The Restoration Contractor's Guide to Contractors Pollution Liability Insurance - Part II

October 7, 2005
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Last month, we looked at how the introduction of universal mold exclusions affected the insurance coverage for restoration contractors. Environmental insurance policies are not standardized, and there are more than 50 policies available in the marketplace. In contrast, General Liability insurance has been completely standardized.

There is only one basic Commercial General Liability policy, and every restoration contractor, flower shop and hospital in the United States purchases it. Although the insurance market like the stock market is in a constant state of flux there are some fundamental coverage differences in the CPL policies being offered today that are worth mentioning.

Does the CPL policy exclude claims to "Your Work" at any point in time? An example of a potentially uninsured claim would be if the insured through negligent work does not get a carpet dry in a short a enough time to avoid mold growth and the entire carpet needs replacing. This exclusion may delete coverage to work performed by you or on your behalf.

Is damage to Impaired Property as a result of "Your Work" excluded? From the prior example, the moldy carpet contaminates with spores all of the stuffed furniture, bedding, ceiling tile, clothing and air ducts which all have to be replaced. This exclusion may eliminate all coverage for the property damage. A sick baby would still be covered.

Does the policy exclude losses due to Loss of Use? From the above example the additional expenses incurred by the building owners for the loss of use of the uninhabitable building could be excluded.

Does the policy exclude coverage for work performed by subcontractors? If the drying contractor was a subcontractor to the insured, all Bodily Injury, Property Damage and Clean Up claims may be excluded. The policy would be unlikely to defend the insured either.

Does the policy force the CPL insurance buyer to hire subcontractors that also carry liability insurance of various kinds?

None of the exclusions in a CPL policy are standardized. Even CPL policies sold by the same insurance company to different restorations firms can vary on very important grants of coverage. It is also possible to negotiate on individual policies the elimination of some coverage restrictions by adding endorsements onto the policy. Therefore it is very important that the insurance agent structure the CPL coverage carefully to insure the full scope of services offered by the firm without glaring gaps in coverage.

Calculating the True Cost of CPL Insurance.
Premium is not the only determining variable in calculating the cost of insurance. The coverage provided must be taken in account. A much more accurate way to evaluate insurance costs is to compare the effective rate paid for the insurance purchased. Taking into account what the policy insures allows for the calculation of the effective rate paid for the CPL insurance. For readers that like formulas:

Effective CPL Rate = CPL Premium/ Net Insured Revenue

Net Insured Revenue = Gross Revenue - {Sub Contracted Work (if excluded by the policy) + Any Uninsured Projects or Classes of Work}

This calculation is heavily dependent upon the coverage's provided in the CPL policy form and the business model of the applicant. Utilizing this cost comparison model allows for apples to apples cost comparisons of CPL policies with different coverage grants.

If there are differences in the coverage provided by the different CPL beyond excluded revenues, a more subjective evaluation has to be used in addition to the effective rate computation above. A specialized environmental insurance practitioner should be able to provide guidance in this area.

Claims Made vs. Occurrence
There are two basic coverage forms of CPL insurance available: Claims Made and Occurrence-based policies. If given the choice, an Occurrence form usually provides slightly better coverage for the insurance buyer than a Claims Made policy, assuming all other factors remaining equal.

Occurrence-based policies are better because they pay for claims that occurred during the policy period regardless of when they are reported. One major benefit of Occurrence-based policies is the business can be closed or sold with out having to renew the liability insurance polices in perpetuity to avoid being insured. Under a Claims Made Policy, only claims made and reported during the policy period or extended discovery period (1-2 years after the policy expires) are covered.

Claims Made policies usually pay for completed operations from prior years as long as those operations were covered under continuously renewed Claims Made insurance. Mold created a hybrid CPL policy that provides Occurrence-based pollution coverage except for the pollutant mold, which has a Claims Made coverage grant. The Zurich ESP policy is an example of this hybrid-type coverage. Most insurance companies only will provide mold coverage on a Claims Made basis for mold due to their fear of runaway mold claims.

What Environmental Loss Exposure Does a Restoration Contractor Have?
The big environmental loss exposure everyone in the insurance underwriting business is worried about with restoration contractors is water in the built environment can lead to mold growth. Of course, actual mold remediation has the risks associated with that work. But the not-so-obvious mold-related loss exposures include any work done by a plumber or roofer: a cabinet installer drives a screw into a water pipe leading to a slow interior wall leak that is discovered when the children in the home cannot learn in school anymore is the loss scenario the insurance underwriting community is most concerned about. The majority of CPL policies sold cover claims from any "pollutant" which could include carpet glue, solvents, antimicrobials and other materials that could lead to a liability claim. These claims would not normally be covered under the firm's general liability insurance because of the absolute pollution exclusion in those policies. Because pollution exclusions in General Liability insurance apply to any contaminant, CPL policies should be purchased to cover all sources of environmental liability, not just mold.

How Are CPL Premiums Determined?
The more refined rating models will have three rates underwriters use, all based on annual revenue in each class of work.
1. General restoration work.
2. Water and drying work.
3. Mold remediation work.

Pricing benchmarks for CPL minimum premiums range between $4,000 and $10,000. Typical rates range from one-quarter of 1 percent for general-restoration revenues to 4 percent of mold-remediation revenues in high-risk states. That is the scientific rating method. In practice, we have noted one very large provider of CPL insurance insuring restoration firms with $300,000, $3 million and $8 million of revenue for CPL premiums of $10,000, $11,000 and $11,500. The $8-million firm purchased a CPL policy that excluded all the work they did except for one client, and also excluded all sub-contracted work. In the final analysis, the effective rate they paid for CPL insurance was relatively high for the insurance protection afforded by the policy. But the premiums were very low, probably too low.

There are no standards for CPL policy forms and there are no standards for rates. As a general rule in the insurance industry, the most naive underwriters always provide the very best prices in the short term. The $3- and $8-million firms are obviously getting bargains from underwriters who are completely naive even to their own company's rating structures and underwriting guidelines. Much like selecting your insurance agent, a reality check on the competency of the underwriter is also in order. The downside to buying an obviously under-priced insurance product is it opens a window for the claims adjuster to void the policy due to the insured's alleged misrepresentation of what they did for a living. If the price is too good to be true, it probably is.

Spend Time on the Application
The applications for CPL are long. If the applications were not specifically designed for fire and restoration contractors, they will ask pages of irrelevant questions. Tough it out and make sure to tell your story even if you have to attach a narrative to the application. If you have professionally trained personnel, be sure to send copies of their current certificates of training. Do not send certificates that are out of date; they reflect poorly on the management capability of the firm. Some of the underwriters will ask for four years worth of prior insurance loss runs and 3 years of financials. As a general rule, the underwriters with the most exclusions will ask the fewest questions. A complete application will save premium dollars.

Avoid the Ultimate Exclusion
Misrepresentation on insurance applications can allow the underwriter to void the policy altogether in the event of a claim. Insurance buyers need to closely review their applications and insurance policies to confirm that the underwriter has a sense of what the firm is doing for a living.

This is especially important in the General Liability policy. A full-service restoration contractor classified as only a janitorial firm on their insurance policies needs to do some soul searching. Cleaning services are an important part of many restoration firms' revenues, but few janitors swing hammers. Appropriate classifications that reflect the true scope of services offered by the firm will minimize the chances of having a disputed claim.

Combined Policy Forms
There are basically two kinds of combined policy forms for restoration contractors. These policies combine a general liability policy with various coverage grants for CPL coverage.

The combined forms written by the professional environmental insurance underwriters will feature a full CPL coverage part with limits equal to the limits of the GL coverage or more. The other sources of combined policy forms will usually provide an endorsement to the GL policy adding in a sub-limit of the GL policy limit for pollution claims. It is common for these limited environmental coverage grants on the GL policy to be inherently defective when compared to real CPL coverage. Extreme caution should be used when considering the purchase of one of these limited coverage policies.

Some of the inherit flaws that may be present include:
1. Is the CPL coverage grant real CPL coverage? Does it insure restoration work or the office?
2. Is there a sufficient CPL limit of liability to meet bid specifications as more and more informed customers demand full CPL coverage in contracts?
3. Will the policy allow for the certification of CPL coverage with ‘Additional Insured' status to the more sophisticated claims administration companies?
4. What is the minimum ‘Earned Premium'? If you have to cancel the policy to purchase real CPL coverage, can you get the unearned premium back?

Contractors Pollution Liability insurance is generally available for restoration firms. Many different policy forms are available to choose from. But caution should be utilized when selecting a CPL policy. It will always be to your best interest to find a trained and experienced risk and insurance advisor/agent/broker to be part of your management team.

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