Part One: Fixing Gaps in Your Liability Insurance Policies
9 out of 10 restoration companies have policies with a fatal flaw
Your insurance agent has very likely set you up to be in breach of contract and to be the insurance company for a really big insurance company on the work you do under master services agreements.
This two-part series will outline first what the problem is and how it happens, then how to easily fix the problem.
Purchase business liability insurance policies that do not set you up for failure. The good news is, by following the advice provided below, it is a pretty simple problem to fix and it usually costs nothing for a restoration firm to implement the solution to the problem.
We review over a thousand insurance certificates that fire and water restoration firms provide to our insurance consulting services clients every year. It is amazing to see how many mistakes insurance agents make in serving the insurance needs of restoration contractors. The mistakes really show up on the certificates of insurance provided in order for a contractor to work under a master services agreement with an insurance company.
No insurance agent in the country would set you up to be an insurance company for an insurance company on purpose. Insurance agents do the best job they know how to do for their customers every day, but the truth is sometimes they simply don’t know how to do the right thing, especially on certificates when a contractor is performing services under a master services agreement.
In a recent compliance audit of more than 100 liability insurance policies, American Risk Management Resources Network, LLC., compared the coverage in actual insurance policies to coverages specified in a master services contract with a major provider of homeowners insurance to perform fire and water restoration services for the policy holders of the insurance company. We then compared the insurance coverage in the actual insurance policy to the insurance coverages as represented on the certificate of insurance. This particular master service agreement had a specific template for the certificate of insurance which had to be completed verbatim by the insurance agent in order for the contractor to be eligible to provide services to the customers of the insurance company.
One-hundred percent of the firms we studied had provided a perfectly compliant certificate of insurance to the holder of the master services contract as a prerequisite to performing services under the contract. However, in an audit of this type, there should be 100 percent agreement between the insurance required in the contract, the insurance policy as issued and the insurances as represented on the certificate of insurance. This was not the case. More than 90 percent of the insurance policies sold did not meet the insurance specifications in the master services agreement.
None of the defective insurance policies were flagged as problematic by the certificate holder because the certificates of insurance represented that all of the needed coverages under the master services agreement contract were in place. Bottom line: we were reading 90 bogus insurance certificates. The insurance certificates were representing insurance coverage not in the insurance policies.
Although the insurance coverage errors varied between 12 common coverage glitches, the most common error made by insurance agents was to represent parties as specified additional insureds who were in fact not covered by the contractor’s insurance policies in any way.
It is important to note that insurance certificates do nothing to alter the actual insurance coverage provided in the insurance policy. The actual insurance policy always determines the coverage provided. Therefore, simply showing a party is an “additional insured” on a certificate of insurance does not actually make the party on the insurance policy.
When an insurance agent makes a mistake by misrepresenting the insurance you purchased on the insurance certificate, why is that your problem? You got the job, life is good, right? Not really.
When you work for someone who actually has insurance specifications in their contract with you, that customer will almost always make you indemnify them for any damages they may incur arising from the work you perform under the contract. Your indemnity obligation to your customer is referred to as contractual liability in the insurance business. A good quality general liability insurance policy will normally insure those indemnity obligations for you through a combination of contractual liability coverage and an additional insured endorsement to the policy.
It is important to note that your duty to indemnify and hold harmless your customer under the contract is almost never limited to the insurances you purchase. You will have to indemnify and hold your customer harmless whether you have the insurance in place to back your indemnity obligations or not. Another way to look at this situation is if you have the right insurance, your insurance company will back your indemnity obligations. However, if you have glitches in your insurance, you in effect become the insurance company for your customers under your indemnity obligations in the master services agreement. Nine out of ten restoration firms working under master services agreements are in this situation today.
I guarantee you do not have a single client who wants to depend on you to personally be their insurance company to protect them from losses arising from your operations. That is why the more sophisticated customers you work for will have very specific insurance requirements for you to fulfill in their procurement contract. Your customers will typically want to be an additional insured under your liability insurance policies and will require that your insurance policy pay first (primary) before your customer’s liability insurance policy has to pay a dime. It is also very common for your customers to require that their liability insurance company will not have to help pay the claim that you caused (non-contributory) and that your insurance company will not turn around and claim the insurance company that signed you up under their master services agreement caused the loss in the first place and that your insurance company deserves to be paid back (waiver subrogation).
The good news is with the exception of additional insured status for work performed under master services agreements, off the shelf general liability and contractors environmental liability insurance policies work pretty well to insure contractual liability. But, mess up on the additional insured piece and everything else falls apart. The certificate of insurance simply tells the certificate holder you have purchased the insurance policies shown on the certificate but reveals nothing about if the insurances actually meet contract specifications.
Master service agreements are very unusual contracting arrangements that run counter to the normal practices in the insurance industry on additional insured endorsements. You may not be actually performing work for the parties you need to indemnify under these contracts. Almost all additional insured endorsements require the insured (you) is performing operations under a written contract with the party seeking to be an additional insured. In a typical master services agreement job, you are actually performing operations for the property owner, not the parties that signed you up for the master services agreement. If the additional insured endorsement on your policy is dependent upon you actually performing work or having a written contract with the party needing to be on the policy, you are in trouble when you perform a job under a master services agreement and represented to the parties granting and managing the master services contract work that those parties will be additional insureds under your insurance policies.
In August, I’ll give you an example that illustrates this very common and easy to understand problem with the insurance coverage provided by a typical automatic additional insured endorsement on a general liability policy sold to a restoration contractor. Plus, detail how to easily fix your coverage problems.