These risk management and insurance mega trends in 2012 that are certain to affect the restoration business. In this article I will cover the top risks facing restoration firms and offer advice on how to counter the emerging mega trend.
Courts Confirm Fungus/Mold/Category 3 water/Bacteria Related Losses Are Not Covered In GL Policies
Since 2006 I have been warning restoration firms in multiple presentations and publications that the fungus/mold bacteria exclusions in the General Liability (GL) insurance policies have eliminated the core liability insurance coverage for restoration firms performing operations where a speck of mold or Category 3 water is involved.
From the knowledge I gained on water and mold losses as a member of the consensus drafting committees of both the IICRC S500 and S520 professional standards and guidelines for water and mold remediation combined with a masters degree in insurance and thirty years of experience insuring contractors, the huge coverage gap in the General Liability policy for any claim involving a speck of mold or Category 3 water was totally obvious to me. However, in spite of what I thought was a obvious insurance coverage design flaw for years, to this day 80% of restoration firms still purchase traditional GL insurance policies. Some restoration firms do not even purchase Contractors Pollution Liability (CPL) which has always seemed crazy to me in light of what they do for a living.
A recent insurance coverage court case in New Jersey involving a General Liability policy and a Contractors Pollution Liability confirms that what I have been warning about for years is accurate. I feel vindicated!
A New Jersey Court of appeals case settled in October 2011 confirms my message that:
- The GL policy is not adequate liability insurance on jobs involving mold or category 3 water;
- Specially modified Contractors Pollution Liability insurance is needed for any firm that may run into water, asbestos, or lead on a job or who may use a chemical treatment of any kind on a project, and
- The purchase of separate GL and CPL policies
should be avoided if at all possible. It is far better from a cost and claims
standpoint to have the GL and CPL insurance on the same policy form.
I found this case in Lexis, a data base used by legal
researchers. This is the first case I have seen in New Jersey where a court is
determining how the Fungus and Bacteria exclusion in General Liability policy
applies on a mold remediation job which also used a fungicide. I would be
quoting from the case here but at the top of the page of the document it says:
NOTICE: NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION.
I am not sure what that means but I am not going to get crosswise with a New Jersey court in finding out.
The takeaways from this case are: This was a $500,000 problem for the restorer; the case was actually brought by the CPL insurer of the franchisee to try to recover from the GL insurance policy which was issued by another insurance company not related to the company that issued the CPL policy. Because the loss involved mold and a fungicide the GL carrier successfully denied the original claim in court and through the appeals process. If the contractor was on their own fighting their General Liability insurance company for coverage in court, the firm would have needed enough cash to pay the $500,000 plus attorney fees for five years.
This case took five years to work through the courts, and the carrier denying the loss on the GL won. I am an expert witness on insurance coverage cases in federal and state courts. I have sat in depositions with teams of lawyers where the clock was ticking at $45 per minute in the room and we were not at the appeals court level. I know of very few restoration firms that make a profit at the rate of $45 per minute in order to pay for lawyers and experts.
The only good news for the restorer in the loss was the CPL policy paid the original claim that the GL carrier had denied. Some of the CPL policies sold to restoration firms today may not have paid the claim at all due to a series of common exclusions that would apply to facts on the loss. Because the GL and CPL were provided by separate insurance companies the original outcome could have been worse for the restorer with both the GL and CPL insurance company’s claims adjusters standing around saying “that’s not my job man” as each adjuster tried to push the claim onto the other adjusters policy. Potentially in this case the contractor could have ended up suing both the GL and CPL carriers for coverage paying out big dollars on per minute basis to sue two insurance companies.
There are common themes in GL coverage cases as they come out of the court system in various states:
- The insurance companies denying losses in the GL policy win, meaning the restoration firm is uninsured.
- The GL policies exclude more in the Fungus/Mold/Bacteria exclusions than any separately purchased CPL policy can insure.
- The work was performed many years ago and is just coming out of the court system now, which means the restorer was involved with legal costs for years. If the costs were higher the restorer could be bankrupt.
- The restoration firm purchased insurance that
takes judges and legal teams to figure out of there is coverage in the policy.
It floors me to read these cases; why would anybody purchase
a liability insurance policy that takes appellate level judges to figure out?
This is crazy!
The Mega TrendAs claims adjusters get schooled up from court cases on the far reaching effects of fungus/mold/bacteria exclusions expect more “water losses” to be declined on both property and liability insurance policies. Claims adjusters will find it more and more difficult to ignore the mold growing on the wall in the Category 3 water loss in the face of such restrictive case law. As a result I expect adjusters to increasingly deny claims under General Liability and Property policies if the loss is related to mold or Category 3 water.
The Counter PlayMake sure you have high-quality insurance coverage on your business with the GL and CPL in a single policy form where possible. Also make sure that you know if a property claims adjuster that is paying for your services on a job is going to limit the recoverable insurance on a water job due to a mold/Category 3 water/bacteria restriction in the policy. Avoid being over extended on work that is not covered in the property insurance policy, you may get left holding the bag.
The Hard Insurance MarketThe cost and availability of insurance varies over time based on the available capacity (money) in the insurance companies and their loss experience. Poor investment returns and the storms of 2011 have drained a lot of money out of the insurance companies. They need to charge more for their products and can be more picky about who they insure in the future. Increased costs and restricted availability of insurance is termed a hard insurance market by insurance practitioners.
Restorers are particularly vulnerable to a hard insurance market place because of the over 2,400 insurance companies in the United States, only seven companies issue the combined General Liability and Contractors Pollution policies needed to avoid the insurance coverage problems I mentioned above. Of particular interest, two of the companies that pioneered the use of combined GL/CPL policies on restoration firms are refusing to renew their policies on this class of business at any amount of premium in 2012. That is an ominous sign of things to come.
Restorers in New York are going to have severe insurance availability problems in 2012. We are cobbling together solutions for these firms in our insurance brokerage operations but it is amazing to me to see how fast the insurance market is drying up for New York- based contractors. Some of these firms will face more restrictive coverage at significantly increased costs.
The Mega TrendWe are witnessing the exit of top-rated insurance companies who pioneered insuring restoration contractors on high quality combined GL/CPL/Professional policies. Those exits combined with tighter underwriting requirements by the surviving underwriters have reduced the number of potential sellers of liability insurance to restoration firms by 25% in the past 18 months. So far the reduction in supply has not lead to increased premiums (yet). Still, plan for 8% rate increases on average in 2012, in stark contrast to the 20% rate decreases we have seen for the past 3 years.
The Counter PlayBe sure that you are insured by an insurance company that has restoration firms as a target class of business and who has been writing them for more than three years. These insurance companies are a lot less likely to decide to not write insurance on restoration firms in the near future.
The Growth in NetworksWhen insurance companies get squeezed on profits, like they have been for three years now, out sourcing non revenue generating functions can look pretty good. Claims departments are a cost center in an insurance company; reducing head count and costs are a constant pressure point with the carriers.
Restoration networks offer an excellent value proposition for the insurance companies; trained, experienced, certified and insured contractors who have been scrutinized by a formal evaluation process, ready to respond to a loss in a consistent manner, anywhere in the US in less than two hours. As a result of this exceptional value proposition for the cash-strapped insurance companies, some networks express their growth in double digit numbers on an annual basis.
Mega TrendThe growth in networks through master service agreements will continue. As a result, less and less claims work will be sourced locally through insurance agents. Working for networks increases the risk of restoration contractors because the insurance companies want to offload job performance risk along with the restoration work.
Counter PlayParticipating in networks is an efficient way to source jobs without taking on undue risk; there is no need to counter that aspect of networks. What participating firms need to keep in mind is the indemnity obligations under the network contracts and is how important it is to fully comply with the insurance specifications of the networks.
The insurance specifications of the network are usually crafted to assure the insurances purchased by the contractor match up to the indemnity obligations the restorer assumes when working in the network. Therefore paying close attention to actually having the specified insurance in place should avoid the situation where a contractor has to indemnify the network for a loss on a job, but does not have the proper insurance coverage in place to back up the indemnity obligation.
In addition to gaining a steady source of restoration jobs, a potential advantage to a network is they may have an insurance package available through a insurance vendor that has been specifically tailored to match the network’s insurance specifications.
More Pressure from Insurance Agents for Contractors to Buy Higher-Quality InsuranceInsurance agents can be sued by their customers for Professional Errors and Omissions if the agent sells inherently defective insurance policies that do not meet the insurance needs of the customer. To avoid professional liability for potentially uninsured losses agents can point out the coverage defects in the policies being proposed at the time of sale.
The smart agents are seeing the writing on the wall on mold/fungus/bacteria exclusions and are becoming increasingly nervous about potential coverage gaps in the policies they are selling. It makes them even more nervous when a firm does not purchase the insurance that the agent knows the firm needs. Lucky for the insurance agent in the first mega trend I discussed, the franchisor required in their insurance specifications that the GL and CPL policies had to be written on separate insurance policies.
Even if the insurance agent for the restorer had suspected a coverage design flaw in separately purchased GL and CPL policies, the agent still would have been forced to place in insurance program that met the specifications of the franchisor.
Mega TrendMore insurance agents will be asking for a letter holding them harmless if the restorer does not purchase the recommended coverage or demands the agent place an insurance design that is fundamentally flawed. The expert witness work of ARMR increased 400% in 2011, directly as a result of insurance agents leaving their customers bare for pollution/mold/fungus/Category 3 water/bacteria losses. Over time the insurance agents will gain understanding on their professional liability loss exposure in this area and will move to manage their risk.
Counter PlayIt is not a good idea to counter this trend in insurance agent professionalism. Contrary to popular belief most insurance agents are not there to sell you something. Most insurance agents genuinely care about you having the insurance you need. If your insurance agent has discovered a insurance design flaw in your insurance program that is so significant they want to be held harmless if you ignore their advice; what is unreasonable about that?
SummaryWe are moving into a hard insurance market place expected to see:
- More claims denials for losses associated with mold and Category 3 water.
- More non-renewals of insurance programs and increasing insurance costs.
- The networks market share of claims work will expand, be very careful to fully meet their insurance specifications, they are designed to prevent you from being uninsured on a claim that you have to indemnify the network on.
- Insurance agents will increasingly ask to be held harmless if you do follow their recommendations for needed coverage.