Last week, I received an email regarding a denied claim. A hardware store serviced a garden tractor they had sold. While changing the oil, they failed to adequately tighten the drain plug. While using the mower, the drain plug vibrated loose, causing the oil to drain and damage the engine. The customer filed a claim to replace or repair the engine and the claim was denied by the CGL insurer.
The entire basis of the denial was a non-ISO proprietary CGL “Business Description And Classification Limitation” endorsement which said:
“Coverage under this policy is specifically limited to those classification codes listed on the Policy Declarations or listed in the SCHEDULE above. No coverage is provided for any classification code or operation performed by the Named Insured not specifically listed in the Policy Declarations or listed in the SCHEDULE above.”
The Business Description shown in the SCHEDULE is simply:
“Hardware Stores / Distributors / Warehouse”
Several years ago, the late John Eubank, CPCU, ARM and I created a webinar about horrible commercial lines endorsements that agents should be wary of and avoided if at all possible. That morphed into a seminar I call “Raiders of the Lost Coverage: Insurance Jones and the Temple of Exclusions.”
The ISO CGL policy provides very broad coverage for insureds who expand their operations into areas beyond those originally underwritten by the insurer. If the insurer prefers not to assume such risks at the original premium, they may be able to adjust the premium on audit or nonrenew the account. However, some insurers may want to limit their assumption of risk, especially for certain types of businesses, by attaching an endorsement that seeks to limit coverage to the class code(s) on which the premium is based.
However, courts often refuse to enforce these types of exclusionary endorsements because reliance on a very broad description as controlling language in an insurance contract may be prohibited as constituting an ambiguity. I’ve actually seen endorsements like this the simply display the actual CGL class code or otherwise provide a vague description. In this case, I would argue that “Hardware Stores” could mean a lot of things and represent businesses with varying services.
To illustrate the view of many courts, in the 2011 case of Essex Ins. Co. v. Foley, the federal district court refused a summary judgment request by the carrier on the basis that a comparable endorsement was ambiguous. The late, great Don Malecki, CPCU, ARM wrote about this in the July 2011 issue of Rough Notes magazine. He cites several other cases, including Indiana Insurance Companies v. Granite State Insurance Co., 689 F.Supp. 1549 (U.S. Dist. Ct. So. Dist. IN 1988), in his earlier March 2010 column. More recently, the NY Court of Appeals ruled on a similar situation.
Another article from law firm Cozen O’Connor cites numerous court cases involving classification limitation endorsements, with mixed results. While some courts have upheld more specific and detailed descriptions, my past research indicates that it is rare for a court to uphold a very broad description.
In the present case, I believe the “Hardware Stores” description to be overly broad and ambiguous. An insured would have no idea what activities or services would fall within this statement as to insurance coverage. In this claim, the service provided was some sort of warranty work and, specifically with regard to the actual damage, an oil change. There are at least three “hardware stores” near me that offer equipment servicing and repair. In addition, 10 seconds of Googling revealed a number of “hardware stores” around the country whose products and services entail more than just the sale of hardware.
For example, when you say “hardware store,” many people think of Ace Hardware. Consider Simons Ace Hardware which has six locations in Indiana. According to their web site, they offer small engine repair and other services such as equipment rental. An underwriter taking two minutes to visit their web site would see that they perform equipment repair and, given that they rent equipment like many hardware stores, from Ace to Lowes and Home Depot, they are likely to service such equipment.
So, again, given that the “Hardware Stores” description is so broad, I believe that a denial of this claim is inappropriate. If the carrier did not want to cover this type of servicing exposure, which is common among many “hardware stores,” they should have written a broader description that, for example, limited coverage to retail sales or specifically excluded any kind of servicing or repair of equipment.
Simply listing a class code description is insufficient given that the insured does not have a copy of a Commercial Lines Manual (CLM) that might be more descriptive. An ambiguity like this is almost certainly going to be interpreted in favor of the insured.