if not void coverage outright from day No. 1), this approach seems highly unlikely in the proposed circumstances. How can a carrier make an accusation of fraud or concealment stand up in court against an insured who proudly proclaims his willingness to address your concrete construction or snow removal needs on his company Web site? I believe the phrase “hiding in plain site” is applicable here.

None of this would automatically prevent the carrier from marking the policy for nonrenewal, again assuming no state regulatory prohibition exists. Meeting nonrenewal requirements is generally easier than trying to get off a policy mid-term.

Whatever the outcome of the voidance, cancellation or nonrenewal process, however, there is a real danger that the carrier will turn on you for getting into this coverage morass. If you failed to mention on the application any of the insured's additional services that fall outside the landscape gardening classification, there are two possible explanations from the carrier's viewpoint, neither of them good: You deliberately covered up the risk for fear the underwriter would turn it down or severely hike up the premium, or you're just stupid. Seeing as the first makes you appear significantly cleverer than the latter, some egocentric agents might risk taking the heat for the cover-up rather than to be judged an idiot. And if the activities hitherto unknown to the insurer are revealed by a liability claim against the insured, the carrier might pursue an E&O claim against you, based on the alleged cover-up or agency oversight.

So, fellow travelers, what have we learned this day? Don't assume contractors limit their activities to their dominant focus. Especially in tight economic times, never expect a hard-working entrepreneur to pass up the chance to make a buck. And don't forget, it's folks who approach opportunities with the attitude of “Hey, I can do this, they are willing to pay me, and it ain't illegal” that made this country great! So while you are making sure to ask all those questions on the application, it wouldn't hurt to check out your prospects' Yellow Page ads or Web sites before blithely assuring an underwriter you are fully aware of the extent of the risk. The carrier deserves the correct info and premium, the insured deserves the correct coverage, and you don't deserve any added E&O exposures.

To put it in race-day parlance, do it right, you get the pole; do it wrong, and get the shaft.

Gentlemen and ladies, start your classifications!

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Policy Issues: The Challenge of Matching Contractors to Classifications

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