AS AN insurance agent for more than 25 years, I have always understood that one deals with the excess and surplus-lines market at one's own risk. For years we have struggled with submissions in which we have applied for specific coverage, only to receive quotes that bear little resemblance to what we asked for. These quotes arrive with a disclaimer that it is the insurance agency's responsibility to determine the difference between the coverage requested and the coverage actually supplied.
Then, in the hard market, E&S carriers started adding restrictive endorsements to their policies. The problem this creates for us is three-fold:
-First, in most cases, all we are given is the name of the endorsement, without the wording.
-Second, we often receive the quote only days before the coverage must be bound, so we have little or no opportunity to review the actual wording of the endorsements.
-Third, the number and complexity of the endorsements continue to grow.
Our procedure is to check each quote and circle any endorsement we previously have not seen that appears to create an issue for our clients. When dealing with a renewal policy, we compare the quote's endorsement list with that of the expiring policy. We order any new endorsement that appears to affect our client and make it a part of the renewal presentation. But following a recent incident, we learned that we had a serious flaw in our procedure. Weeks after we bound renewal coverage for a client, we discovered that the policy, when it arrived at our office, had a disturbing endorsement attached, which we had missed in our pre-quote review.
The endorsement was attached to a CGL policy for a "paper" contractor, and it dealt with the contractor's responsibility to see that his subcontractors had proper coverage. The endorsement's title on the renewal policy was the same as that on the endorsement attached to the expiring policy-but it had a different edition date, which we previously had not caught. Therefore, we had not ordered a copy of the endorsement to attach to the renewal quote we presented to our client.
To paraphrase the expiring policy's endorsement, it said that if any subcontractors or independent contractors do not carry limits of liability or coverage equal to or greater than the limits or coverage provided by the contractor's policy, then the insurance company, upon auditing the policy, can consider the subcontractors or independent contractors to be employees of the insured contractor and charge additional premium for the exposure. However-and this was the endorsement's saving grace-the policy's coverage would not be affected by our insured's failure to use a subcontractor with adequate limits or coverage.
Imagine my surprise when I discovered an endorsement on the renewal policy with the same title, but with vastly different language. The endorsement not only included the wording about limits and coverage equal to or greater than our client's but also contained a provision stating a requirement to notify all "potential insurers" (those of any subcontractors or independent contractors) of any claim reported to our insured's carrier. If the insured failed to comply with these conditions for a subcontractor whose work "directly or indirectly" gives rise to a claim, coverage was voided-that's right, voided-for the reported claim. Furthermore, the endorsement said that the insurer did not have to "demonstrate any prejudice" for it to enforce the coverage conditions.
I had to ask myself, exactly what is this endorsement saying? What does it mean for a subcontractor to have limits and coverage equal to or greater than those of our insured? In this client's case, we had added an endorsement to the CGL policy providing employee benefits errors and omissions insurance. I know that not every subcontractor's CGL provides this coverage. Therefore, I must assume that my client's coverage for any claim arising out of an accident caused "directly or indirectly" by a subcontractor that does not carry employee benefits E&O would be void.
How can that be, you might ask, when it is unlikely that a job-site claim would arise from an employee benefits issue? But relevance doesn't matter, since the insurer in this case does not have to demonstrate prejudice. To void the claim, all the carrier has to do is show a violation of the condition.
As I pondered the headache created by the immateriality of prejudice, I realized it was insignificant compared with the problem posed by the requirement that subcontractors have liability limits and coverages equal to or greater than our client's. I submit that this is an impossible condition to meet.
Consider an insured business that experiences a policy limits claim for $1 million. During the insurer's claim review someone says, "Have we reviewed the general liability policies of all of the subcontractors 'directly or indirectly' involved in this claim to see if they have coverage equal to or greater than ours?"
At best, the insured only could hope the sub had coverage "equal to" his, which would happen only if the sub had a CGL policy with the same insurer and had all of the same endorsements. As we have now learned, even that may not be enough. To be sure of an exact coverage match, all of the endorsements must have the same edition dates. If the carrier can show a sub's coverage is less than the insured's-even if it does not prejudice the claim-it can void coverage.
Finally, consider that in today's insurance market, there is no standardization of the CGL form. Even carriers that use ISO forms do not use the same editions of those forms. At present there are eight possible editions from 1973 to 2001. If you compare the standard ISO 1998 form to the ISO 2001 form you will find an argument for stating that in certain instances one form provides less coverage than the other.
My conclusion? In effect, our client has virtually no coverage under his current CGL policy as long as the new endorsement is attached.
What can agents do? I recommend that you order copies of all endorsements listed on the policies of any E&S carrier you plan to quote-including endorsements with old names but new edition dates-and that you make those endorsements part of the proposal. Read the endorsements and be prepared to sell the difference in coverage. Question the language of an endorsement and make the insurance carriers responsible for explaining it. Insurance agents need to start objecting to these ridiculous hard-market endorsements, or we must be prepared to defend ourselves when our clients discover the inadequacy of their coverage.
Epilogue: I sent the endorsement in question to a respected insurance law firm and asked them if my interpretation of coverage issues was accurate. They concurred, and based on that I sent a letter to the carrier, outlined my concerns as noted above, and asked them to reinstate the old endorsement. They initially replied by stating the endorsement language was the language they wished to use and that my alternative was to cancel and re-write coverage through another carrier. They did not dispute any of my allegations about how claims could be handled under this endorsement. Later still, the company said it would replace the new endorsement with the original for agents who so requested. We did so, and the company reinstated the original endorsement retroactive to the effective date of the policy. The entire process took about six months.
Patrick Locke, CIC, CRM, is a principal and founder of Independent Insurance Group, which started business in 1993. The agency writes commercial lines exclusively, focusing on larger accounts, including contractors. Mr. Locke entered the insurance business in the mid 1970s as an adjuster with Liberty Mutual. He later worked as a producer in an independent agency as well as a captive agent for Nationwide.
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