Special Insurance Needs For Cleaning, Drying and Restoration Contractors
January 12, 2011
In 2004 I predicted that the insurance needs of cleaning and restoration contractors would change dramatically if the insurance industry went ahead with their plans to universally exclude mold claims from the insurance policies of property owners, contractors and even insurance agent’s professional liability insurance policies.
Specifically what I predicted was:
- Insurance companies would force universal exclusion for mold into insurance policies.
- Insurance companies would avoid writing insurance on anybody involved with mold remediation.
- The environmental insurance market place would step in and insure cleaning and restoration contractors.
Here is how the insurance companies eliminated a lot of the standard liability insurance coverage for cleaning, drying and mold contractors by the introduction of one exclusionary endorsement targeting mold claims. Although the actual exclusions in insurance policies vary, a typical Fungus/Bacteria exclusion produced by the Insurance Services Offices for use in Commercial General Liability insurance policies will read:
This insurance does not apply to:
Fungi Or Bacteria
a. “Bodily injury” or “property damage” which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any “fungi” or bacteria on or within a building or structure, including its contents, regardless of whether any other cause, event, material or product contributed concurrently or in any sequence to such injury or damage.
b. Any loss, cost or expenses arising out of the abating, testing for, monitoring, cleaning up, removing, containing, treating, detoxifying, neutralizing, remediating or disposing of, or in any way responding to, or assessing the effects of, “fungi” or bacteria, by any insured or by any other person or entity.
What does this exclusion on the General Liability insurance really do to a contractor’s liability insurance policy? Well no body knows for sure because they are relatively new exclusions that have not been fully tested in civil court. In my informed opinion as an expert witness in multiple Federal courts on related topics, this exclusion eliminates a lot more insurance coverage than most people realize for any firm who works with cleaning bacteria, Category 3 water and/or mold.
Here is how the fungus/bacteria exclusion can take over an insurance policy anytime an insurance company wants to walk away from a loss. First, this exclusion is an endorsement to the policy, so it automatically overrides the other provisions in the insurance policy. Although commonly referred to in insurance circles as the “Mold” exclusion, the word after fungus in the exclusion (which includes mold in its definition) is “bacteria.” As written, the exclusion blows out the liability insurance coverage for both sources of contaminates if the liability claim against the insured party is even partially based on the threatened existence of these materials.
Anybody who is IICRC mold-certified knows that mold spores are omnipresent in the plant earth. The first part of the exclusion becomes effective at the threatened existence of something that is already at every job site, wow. Referring back to S500, the IICRC water damage restoration standard, by definition this exclusion would also apply to Category 3 water, which would then include work on backed-up sewers and floods, common work for all water remediators and a lot of cleaning contractors as well.
The phrase in section “a” of the exclusion that begins“…regardless of whether any other cause…..” was originally created for the flood exclusion in property insurance policies around 1983. In insurance lingo, that section of the fungus/bacteria exclusion is referred to as the anti concurrent causation section of the exclusion, although the words anti concurrent causation are not used in the verbiage.
This is the first time the anti concurrent causation clause has been used in the General Liability policy. Although the affects of these terms in a liability insurance policy is not well known at this time, the effect of the anti concurrent causation clause on property insurance policies is very well known.
As any contractor who is trying to collect for their work under a property policy knows, a flood exclusion on a property policy knocks out all the insurance coverage if a flood in any sequence of events caused even part of the loss. Now the same words are sitting in the General Liability insurance policy of every cleaning and restoration contractor in North America. Note there is no reference in the exclusion to how much or what type of fungus or bacteria needs to be threatening to exist before this exclusion takes over the entire insurance policy.
What this new exclusion does to virtually all General Liability insurance policies is to give the claims adjuster the ability to deny a liability loss that involves even a threatened speck of any type of fungus or bacteria as part of or in any sequence to the overall loss. As tough as the first part of the fungus /bacteria exclusion is, the second part of the exclusion, section “b,” is worse for cleaning and restoration contractors. With essentially any combination of events resulting in a claim that involves even a threatened speck of any type of fungus or bacteria being completely excluded from the policy, what would the purpose of section b of the ISO fungus/bacteria exclusion serve?
I can only think of one thing. This is the “you-cannot-be-in-the-water-restoration-mold-remediation-or-the-anti-microbial-cleaning-business” exclusion in the core business liability policy purchased by firms. Under the words in section b, the General Liability policy will become totally null and void once a contactor shows up at a job to “in any way access or respond to fungus or bacteria.”
The main difference between this part of the fungus bacteria exclusion and the first part is this section does not require exposure to or the threatened existence of the materials to take over the entire insurance policy including the insurance company’s duty to defend the insured. For example as soon as the contractor shows up at a job to access or respond to Category 3 water loss technically the GL policy is void when he or she walks in the door. If the contractor causes a fire on a Category 3 water loss, the fire would excluded by section b of the exclusion even if there was no exposure to fungus or bacteria. That is because it is the job itself, not just a loss resulting from exposure to the materials, that is excluded under section b of the fungus/bacteria exclusionary endorsement.
My crystal ball on prediction no. 2 was not as clear. Traditional insurance companies continue to insure cleaning and restoration firms, and why not sell insurance if you can charge top dollar on liability insurance policies with a “you cannot be in the business” exclusion? There has also not been much of a shift in the insurance buying habits of restoration contractors on their General Liability insurance policies in spite of the fungus/bacteria exclusions. Apparently, from the loss runs we review in our insurance brokerage operations, claims adjusters on liability claims against cleaning and restoration contractors are not reading their fungus and bacteria exclusions in reference to the IICRC S500 and S520 professional standards for water and mold remediation. As a result, many liability claims against contractors are being paid today under general liability insurance policies that are simply not covered because of the far reaching effects of fungus and bacteria exclusions.
It is only about a 20-minute project to connect the dots between the words in the fungus/bacteria exclusions and the words in the ANSI-accredited IICRC documents. With insurance company profits squeezed in 2010, eventually the claims adjusters will figure out how far reaching the fungus/bacteria exclusions in their policies really are. I do not expect the benevolent behavior of the insurance companies of not pulling the trigger on fungus / bacteria exclusions in General Liability insurance policies to continue.
Did prediction No. 3 from 2004 come true? That’s a definite yes; the environmental insurance market targeted restoration contractors for an area of growth in their product line. The number of sellers of Contractors Pollution Liability insurance has grown tenfold since 2004 and the price of insuring for mold, fungus , bacteria, lead, asbestos, anti-microbials and a wide range of other “pollutants’ has fallen tenfold as well in the same time period.
Although the quality of the CPL coverage varies a great deal in the various offerings in the market place, overall the CPL coverage sold today is better than the General Liability insurance being sold to water and restoration contractors. At least most CPL insurance policies do not have a “you cannot be in the business” exclusion.
The only way to correct the material coverage defect in the General Liability policies sold to cleaning and restoration contractors is to purchase a combined General Liability and Contractors Pollution Liability insurance policy from the environmental insurance market. (In the interest of full disclosure, let me tell you that I personally pioneered the adaptation of combined GL/CPL insurance policies, which were originally developed for nuclear weapons plant cleanup contractors for use in the cleaning and restoration business. My employer actively sells these policies, which are now offered by 10 different insurance companies. )
From reviewing hundreds of actual insurance policies sold to cleaning and restoration contractors, we know that 80% of all the cleaning and restoration contractors have fundamentally flawed liability insurance programs in place today. The coverage flaws are primarily because either the firm does not purchase CPL coverage, which is common with cleaning firms that mistakenly think the effects of fungus/mold exclusions are limited to mold contractors, or the contractor buys a separate CPL insurance policy and a separate GL policy.
In addition to wasting premium dollars in this inefficient design, the purchase of separate Contractors Pollution Liability insurance can never fill the gap in insurance coverage created by the “you cannot be in the business exclusion” in the General Liability policy.
Any insurance program on a cleaning and restoration firm that has these two vitally important liability insurance policy forms with separate insurance companies is fundamentally flawed in its design because of the irresolvable coverage gap between the GL and the CPL policy.
The combined GL/CPL policy forms sold to cleaning and restoration contractors are not standardized in the insurance industry, they are not reviewed and approved by insurance commissioners, and they vary a great deal in their quality.
To help insurance agents through the coverage morass in these unregulated policy forms, the Independent Agents of America has introduced a customized policy for cleaning and restoration firms. These insurance products are available in every state through any of their two hundred thousand member “Trusted Choice” agents in the United States over an Internet-based market access facility called Big I Markets. Contractors seeking a state-of-the-art solution for their liability insurance needs can now go to any independent insurance agent in the U.S. and access the customized insurance package that is essentially free of fundamental design flaws. Allstate insurance agents also have access to customized insurance programs for cleaning and restoration contractors but it requires a home office referral to access the product line. Good quality insurance for the cleaning and restoration business is readily available and accessible.
In summary, my predictions played out from the insurance company side. However, the cleaning and restoration contractors and the firms that employ them did not respond to the universal introduction of the “you cannot be in the business” exclusion in the way I had anticipated.
The current situation is actually irrational from a risk management stand point. Why bother purchasing or requiring a liability insurance policy that fundamentally excludes what the firm does for a living? Because the fungus and mold exclusion are so little understood by insurance practitioners relative to the work of cleaning and restoration contractors, we are stuck in this unfortunate state of affairs with cleaning and restoration contractors purchasing fundamentally flawed business liability insurance packages.