What is a liability money trap? For what I am addressing here, it is a set of facts and circumstances that can lead to potential liability issues for restoration firms. Facts and circumstances have already set the trap for the unaware; below is some advice on how to not into the traps.
Insurance brokers who specialize in insuring restoration firms are in a unique position to identify future industry trends. In the insurance application process, we get to see the business forecasts for the upcoming year for firms in the restoration business from across the country. We also see the insurance claims themselves, which allows us to see trends in liability arising from the work performed by restorers. Often, the work leading to the claims was completed many years prior.
In developing new insurance products, which we had to do at ARMR to address COVID-19 as a new risk to insure in 2020, the research and development process for new insurance products alerts us to emerging trends in liability.
The insurance consulting side of our business gives us unique insights into common coverage mistakes in policies to restoration firms working for insurance consulting clients who hold direct repair master services agreements with insurance companies.
From this perspective, here are the top money traps I see set for 2021.
1. Bogus insurance certificates
This one is crazy and easy to avoid. I write about this trap often in the pages of R&R and have done so for years. So far, there has been little to no effect on the number of bogus insurance certificates ARMR reviews on an annual basis. Nine out of 10 of the insurance certificates we review are not a true representation of the insurance coverage in place. It has been that way for many years; it is not a new situation and will not improve unless owners pay attention to this trap.
What happens to set this trap is a well-intentioned, but naïve insurance agent issues an insurance certificate that perfectly complies with the mandatory insurance certificate language required in a contract. However, the actual coverage in the insurance policy does not match the coverage the certificate of insurance says you have. With the bogus insurance certificate on file, your customer allows you to work. Everything will move along fine until there is a claim involving that customer and your liability insurance does not apply to your customer, which was a requirement in the contract you signed with them.
A good set of insurance requirements in a contract will be designed to make it hard for you to be fundamentally uninsured for the indemnity obligations you undertake in performing your work. Insurance certificates do nothing to change the coverage in an insurance policy. When an insurance certificate says you have coverage you do not have, you are still on the hook for uncovered claims regardless of what the certificate of insurance says.
Bottom line: when your insurance does not meet the insurance specification in a contract and a bogus insurance certificate has been issued enabling you to work under a typical direct repair master services contract, you just personally became an insurance company for the insurance company that is paying your bill as a claim on the property owner's policy and the direct repair network.
We had to work through an issue this year where the claim against the holder of the master services contract was $3 million. The contractor who was responsible for the loss in the first place did not have adequate insurance to indemnify the holder of the master services agreement. Insured or not, that contractor needed to come up with $3 million to reimburse the holder.
On an annual basis, ARMR, as part of our insurance consulting business, reviews hundreds of actual insurance policies sold to restoration firms. Only 6% of the policies meet the common insurance requirements found in the master services agreements with insurance companies. That 6% includes the policies ARMR sells. If you take those out, the failure rate of insurance agents to meet the common insurance requirements in direct repair master services contracts is about 49 out of 50.
The most common error is that the liability insurance policy only makes your clients (the holders of master services contract in this example) an additional insured, for the work you perform for them, at their location.
Bottom line: when you get a work order from a holder of a master services agreement, you are not performing work for that company and you are not working at their office. You are working for a property owner at the insured property that had a covered loss. Turns out that situation is common in master services contracts, and creates a big insurance coverage problem with blanket additional insured coverage extensions in general liability and contractor pollution liability policies. Both of these policies normally require you to be performing operations for the party that wants to be an additional insured, and for you to be working in that party’s building. That is never the fact situation when you work under a master services agreement with insurance company.
What is so crazy about the above situation is the insurance needed to fix the coverage glitch is free under liability policies that insure you for what you do for a living.
However, policies that have this coverage glitch likely have some other significant coverage glitches as well (see #2 below).
- Find your General Liability Policy and Contractors Pollution Liability policy.
- Find the section applying to Additional Insureds.
- If you see the words “Blanket Additional Insureds”, you need to look for the words mentioning “performing operations for the Additional Insured, at the location of the Additional Insured”.
- There are ways to override those coverage glitches by utilizing alternative additional insured coverage extensions. These are usually cost-free if the correcting endorsements to the policy are requested before the policy takes effect.
The solution is to find insurance that does not require you to be performing operations for the party that wants to be an additional insured. The needed insurance coverage is readily available and has been since 2013.
Why is there a 90% plus failure rate on getting the needed coverage? Three possible reasons:
- The restorer does not get the entire set of insurance requirements to the insurance agent.
- The insurance agent does not recognize the importance of the instructions in the insurance requirements.
- The agent has sales goals that must be achieved with the insurance companies that mess up the additional insured requirements in master services agreements, and therefore just ignore the entire coverage problem and trap that doing so sets.
There are multimillion-dollar claims being paid in this area. It is not a little trap; not getting the additional insured status for the holders of direct repair master services agreement is a bear trap with teeth.
2. Buying inherently defective General Liability insurance
Why would anybody in the restoration business buy an insurance policy that excludes all claims arising from a mold or category 3 water job? It is impossible for a restoration firm to avoid all projects with a speck of either of these materials. This money trap is easy to avoid with General Liability insurance that is designed to insure a restoration firm specifically.
Again, based on hundreds of insurance certificate reviews performed by ARMR, 70% of all restorers are sold GL insurance policies with this insurance coverage trap. The problem lies in GL policies that contain a fungi or bacteria exclusion. They all do, with the single exception of the insurance policies built specifically for restoration firms that combine GL insurance with contractors pollution liability into a single package policy.
The fungi and bacteria exclusion contains two parts. The first part can be insured through a good quality contractors pollution liability policy, specifically providing coverage for the work performed under IICRC guidelines. But the second part of the fungi or bacteria exclusion in GL policies applies to a loss arising from a job site where a speck of mold or category 3 water needs to be cleaned up. The exclusion applies to all the coverages in the GL policy and the resulting insurance coverage glitch cannot be fixed through the purchase of contractors pollution coverage.
If you have a separate GL policy from the contractors pollution liability policy, you have the jobsite exclusion in the form of a fungi or bacteria exclusion buried in the policy somewhere, no doubt about it.
- Have your insurance agent remove the jobsite exclusion part of the fungi bacteria exclusion in your GL insurance policy. (It is the second part of the most common fungi or bacteria exclusion)
- Switch your liability insurance policy to a combined GL+CPL+professional liability policy that does not exclude all loss from a jobsite involving cleaning up or assessing a speck of mold or a drop of category 3 water.
These combined policies have been available for 17 years from specialty wholesale insurance brokers like ARMR. Although self-help fix #1 above will work in theory, I have never seen it accomplished a single time in 17 years. But your situation may be different.
3. Illegal application of antimicrobials
This is an emerging risk arising from the common practice of applying antimicrobials to jobsites. EPA-approved antimicrobials are regulated by the EPA as pesticides. Applying antimicrobials by spraying them indoors has gone on for decades. Most do no harm and that is a good thing. The antimicrobials are not reliably effective when applied in the methods commonly used to sanitize buildings today. In my years sitting on IICRC census drafting committees, I often hear the words “spray and pray”, as in spray it on an pray it works. Until March 2020, “spray and pray” was used within the context of mold remediation.
COVID-19 has made the practice of spraying antimicrobials indoors a lot more common. Sixteen states require the applicators of antimicrobial materials to hold a pesticide applicator's license. Applying regulated antimicrobials in those states without a license is illegal. More states are likely to create the same regulations. The deaths associated with COVID-19 makes the conversation of illegal application of antimicrobials a lot more important than it once was.
There are at least two problems with engaging in the practice of applying antimicrobials without a license:
- Insurance companies cannot pay for work that is illegal. You may find your invoice reduced for the antimicrobial-related charges in the 16 states if you do not have the needed licensing.
- Performing illegal operations in the application of antimicrobials makes it easier for plaintiff lawyers to prove that you were negligent if your work damaged property or a person. (Think a claim alleging you were the cause of a wrongful death from COVID-19.)
This one is simple. If you are applying antimicrobials, find out if you need a license in your state. You can call the State Department of Agriculture or go to the costagroupeducation.com.
4. Applying antimicrobials in ways not addressed in label directions
This is another emerging liability trap. The product label of EPA-approved antimicrobials will have very specific instructions for the approved use. This includes application methods to be used and the required wet dwell time for the product to be effective. The EPA- approved antimicrobial labels will also contain this warning:
DIRECTIONS FOR USE
It is a violation of Federal Law to use this product in a manner inconsistent with its labeling.
This trap concerns me because so many restorers are applying antimicrobials in ways that directly go against the label directions. In these situations, it will be easy for plaintiff’s lawyer to show the application of antimicrobials was performed in a negligent manner. The fact that these practices are widespread increases the likelihood of class action lawsuits against all users of a particular product applied in a particular way.
A case in point. The label of a widely-used antimicrobial product says it is effective as a viricide when sprayed on a hard surface at a distance of 6 to 8 inches and allowed a wet dwell time of at least three minutes.
The supplier of that material also sells electrostatic sprayers. In the marketing materials for the company’s sprayers, it instructs users to spray the antimicrobials 2 to 4 feet from the surfaces being treated. The company lists touchless work and being able to use less antimicrobial material as features and benefits. Nowhere does it mention the importance of wet dwell time, likely because there is no wet dwell time with light applications of the material 2 to 4 feet away. In this real-life example, the recommended method of application from the manufacturer is in direct conflict with the product label of the antimicrobial.
- Follow the EPA-approved label instructions for antimicrobials.
- Use antimicrobials not regulated as a pesticide for bioremediations.
- Pay attention to the services you advertise on your website and marketing materials. Some well-informed insurance companies have rules against insuring firms in the business of illegally applying antimicrobial pesticides. Not being insurable is a trap no one wants to step into. That is a game-over scenario.
There are other money traps for restorers to step into, but they are not as widespread as these four. The money traps are easy to see and avoid if you are looking for them. The bogus insurance certificates and no liability insurance at jobsites involving cleaning up a speck of mold or bacteria (including category 3 water) are traps your insurance agent will need fix for you. The other two, not being licensed a pesticide applicator where a license is needed and the application of antimicrobials that is “a violation of federal law” are directly within your control.