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.

Another Reminder that Contracts are Powerful in Virginia

Christopher G. Hill | Construction Law Musings

Regular readers of this construction law blog are likely tired of my refrain that the contract is king here in Virginia.  With few exceptions, some of which have been passed in the last few years, the contract can and does essentially set the “law” for the transaction.  A recent opinion from the 4th Circuit Court of Appeals confirms this principle.

In Bracey v. Lancaster Foods, LLC, the Court looked at the question as to whether parties can contractually limit the statute of limitations in which a plaintiff or arbitration claimant can file its claim for relief.  In Bracey, Michael Bracey, a truck driver, sued his former employer, Lancaster Foods, asserting various employment law claims. Lancaster moved to dismiss and compel arbitration based on the terms of an alternative dispute resolution agreement Bracey signed when he was hired, under which he consented to arbitration of any employment-related claim and waived all rights he may otherwise have had to a trial. Bracey challenged the arbitration clause, one that also included a 1-year limitation on the time in which Bracey was allowed to file any claim, as unconscionable.  A federal judge in Maryland agreed and granted the motion to dismiss.

After dispensing with some procedural formalities, the 4th Circuit agreed with the lower court stating:

[a]s a general rule, statutory limitations periods may be shortened by agreement, so long as the limitations period is not unreasonably short” and the statute at issue does not prohibit a shortened limitations period. In reaching this decision, we explained that “[c]ourts have frequently found contractual limitations periods of one year (or less) to be reasonable.

While Bracey argues that it would be difficult to exhaust his claims before the EEOC prior to making a demand for arbitration, it is not entirely clear that administrative exhaustion would even be required when the parties contractually agree to resolve employment disputes in arbitration.

In short, even in the instance where there could be other factors that would make the shortened limitations period a burden on a claimant, there is no categorical rule that states that a shorter limitations period is unconscionable when entered into by contract.

While this is not a construction case, it does highlight the need to carefully review your construction contracts with the help of an experienced Virginia construction attorney.  Absent a careful review and possible edit of the contract, you could be stuck with a limitations period shorter than that of the applicable statute.

As always, I recommend that you read the opinion in its entirety and draw your own conclusions.

Burden Supporting Termination for Default

Terminating a contractor for default is a “‘drastic sanction’ and ‘should be imposed (or sustained) only for good grounds and on solid evidence.’” Cherokee General Corp. v. U.S., 150 Fed.Cl. 270, 278 (Fed.Cl. 2020) (citation omitted).    This is true with any termination for default because terminating a contract for default is the harshest recourse that can be taken under a contract.  It is a caused-based termination.  For this reason, the party terminating a contract for default needs to be in a position to carry its burden supporting the evidentiary basis in exercising the default-based (or caused-based) termination.  Stated differently, the party terminating a contract for default needs to justify the reasonableness in terminating the contract for default.

A party looking to terminate a contract for default should smartly work with counsel to best position its justification in exercising the termination for default.  Likewise, a contractor terminated for default should immediately work with counsel to best position the unreasonableness or the lack of justification for the default-based termination.

The recent Court of Federal Claims opinion in Cherokee General Corp. contains a worthwhile discussion on termination of contracts for default in the federal government contracting arena (including the contractor’s argument that the termination for default should be converted into a termination for convenience).  As explained by the Cherokee General Corp. Court, a contracting officer is given broad discretion to terminate a contract for default. Cherokee General Corp., 150 Fed. Cl. at 277 (citation omitted).  This discretion may be overturned if the contracting officer’s decision to terminate the contract for default is “arbitrary, capricious, or an abuse of discretion.  Id. (citation omitted).  In support of this broad discretion, however, a court can “sustain a [contracting officer’s] default termination ‘for all of the reasons noted by the contracting officer at the time [of his/her default termination letter],’ or ‘for any additional valid reason [justifiable by the circumstances].’” Cherokee General Corp. at 280 (citation omitted).

A termination based on the contractor’s refusal or inability to perform the work with the necessary diligence is appropriate where the contracting officer reasonably believed that “there was ‘no reasonable likelihood that the [contractor] could perform the entire contract effort within the time remaining for contract performance.’ If, however, “[t]he delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor,” then “[t]he Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages.”  “Examples of such causes include (i) acts of God or of the public enemy, (ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers.” 

The government bears the initial burden of proving a contractor’s“demonstrated lack of diligence” which “indicat[ed] that [the government] could not be assured of timely completion. The “factors usually relied upon by courts and contract boards” to determine whether the government has met its burden include “a comparison of the percentage of work completed and the amount of time remaining under the contract; the contractor’s failure to meet progress milestones; problems with subcontractors and suppliers; the contractor’s financial situation; as well as a contractor’s performance history; and other pertinent circumstances.”  If the government meets its burden of proof, then the burden shifts to the contractorto show that its default was excusable

Cherokee General Corp., 150 Fed.Cl. at 278.

Mentioned above, but worthy of repeating, a party terminating another based on a contractual default needs to appreciate that it maintains a burden supporting the basis of the termination.   Ignoring this burden, or not appreciating the significance of this burden, can result in a party not being able to substantiate the reasonableness and justification for the termination for default.  Noteworthy, the discretion afforded a contracting officer under a federal government contract is not the same discretion afforded to every party under every contract.  Knowing this makes the appreciation of the burden supporting the basis of the termination for default a very important consideration.

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.

Improving Recovery on Delay and Impact Claims Using American Society of Civil Engineers’ Standard

Jason Ebe | Snell & Willmer

2020 is now behind us, and we have reason for a positive outlook for 2021. However, delays and impacts due to COVID-19 and other factors in 2020 will likely continue into 2021, and claims and disputes over relief will likely increase in 2021. A persuasive claim analysis and presentation and demonstration that if the parties cannot negotiate or mediate a reasonable resolution, and the claim must be arbitrated or litigated, you have a high likelihood of success may help maximize your ability to present and recover on your claim for relief. On the other hand, you may need to be able to successfully defend against such a claim.

The American Society of Civil Engineers has issued its draft Standard for Identifying, Quantifying, and Proving Loss of Productivity for second public comment in anticipation of publication in 2021. This standard was developed by a consensus standards development process, which has been accredited by the American National Standards Institute (ANSI). Accreditation by ANSI, a voluntary accreditation body representing public and private sector standards development organizations in the United States and abroad, signifies that the standards development process used by ASCE has met the ANSI requirements for openness, balance, consensus, and due process. The provisions of the standard are written in permissive language and, as such, offer the consultant/expert a series of options or instructions, but do not prescribe a specific course of action. Significant judgment is left to the consultant/expert. The authors note “The appropriate applications of these Principles are dependent upon and should be tailored to the available project management resources, date, and circumstances of a specific project.” Thus, the standard does not promote a one size fits all approach. Rather, larger and more sophisticated projects may require more sophisticated processes and techniques, whereas smaller, shorter duration projects may be better suited for simpler processes that may be less precise, but more cost efficient for the amounts in dispute.

The standard includes best practice guidance on collecting and storing productivity data and tips for identifying, reporting and mitigating productivity loss. With respect to damage calculation methods, the standard addresses the common methods of measured mile, modified total cost and total cost. Interestingly, the draft for second public comment proposes a strikethrough of the traditional preferred damage quantification method of actual discrete costs, so we’ll have to wait and see how that is addressed in the final publication. Regardless, many courts and arbitrators continue to recognize that damages based upon actual discrete costs tend to be the most persuasive. The standard also includes in an appendix a hypothetical project with examples of application of different loss of productivity quantification methods to an impacted project. Also included is a bibliography of relevant publications on measured mile; total costs and modified total cost; changes, rework, change orders and cumulative impact; specialized studies related to weather and seasonal factors; learning curve, overtime, project characteristics and management factors; congestion, trade stacking, crew size and delayed delivery; acceleration, delay and disruption; and shift work, poor management and estimating guides. The bibliography alone is a useful research tool for performing due diligence and analyzing the testimony of your consultant/expert or the opposing consultant/expert.

Based on the foregoing, this standard may provide a useful tool for you and your consultant/expert in analyzing and presenting a persuasive claim for recovery of relief for delay and impacts due to COVID-19 and other factors. Conversely, if you are in the position of having to defend against such a claim, this standard may similarly benefit you and your consultant/expert in analyzing and defending a claim that has not been prepared using appropriate practices.