Classification Limitations: Managing a Subcontractor’s Insured Work Exclusions
When it comes to commercial general liability (CGL) policies, some endorsements are great for upstream parties. Others, not so much. On the good side are additional insured endorsements which allow general contractors, property owners, and property managers to receive coverage under their subcontractor’s insurance policy. On the bad side are classification limitations, which can nullify the coverage of additional insured endorsements altogether.
As we continue our series on CGL policy gaps, this article takes a closer look at classification limitations and what they mean for a company’s risk mitigation strategy.
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What is a Classification Limitation Endorsement?
A classification limitation narrows a named insured’s coverage to only designated operations cited within the policy using specific Insurance Services Office (ISO) codes.
A typical classification limitation endorsement reads: “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.”
The classification limitation endorsement is more common on policies for businesses with a wide range of operations, like those in construction. They also frequently accompany policies for companies unable to obtain insurance in the standard market. The limitation helps insurers minimize the exposures they price and underwrite in the policy.
When coverage narrows for the named insured, it shrinks for the additional insured as well.
Let’s revisit Real Good Builders and Pete’s Painters (from our look into CGL gaps and workers’ compensation to illustrate how this affects coverage.
General contractor Real Good Builders hires Pete’s Painters for the interior painting of their new office building. As part of the standard contract, Pete’s adds Real Good as an additional insured on its CGL policy.
Real Good Builders is so impressed with Pete’s interior work that they ask the company to paint the four-story building’s exterior as well. While in a lift outside, a Pete’s employee gets seriously injured by some falling debris. The employee sues Real Good Builders for contributing to the accident.
Real Good, as an additional insured, tenders the suit to Pete’s insurance company for defense. The insurer denies coverage citing the classification limitation endorsed on Pete’s CGL policy.
How do Classification Codes Limit Insurance Coverage?
The scenario above is based on an actual court case. In that lawsuit, the court ruled in favor of the insurance company’s denial of their duty to defend. Upon examination of the subcontractor’s policy, they found a classification limitation for ISO 98305: Painting – Interior Buildings or Structures. Separate codes apply to exterior painting and even designate building height:
98303: Painting – Exterior Buildings or Structures Exceeding Three Stories in Height
98304: Painting – Exterior Buildings or Structures Three Stories or Less in Height
Because the injury occurred while performing exterior painting and the policy did not specifically list these codes, the court found the insurance company had no duty to defend. Thought of another way, classification limitations narrow a policy to exactly what work is included and broaden everything that is excluded.
What can be Done to Manage Classification Limitations?
Don’t let classification endorsements be a subcontractor’s well-kept secret. Take the extra steps to find, eliminate, and fight these costly exclusions.
Tip #1: Review the certificate of insurance
Each COI includes a section near the bottom for the named insured to list any exclusionary endorsements. Pete’s Painters must disclose that a classification limitation exists on its policy. This should be a red flag for any upstream certificate holder to ask questions about the specific scope of work allowed and to request a copy of the endorsement for verification.
Tip #2: Create process safeguards
Train project managers to request a COI review for any subcontractor scope of work changes. This includes asking a subcontractor to do anything outside of their hired duties, including something as simple as a five-minute favor. Injury or damage can strike at any time.
Accounting represents another place for compliance checks. If a subcontractor receives payment beyond the initial estimated timetable, open an inquiry. Identify if the project is just experiencing delays or if the subcontractor is doing additional work that could fall outside of its policy’s classifications.
Tip #3: Prohibit classification limitations through the contract
Create a clause in the contract that prohibits subcontractors from using CGL policies with classification limitations or specify which codes must be included. If a company fails to disclose the classification endorsement or the subcontractor misrepresents its work within the classifications, the upstream additional insureds now have a case for breach of contract.
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