ISO PRODUCTS/COMPLETED OPERATIONS LIABILITY COVERAGE FORMS UNDERWRITING CONSIDERATIONS
(July 2024)
INTRODUCTION
Underwriting products/completed operations liability exposures begins with a review of the Insurance Services Office (ISO) Products/Completed Operations Coverage Forms. This review is then followed by identifying and evaluating exposures and hazards.
Related Article: ISO Products/Completed Operations Liability Coverage Forms Analysis
COVERAGE
When more than one entity appears on a declarations, it’s important to determine what each named insured does and their relationships. If an entity is not related to or legally combinable with the covered business, it should be insured separately.
Because each named insured is treated as if covered separately, each has its own Who Is an Insured provision. If an entity is an individual, the provision for individuals as insureds applies. If one is a partnership, the provision for partnerships as insureds applies. These distinctions are very important when an individual is included as an insured on a coverage form issued to a corporation. In that case, the individual is covered, not only with respect to the business of the corporation, but also for any of his or her owned sole proprietorship business operations. In addition, the individual's spouse is also included as an insured for the business operations of that sole proprietorship.
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Example: An underwriter reviews the application for products completed/operations liability coverage on Kindleton Manufacturing LLC and Marvin Kindleton. Referring to the "Who Is An Insured" section in the coverage form, each of the following is an insured:
There is no requirement that Marvin Kindleton’s activities be related to Kindleton Manufacturing LLC in any way. |
The next underwriting step is determining what the named insured does that could result in a covered loss. The insuring agreement only requires that the insured be legally obligated to pay damages for injury to others or damage to their property included within the products-completed operations hazard covered by the insurance. Because of this, every product manufactured and completed operation exposure for each named insured must be determined, described, and evaluated to be certain that each represents acceptable exposures to the insurance company providing coverage.
At this point in the process, a standard application or general questionnaire may be insufficient. A products and completed operations risk survey specific to the operations is helpful. Other documents useful to fully develop the complete identity of a business or operation include its annual financial report, profit and loss statements, balance sheets and other financial records. Keeping track of the business's finances represents a risk management approach to asset protection.
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Example: Building on the example above, Kindleton Manufacturing LLC makes a variety of metal products used in the home building industry. Marvin Kindleton individually is a custom homebuilder. Marvin and his wife also make and sell children’s jewelry from their home. The metal parts manufacturing exposure includes a homebuilder, jewelry manufacturer and jewelry dealer. These additional operations must be investigated and evaluated more thoroughly. In this case, simply adding Marvin Kindleton individually without asking any further questions would have led to missing important exposures. |
Once the nature and extent of all business operations are determined, the process of identifying hazards begins. The first step in the process is completely listing and describing all current products being manufactured and ongoing projects. The next step is to do the same for discontinued products and completed projects for the past five to 10 years, depending on the products or projects involved. This should include an explanation of why the products were discontinued. If some completed projects were of a different type than those currently being worked on, an explanation is in order, including whether the insured may resume them in the future.
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Example: Kindleton Manufacturing LLC bid on a contract to supply structural beams for railroad cars. It was awarded the contract and produced the beams for the three-year length of the contract. The contract ended one year prior to the requested policy period and the cars are expected to last at least 20 years. Kindleton does not plan to manufacture structural beams again but will have a discontinued products exposure until those railroad cars are no longer in service. |
The next step is to evaluate the type of damage that could occur if a product or completed operation fails. If this cannot be done, the named insured must provide more detailed information on product functionality and/or project objectives. A good reference tool is the website for the industry group the named insured belongs to.
Individual claim information is essential. At least five years of such information is required but 10 or more years of information may be needed for high hazard products and completed operations.
P/CO coverage is broad and applies anywhere, subject only to the coverage territory as defined. Locations do not appear on the application. Coverage automatically applies if the named insured begins manufacturing a new product or starts a new operation. As a result, it is extremely important to receive updated information at least annually. This gives and insurer the opportunity to review new products and operations so they may be appropriately underwritten and priced.
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Example: Kindleton Manufacturing accepts a contract to
manufacture fan blades that are placed inside computer servers to aid in
cooling the equipment. This contract is accepted after coverage is in effect.
Without a limitation on the policy, this product is covered. |
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If the named insured routinely produces new products, some insurance companies may endorse the policy to limit coverage to only certain specified or identified products and/or operations. This forces the named insured to report any new products or projects before coverage is provided. Such restrictions may benefit the insurer but impose hardships on the named insured. The producer involved in placing the business could be trapped in the middle and must ensure that clear lines of communication are maintained at all times and that all decisions made are well documented.
EVALUATING LOSS HISTORY
Evaluating loss history requires adequate information on previous losses. Loss runs should have a reasonably current valuation date and include between five and 10 full years of experience in addition to the current year. The minimum information are loss dates, descriptions, whether the loss is closed or open, and the amount paid or the current reserve amount. While reserve information is helpful, most insurance companies are reluctant to provide it. Reserves are a carrier’s estimate of a claim’s value based on available information. This information could change dramatically as discovery progresses. The reserve value is confidential because, if released, it could weaken a carrier’s ability to negotiate an equitable settlement.
FREQUENCY
Small losses that occur frequently may not result in an unacceptable loss ratio but may indicate unresolved problems. Small property damage claims suggest a quality problem or lack of attention to detail that could reflect a morale hazard on the part of the insured. The key to evaluating a series of small losses is determining if an adverse pattern exists that can be evaluated and corrected.
Claims handling costs for both the insurance company and the insurance agency on frequent small losses are in addition to the amounts paid on the actual losses. An overall loss ratio may become unacceptable when the claims handling costs are included.
Liability deductibles may solve some problems but conceal more serious ones. Deductibles should be used cautiously and only after the cause of the frequency is thoroughly evaluated.
SEVERITY
Large or severe losses may be incorrectly dismissed as flukes, aberrations, or exceptions. In fact, a significant loss that happens once can happen again unless and until appropriate steps are taken to prevent it. The details of how a loss occurred and the changes made afterwards to keep it from happening again are important. The actions taken may determine if the risk is acceptable and if coverage can continue to be provided. Thorough post-loss evaluations are important. Risk mitigation occurs only when all issues, circumstances and processes related to the loss are studied, understood, and acted upon.
PRICING
Pricing an exposure should not occur until and unless it is acceptable to the underwriter who must then determine the correct classification and any (a) rate loss costs that might apply to it. These steps are fundamental for any premium calculation. An error at the beginning of the process results in an incorrectly priced risk.
The underwriter must review manual premium calculations to determine that they are complete and accurate. Using judgment underwriting factors in the insurance company’s schedule rating plans, the underwriter then applies additional pricing credits or debits based on the individual risk's characteristics. The only factors that may be considered are those that can be determined and evaluated but that are not otherwise included in the basic loss costs.
Related Article: ISO Products Completed/Operations Liability Coverage Forms Rating Considerations
POLICY CHANGES
Endorsement requests bear scrutiny. A name change could indicate an ownership change that could affect the future conduct of the business operations. An address change might involve a completely new product line. Unusual language requested in certificates of insurance should trigger inquiries concerning changes in the products or projects pursued by the insured. Frequent change requests suggest possible altered or emerging exposures that should be thoroughly evaluated.