In August, I covered the risk picture for the restoration business with a summary of the COVID-19 risks. The bottom line is things are a lot better than they appeared they were going to be a year ago. Here I will discuss the insurance picture for restorers’ business insurance over the next 12 months and suggest some adaptations to address impending changes in that risk picture.
Liability insurance rates are going up about 6% on average, a little less than last year.
The business insurance marketplace for restoration firms with insurance companies targeting restoration contractors as desirable business continues churn. As some insurance companies crash and burn with net losses resulting from charging premiums insufficient to cover their losses, others see the greener grass on the other side of the fence and jump into the insurance marketplace for restorers.
There are good and bad aspects of that churning. Continuity in insurance coverage is highly desirable when the exact time and date of loss cannot be easily determined, like a mold-related loss in an interior wall because of a drywall screw. There is no continuity in the insurance program when a firm is insured by insurance companies that are jumping into and out of a target market. On the other hand, the steady inflow of new, relatively naïve, insurance companies does keep access to insurance good for restoration firms. There will be good access to relatively inexpensive liability insurance in the foreseeable future for restores.
But most firms are not “average.” The 6% rate increase does not apply to firms offing build-back services. Depending on what the rate increase was in 2020, it could be more than 6% in 2021 as the informed carrier re-underwrites their book of business. It turns out build-back restoration contractors were being rated by the insurance underwriters as “janitorial firms” for years. Most of the liability claims in number and the most expensive claims in fire and water damage restoration work come from build-back work. Janitors have industry standard insurance rates that are one-third as much as remodeling contractors. Roofers’ insurance rates are seven times those of a janitorial firm. As would be expected, the insurance companies that were charging one-third to one-seventh as much as they needed to pay for the losses under the General liability policies they sold to restoration contractors crashed and burned with losses exceeding the premiums charged. This explains why four out of the five insurance companies that targeted insuring restoration companies in 2016 no longer sell insurance to restoration firms.
Insurance bargains are still available to restorers. A few new insurers have entered the restoration business as a target class of business and seem to be making the same rating mistakes that others made in the past, which will seal their fate in a year or two.
The most expensive claims in restoration arise from the work of a build-back subcontractor to the restorer. Far too often, the subcontractor does not have adequate liability insurance to protect both them and the restorer acting as a general contractor. The solution to that problem is a tight subcontractor agreement that contains an indemnity agreement and a modern set of insurance requirements.
A new trend in 2021, apparently set off by COVID-19 risk concerns, and a trend that is expected to continue: the insurance companies that are selling General liability insurance policies with glitchy coverage on mold and bacteria job sites are getting out of the fire and water damage contractor business sector. If your General liability policy is not already in a modern package policy with the CPL today, this trend may adversely affect you. Work with your insurance agent at least 60 days prior to your insurance renewal date to make sure you have access to insurance on your company. If your insurance agent needs help finding you insurance, please have them call ARMR, as a wholesale insurance broker we insure 1500 fire and water restoration firms through local insurance agents. We are always on top of insurance industry trends in the restoration space.
The average loss in fire and water restoration work remained constant in 2020, between $50,000 and $100,000. However, due to “social inflation” which is a term being used a lot these days in insurance circles, there is an increasing number of large losses and that is driving up insurance rates. Social inflation refers to the phenomenon where a jury awards really big amounts of money to an injured party. In the past couple of years, we have seen two liability claims exceeding $8,000,000 each on roofers working as a subcontractor to a restoration firm and an auto claim on a restorer that involved bumping a moped into oncoming traffic awarded at $3,000,000 in damages to the rider of the moped. Four years ago, I could not find a claim on a restoration firm over $1,000,000. Those three claims were on ARMR customers.
In 2021 there continues to be an extremely high failure to meet the insurance specifications in direct-repair networks (80%-plus). This is not good for you if you are in the 80%. It is not good for the direct-repair networks or their clients either. It is not a new problem, but it is not getting any better. If you work in a direct-repair network, it is in your best interest to make sure your insurance meets the insurance requirements in the contract. Partially due to social inflation, the amounts of the indemnity claims being made from the network or by its insurance company customers against the very few contractors that actually get sued for damages arising from their work are getting more expensive in recent years. One claim I know of against a contractor in a direct-repair program was for $3,000,000 in damages.
The astute reader looking at the non-compliance numbers and knowing how persnickety direct-repair networks can be on prescribed insurance certificates will be asking, “How can it possibly be that a direct-repair network would allow 80%-plus of its contractors to operate without insurance that meets the insurance specifications in the contract?” The answer is simple: The insurance agents issue certificates of insurance that represent that all the needed coverage is in place to meet the insurance specifications. It is impossible for anyone to know from reading an insurance certificate what the actual insurance coverage in the policies is. But we know in ARMR – from reading thousands of insurance policies sold to restorers over the years — that insurance agents get it wrong between the actual coverage in the policy and what the certificate of insurance represents as covered more than 80% of the time in practice.
Some direct-repair networks are trying to clamp down on noncompliant insurance by hiring professional insurance certificate review firms. The direct-repair networks do not want the contractors in their network to be uninsured. A lot of contractors who work in direct-repair networks forget this fact of life: With or without insurance to back you up, you will have to pay for the damages you cause at a job site and pay to defend the network and the network’s clients (the property owner’s insurance company) if they get sued for something you did, or if you cost the insurance company more than it would have otherwise needed to pay to settle a claim from their customer. There is no upper limit on the amount you are responsible to pay for and your responsibility to pay is not dependent upon the insurance coverage you buy. That is just how the contact you signed works; it is not a new situation in 2021. The good news is functional insurance is available for this contractual liability risk and it costs the same as non-functional insurance.
The constraint in the insurance marketplace leading to the high non-compliance rate is not the availability or cost of functional insurance; it is the insurance agents. The 60% of agents that are confused about the job site exclusion for fungi or bacteria clean-up work in mono-line general liability insurance policies are usually the same insurance agents that do not understand the insurance requirements of direct-repair contractor networks. In defense of the insurance agents, many agents say they never were given the full set of insurance requirements in the contract, and the insurance requirements in direct-repair networks are not an easy subject to understand. In some ways the insurance requirements, which must accommodate the needs of the insurance companies serviced by the direct-repair network, go against what the agents have been taught in insurance classes.
I speak with insurance agents every day. All but two of those agents in the past 17 years have had the best interests of the customer in mind and wanted to get functional insurance into place on their clients in the restoration business. Only two insurance agents, when presented with the facts on the insurance requirements of a direct-repair network, were willing to lie on an insurance certificate so they could meet the agency’s sales goals with an insurance company. They left their customer exposed to the indemnity obligations in the direct-repair network contract without insurance to back it up in the process. The other insurance agents in the 80%-plus failure to meet the insurance specifications in a direct-repair network are just naïve, almost all with the best intentions for their customer. How do you fix this situation? Tell your insurance agent to find liability insurance that specifically meets the insurance requirements of direct-repair networks. Those purpose-designed insurance packages are readily available.
My Risk Management Forecast for the Next 12 Months
- Restoration firms will have good access to high-quality business insurance at 6% rate increases on average.
- COVID-19 should focus the attention of the professional risk managers responsible for commercial buildings on the differences between insured and uninsured contractors for cleaning and disinfecting work. Most janitorial firms currently are uninsured for virus disinfecting work, giving the competitive advantage in the commercial building disinfecting services to firms with high-quality CPL coverage.
- At ARMR over the past year, we have been exploring how our clients can articulate the value proposition of CPL insurance to building owners. I see having high-quality CPL as a developing trend in the vendor selection criteria for building cleaning, sanitation and disinfecting services. Why would a building owner choose to hire an uninsured or uninsurable firm for disinfecting services when there is a cost-free alternative in the insured vendors CPL insurance? With creative marketing, there maybe a new business sector emerging for restoration firms in the commercial building sanitation space.
- An emerging trend in 2021: General liability insurers are not renewing the liability insurance on janitorial firms that offer disinfecting services, which forces those firms to exit the disinfection services marketplace. That situation creates a market void for disinfecting services that can be filled by insured restorers.
- The predicted exodus of insurance companies that are writing general liability insurance policies on restoration firms, without providing corresponding CPL coverage in a package policy, has the potential to put one of every four restorers on the street looking for a new home for their business liability insurance in the next couple of years. If you have your general liability insurance in a different insurance company than the CPL insurance, you are in this group.
- Direct-repair networks through tighter insurance verification measures will lead to more “red lighted” situations on the 80%-plus of firms that are sold insurance policies that do not meet the insurance requirements in the direct-repair network contracts.
Risk Management Advice
- Make sure you only use insured subcontractors and that you are an additional insured on the subcontractors’ policies. You will need a set of tight insurance requirements in your contracts with subcontractors to accomplish this. If you need a template for how to do this, look at the insurance requirements of a direct-repair network. If you need more information, ARMR has sample insurance specifications for subcontractors that your attorney can use in your subcontracts.
- Always provide the full contract that you are signing, along with the insurance requirements to your insurance agent when you need a certificate of insurance. A qualified insurance agent should be able to advise you on any coverage deficiencies in your insurance.
- Insurance companies have been and continue to abandon the restoration contracting class of business. For your business insurance, you should select a strong carrier with a long track record of being committed to the restoration class of business. No matter what the green lizard encourages you to do in switching insurance companies to save 15%, continuity year over year in a contractor’s business liability insurance is a really good idea. In defense of the lizard, you could switch auto insurance companies every day and still have functional automobile insurance, because everyone knows the date and time of loss on an auto accident. In sharp contrast to automobile accidents, I once had to get involved on a mold claim that was first reported six years after the job was completed. The contractor had switched CPL carriers four times in those six years. Figuring out which of the four CPL carriers should pay was a problem when they all said it was their competitors’ job to pay the claim. None of the four insurance companies were paying for anything for months, including the lawyers needed to defend the contractor. Within hours of being alerted to the situation, I convinced one of the insurance companies to cover the claim. But it was a touch-and-go situation that never would have happened had there only been one insurer involved. If your firm is going through a series of non-renewals from insurance companies, you are not in a good place, and it gives you a bad track record with future insurance companies. Underwriters are leery of firms that have been non-renewed or cancelled in the past five years.
- Because of social inflation, every restoration contractor needs to carry at least $2,000,000 in liability insurance over the general liability, auto Liability and CPL insurance coverage.
And as always, if you have a question on risk or insurance, please give ARMR a call. We hand out free advice.