Does a CGL Policy’s “Business Description” or “Class Code” Limit Coverage?

Farrell Miller | Cozen O’Connor

One way a CGL insurer can narrow otherwise broad bodily injury and property damage coverage is by activity. Activities that face similar risk can be grouped using an activity classification code, which can be incorporated into the policy through a class limitation endorsement.

For instance, a policy issued to an individual (for any business of which he is a sole owner) could include an “accounting” class code and a class limitation endorsement, effectively narrowing coverage to accounting activities. Courts routinely enforce such endorsements.[1]

Suppose that, instead of a class limitation endorsement for accounting, the policy’s declarations page merely said “business description: accounting” and “Class Code: 7619—Accounting.” Now suppose the individual also owns a non-accounting business and is sued for liability in connection with that business. Would that be covered? In other words, what effect should a court give to a class code or business description that isn’t incorporated into the policy by endorsement? This question underpins two divergent Circuit Court decisions.

In Smith v. Burlington Ins. Co., Smith owned and operated a courier service and a security service.[2] One of Smith’s armed security guards shot an unarmed teen while on duty at an Oklahoma apartment complex. The teen later died. His mother brought a wrongful-death action against Smith d/b/a Smith and Son Security. On Smith’s CGL policy with Burlington, the declarations designate “Form of Business” as “Individual,” and “Business Description” as “Courier Service.” The Policy section defining “who is an insured” says “If you are designated . . . as [a]n individual, you and your spouse are insureds, but only with respect to the conduct of a business of which you are the sole owner.” Within the policy was a “Schedule of Classification and Rates” listing “94099—Express Companies” (i.e. a Class Code).

Burlington denied coverage, saying that the policy was intended to cover Smith only for his courier service business. The district court sided with Burlington and the Tenth Circuit affirmed.[3] The district court held that two standard policy provisions effectively incorporated the business description into the policy itself. The first provision, a merger clause, says “declarations together with the common policy conditions and coverage form(s) and any endorsement(s), complete the above numbered policy.”[4] The second provision, in the “Representations” section, says “By accepting this policy, you agree: (a) The statements in the Declarations are accurate and complete; (b) Those statements are based upon representations you made to us; and (c) We have issued this policy in reliance upon your representations.”[5] The district court also held that using the Class Code “94099—Express Company” “rather than a code that could conceivably cover any armed security guard business confirms that there was no intent to cover Smith’s security business.”[6] The court concluded by stating that it refused to adopt a “strained interpretation that the ‘courier service’ policy covers any business Smith might choose to pursue.”[7]

In Mount Vernon Fire Ins. Co. v. Belize NY, Inc., a general contractor (GC) hired Belize NY, Inc. to perform demolition work at a church in Harlem. A few months later, the GC again hired Belize solely to supervise a subcontractors’ work at the church.[8] Months later, a person entered the church, shot and killed several people, and started a fire before taking his own life. A wrongful death suit was commenced against Belize, alleging that the GC unlawfully shut off the church’s sprinkler system and “bricked over” or eliminated several church exits.[9] On Belize’s CGL policy with Mount Vernon, the declarations designated Belize’s “Form of Business” as “Corporation,” and “Business Description” as “Carpentry.”[10] Two classifications were listed under “Premium Computation” on the Declarations Page: “Carpentry-Interior-001” and “Carpentry-001.”[11]

Mount Vernon denied coverage for the wrongful-death action, arguing that Belize was acting in a supervisory capacity rather than performing carpentry work at the time of the shooting.[12] The district court sided with Belize and the Second Circuit affirmed. The Second Circuit held that under New York law, exclusions “must be set forth clearly and unmistakably.”[13] But the policy didn’t do that, since there was no “specific language indicating that the classifications [or the business description] determine the scope of the coverage.”[14] “Were we to accept [Mount Vernon’s] argument, insurers would be permitted to argue for limitations of all kinds by invoking the stand-alone words of classification not otherwise referred to in a policy. If Mount Vernon wished to limit coverage based on classifications, it should have done so specifically.”[15]

The Smith and Mount Vernon courts appear to disagree about whether a standalone business description or class code can narrow coverage. Can Smith and Mount Vernon be harmonized? Here’s some guidance. If an insured has a CGL policy with a business description and/or class code suggesting a small risk, and seeks coverage for an activity that involves a completely different, larger, and perhaps more exotic risk (e.g. armed security service), then a court is likely to find that the insurer did not intend to cover the larger risk. To decide otherwise would unfairly blindside the insurer. On the other hand, if the insured has a policy with a business description and/or class code that suggest a risk that is similar to the actual claim (e.g. carpentry vs. construction supervision) then a court is likely to say “close enough” and find coverage. To decide otherwise would be unfair to the insured, since the policy wouldn’t clearly and unmistakably limit coverage. In the end, the safest course is to ensure that the policy accurately reflects both parties’ understanding of the risk.


[1] See, e.g.Evanston Ins. Co. v. Heeder, 490 Fed. Appx. 215 (11th Cir. 2012) (no coverage where classification limitation endorsement narrowed coverage to residential roofing, and claim arose from a commercial roofing project); Ruiz v. State Wide Insulation & Constr. Corp., 269 A.D.2d 518 (N.Y. App. Div. 2000) (no coverage where classification limitation endorsement narrowed coverage to painting and the insured party was hurt during a roof repair); Princeton Excess and Surplus Lines Ins. Co. v. US Global Security Incorporated, et al., Case 4:18-cv-02705 (S.D. Tex. Sept. 24, 2019) (no coverage where designated operations exclusion narrowed coverage to exclude injuries arising out of any work at or in bars, restaurants, taverns or other establishments selling or providing alcoholic beverages, and exception to exclusion did not apply as there were no allegations of an injury arising out of parking lot security operations).

[2] 2019 U.S. App. Lexis 19175, 2019 WL 2635725, at *1 (10th Cir. 2019) (interpreting Oklahoma law).

[3] Smith v. Burlington Ins. Co., 2018 U.S. Dist. Lexis 54403 (N.D. Okla. 2018), aff’d 2019 U.S. App. Lexis 19175, 2019 WL 2635725 (10th Cir. 2019).

[4] Id. at *11

[5] Id.

[6] Id. at *7.

[7] Id. at *15.

[8] 277 F.3d 232, 235 (2d Cir. 2002) (interpreting New York law).

[9] Id.

[10] Id. at 234.

[11] Id.

[12] Id. at 236.

[13] Id. at 237.

[14] Id.

[15] Id. at 239.

Top [Construction] Insurance Cases of 2020

Grace V. Hebbel | SDV Insights

COVID-19 business interruption coverage litigation may have stolen the show in 2020, but those cases should not eclipse other important insurance coverage cases decided throughout this past year. As the courts nationwide struggled with the insurance coverage implications of COVID-19 related business loss, other significant coverage decisions were overshadowed. Read on to learn about how computer glitches, biometric privacy, and a falling wheelbarrow have all played a role in\ shaping some of the most interesting and influential insurance coverage decisions of 2020, as well as get a sneak peek at the key coverage decisions looming in 2021. Enjoy!

1Nash Street, LLC v. Main Street America Assurance Company,
    No. 20389, 2020 WL 5415325 (Conn. 2020)

Do exclusions k(5) and k(6) absolve an insurer of its duty to defend its insured for allegations of faulty workmanship?

No, under Connecticut’s broad duty to defend standard. Plaintiff, represented by SDV, sought a defense for a suit alleging faulty workmanship after part of a homeowner’s structure collapsed while work was performed on the foundation. The insurer denied coverage to the plaintiff, arguing that there was no coverage for “that particular part of any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it.” The Connecticut Supreme Court sided with the insured, holding that exclusions k(5) and k(6)(which are identical to ISO GL exclusions j(5) and j(6)) did not unambiguously preclude coverage because it was at least possible that the exclusion was intended to apply only to damage in the area of the dwelling where the insured performed work. Because the contractor only worked on the basement, but damage occurred to the entire structure, coverage was not unambiguously excluded. As part of its analysis, the Court also articulated a new and more expansive test for the duty to defend, holding that an insurer owes a defense whenever there is “legal uncertainty,” meaning that it is unclear how a court might interpret a policy’s relevant language.

Click here to read more.

2.Skanska USA Bldg. Inc. v. M.A.P. Mech. Contractors, Inc.    — N.W.2d –, 2020 WL 3527909 (Mich. 2020) Does a subcontractor’s defective construction constitute a covered “occurrence” under a general liability policy? Yes. On June 29, 2020, Michigan become the twenty-sixth state to recognize defective construction as an “accident” and therefore a covered “occurrence” under a general liability policy. The construction manager plaintiff sought coverage for liability arising out of a general contactor’s faulty installation of several expansion joints. Concluding that faulty workmanship was not an “occurrence,” the subcontractor’s insurer denied coverage. SDV filed an amicus brief arguing that the subcontractor’s faulty workmanship was an “accident” and therefore, an “occurrence” under the policy, and the Michigan Supreme Court agreed. Notably, the court stated that the alternate view, expressed in decisions such as Weedo v. Stone-E-Brick, Inc., 405 A.2d 788 (N.J. 1979), reflected “an outdated view of the insurance industry.” This decision represents another victory for construction industry policyholders, as states across the country trend in favor of coverage for defective construction. 

Click here to read more.

CASES TO WATCH IN 20201

1. Citizens Property Insurance Corp. v. Manor House, LLC, et al.    Case No. SC19-1394 (Florida Supreme Court) In September of 2020, the Florida Supreme Court heard oral argument on the issue of whether or not a first party policyholder is entitled to consequential damages for a breach of contract claim. Plaintiffs brought suit against their first party property carrier, Citizens, alleging breach of contract and fraud for Citizens’ failure to properly adjust a loss from Hurricane Frances in 2004. According to Manor House, Citizens failed to timely and adequately adjust the loss, as well as pay undisputed amounts. Although a bad faith claim was barred by statute, plaintiffs sought extra-contractual, consequential damages for lost rents as a result of Citizens’ conduct and delay. The Florida Supreme Court accepted the following certified question from the Fifth Circuit District Court of Appeal: “[I]n a first—party breach of insurance contract action brought by an insured against its insurer, not involving suit under Section 624.155, Florida Statutes, does Florida law allow the insured to recover extra-contractual, consequential damages?” The Florida Supreme Court is set to decide this important question in the coming months.

What Every Lawyer Should Know About Insurance Coverage

John S. Worden and Nicole N. King | Venable

2020 presented new challenges and opportunities for businesses in regards to their insurance coverage and related recovery. The new year will likely present new insurance products and increased litigation.

  1. Types of Insurance. Insurance is meant to safeguard businesses against liability and financial risk. There are numerous types of insurance available on the market, and purchasing the right type and amount of insurance is always determined by the business’ specific situation. What are your considerations when purchasing insurance and how do you evaluate terms and conditions?
  2. The Duty to Defend. Many third-party insurance policies require that the insurance carrier defend the insured against lawsuits or claims to which that insurance policy applies, including those claims that are potentially covered (i.e., include a “duty to defend”). The duty to defend is broad, arising when an insured tenders the defense of a lawsuit to its insurer and ends when (1) the underlying lawsuit is concluded; (2) the insurer unambiguously demonstrates there is no potential for insurance coverage; and/or (3) policy limits are exhausted (note that for some policies, defense costs do not exhaust the limits of insurance). But this relationship can be affected by a number of issues, including conflicts of interest, policy exclusions, and allocation between covered and uncovered claims.
  3. The Tender of Defense. Any potential claim brought against a business that might be insured should be tendered to the insurer as early as possible, because the insurer normally cannot be held responsible for coverage until it is asked to undertake the defense, and thus, depending on the state law applicable to the policy, it may not be responsible for defense costs incurred before tender.
  4. Allocation Re “Mixed” Claims. Where the underlying action for which an insured seeks insurance coverage contains both claims that fall within insurance coverage and other claims that are not covered, disputes sometimes arise between the insured and its insurer regarding whether an insurer can defend only those claims that it deems covered. Generally, in situations like this, the insurance carrier must provide a defense of the entire action—including potentially uncovered claims—as long as at least one claim raises the potential of insurance coverage. It is important to note, however, that certain insurance policies contain explicit allocation provisions, which may allow an insurer to argue that it can split defense costs. Moreover, certain jurisdictions allow an insurer to seek reimbursement for previously paid defense costs where it later determines that a claim is not covered.
  5. Exclusions and Conditions. Policies may contain exclusions that insurers could rely on to deny coverage for an insured’s claim. It is important to note, as an initial matter, whether the exclusions apply to defense costs or settlement or judgments (or both). For instance, a policy may exclude coverage for prior wrongful acts, or an insured’s prior knowledge of a potential wrongful act, both of which purport to exclude coverage for alleged conduct that predates the policy’s effective date.
  6. Impact of Choice of Law Provisions. Insurance law is established at the state level. Thus, the law applicable to your policy may vary. Certain policies contain explicit choice of law provisions that declare the law that will apply to any dispute regarding the terms or applicability of the policy. Where a policy is silent as to the applicable law, however, insureds must evaluate several factors, including the state where the contract was signed; the location of the insured and insurer; the location at which the injury, damage, or claim occurred; and where the insured risk is located. Sometimes, but not typically, the first to the courthouse will determine what state law applies.
  7. Lost Policies. What happens when you can’t find copies of your policies? Not all hope is lost. There are ways to establish the existence of lost policies and obtain coverage even if the actual policies cannot be found.
  8. Coverage for Corporate Successors. If a business has been involved in a merger of any kind, acquired any division, subsidiary, product line, or real property, it is imperative that they negotiate an insurance policy that covers these types of entities or add them by endorsement, because insurance policies may not be able to be assigned without insurer consent.

Plaintiffs’ Bar Hits A Wall When It Comes to “Access” Damages

Jorge Cruz-Bustillo | Chartwell Law

In Florida, for years, the plaintiffs’ bar has been filing first-party property law suits for ensuing water damages caused by the failure of cast-iron pipes. In those cases, in which there is no evidence of interior water damages, the plaintiffs’ bar has been claiming repair costs associated with “access” (i.e., tear out and replacement) through the flooring to repair a plumbing drain line. Of course, with this “access,” the plaintiffs’ bar seeks recovery for damages based on matching which could include continuous flooring, baseboards, drywall, painting, etc.

A typical homeowner’s insurance policy in Florida will have a “perils insured” provision similar to the following:

“We insure against risk of direct loss to property described in Coverages A and B only if that loss is a physical loss to property; however, we do not insure loss:***

2. caused by:***

h. (1) wear and tear . . . deterioration; ***

If any of these cause water damage not otherwise excluded, from a plumbing . . . system . .., we cover loss caused by the water including the cost of tearing out and replacing any part of a building necessary to repair the system or appliance. We do not cover loss to the system or appliance from which this water escaped.”

The last paragraph of the “perils insured” provision is referred to as the “ensuing loss” exception. This “ensuing loss” exception provides coverage for any resulting water damage caused by the discharge of water from a plumbing system or household appliance, that is not otherwise excluded under the policy. This “ensuing loss” exception also includes “the cost of tearing out and replacing any part of the building necessary to repair the system.”  The latter provision is known, in first-party property litigation, as “access.”  

In Homeowners Choice Property & Casualty v. Maspons, 211 So. 3d 1067,1069 (Fla. 3d DCA 2017) the Third District Court of Appeal clarified that a homeowner’s insurance policy does not cover “access” through the flooring unless the plaintiff can prove that there are ensuing water damages caused by a back-up covered under the Policy.

In Maspons, supra, the plaintiff furnished a video showing a “break” in the drain line. The insurance carrier retained a plumbing company that inspected and found a “large hole” in the drain line. The trial court entered summary judgment in favor of the insureds. Id. at 1068 (“Based upon this state of there cord, the trial court found there was no coverage under the insurance policy for the repair and replacement of the pipe, but that Homeowners Choice was responsible for the greater cost of tearing out and replacing the slab to make the repair.”)

The Third District reversed and remanded directing the trial court to enter summary judgment in favor of Homeowners Choice. Id. at 1070. The Third District held: “At the time of the summary judgment proceeding . . . There was no evidence that the water exiting the pipe had caused any damage to its surrounding.”  Id. Based on the plain language of the “perils insured” provision, the Third District concluded that ensuing water damages was a necessary condition precedent to coverage for “access” through the flooring (even though the camera inspection did in-fact show that the drain line was broken).

The Third District’s analysis is important for the defense bar to understand. Specifically, the Third District wrote: “Any analysis must begin with the language of the insurance contract.” Id. at 1069. “We give the undefined words of an insurance contract their ordinary meaning, just as we would with any other type of contract.” Id. “‘Direct’ and ‘physical’ modify loss and impose the requirement that the damage be actual.” Id. “Examining the plain language of the insurance policy in this case, it is clear that the failure[i.e. break and/or large hole identified in Maspons] of the drainpipe to perform its function constituted a ‘direct’ and ‘physical’ loss to the property within the meaning of the policy.” Id. The Third District continued:

“However, the last paragraph of the “perils insured” provision, often referred to the “ensuing loss” provision of the policy, cautions that we not prematurely abort our inquiry. That clause provides the homeowner with coverage for an‘ ensuing’ loss that is not specifically excluded. Thus, while the exclusion for“[w]ear and tear” or “deterioration” might mean, and this case does mean by virtue of the Maspons’ concession that Homeowners Choice is not obligated to compensate the Maspons for their corroded drain pipe, if the Maspons suffered consequential loss as a result of the corroded pipe and that consequential or “ensuing” loss is not excluded under another provision of the policy, the loss is covered.” (emphasis added) [citations omitted]. Id. at 1070.

“Happily, for us, we can quickly conclude the interpretative gymnastics in which we are engaged at this point.” Id. “There was no evidence that the water exiting the pipe had caused any damages to its surroundings.” Id. “Thus, the trial court erred by entering judgment against Homeowners Choice for the cost of the repair and replacement of the slab necessary to reach the broken pipe at this time.” Id. “For this reason, we reverse and remand this case for entry of judgment in favor of Homeowners Choice Insurance Company, but without prejudice to the Maspons filing another claim of loss at a later date, if appropriate.” Id.

In Maspons, ensuing water damages were covered. The Third District, however, found that there was no evidence of ensuing water damage. Since the necessary predicate condition precedent did not exist, the Third District directed the trial court to enter summary judgment in favor of Homeowners Choice. For those Florida policies which contain a “water back-up” exclusion, under Maspons “access ”damages would never be covered.

No Coverage for Collapse of Building

Tred R. Eyerly | Insurance Law Hawaii

    Damage to a building caused by the break of a water pipe was not a collapse under the policy. Naabani Twin Stars v. Travelers Cos., 2020 U.S. Dist. LEXIS 196443 (D. N. M. Oct. 22, 2020).

    An underground water line ruptured on plaintiffs property This caused a collapse under the adjacent parking lot, which in turn caused land beneath the building go change positions and damage the building. A geotechnical consultant concluded that a material change in the site conditions occurred as a direct result of the rupture of the water pipe in the parking lot, and that those changes directly affected the settlement of the building.

    Travelers denied coverage for the damage. Travelers concluded that the building settlement was the result of subsurface movement, which invoked the earth movement exclusion. Travelers inspection concluded that the building was not in a state of collapse. The policy defined collapse as “an abrupt falling down or caving in of a building or structure, or any part of a building or structure, with the result that the building, or part of the building, cannot be occupied for its intended purpose.”

    Plaintiff sued and Travelers moved for summary judgment. 

    The court found that the definition of “collapse” was clear and unambiguous. The court could not find any evidence to show that plaintiffs’ building suffered a “collapse” as defined by the policy. The damage to the building fell squarely within the definition’s exclusion, which did not cover standing buildings with “cracking, bulging, sagging, bending, leaning, settling, shrinkage, or expansion.” Plaintiff did not identify any evidence of the building “falling down or caving in.”  Instead, plaintiff contended the building was in danger of falling down or caving in. 

    Plaintiff also argued that the efficient proximate cause of the damage was the ruptured water pipe. But the policy’s anti-concurrent causation clause displaced any benefit Plaintiffs might receive from the efficient proximate cause doctrine. To find otherwise would be to rewrite the policy. 

    Finally, the earth movement exclusion was applicable. The provision barred coverage for “loss caused directly or indirectly by any earth movement, whether natural or man-made, including  . . . earth sinking, rising or shifting, including soil conditions which cause settling. . .” Here the evidence was clear that the damage was caused by shifting soil, itself caused by the underground water movement. 

    Travelers’ motion for summary judgment was granted.