ICS Magazine

Insurance and the Restoration Contractor

April 11, 2005
Last month we took an introductory look at the changing reality faced by restoration contractors as it pertains to insurance. Now let's delve deeper into some of the challenges on the horizon and the ways to meet them.

The Change in the Liability Insurance Needs of Restoration Contractors is Permanent
The universal introduction of mold exclusions and limitations on insurance policies has created a permanent shift in the insurance market place for restoration contractors. Today, any firm that has a loss exposure from water intrusion into the built environment needs to be serviced by highly skilled insurance brokers with the same complex environmental-insurance tools used by hazardous-materials contractors.

This is not to imply that water is hazardous, but the consequence of uncontrolled water can be mold, and mold-related claims are what insurance companies are trying to avoid with new exclusions and limitations.

The environmental-insurance marketplace has evolved over the past 25 years, with more than 100 different environmental-insurance products. Special adaptations to a handful of these insurance products are what restoration contractors will need to purchase in order to get appropriate coverage for their water and mold work in the future.

It is important to note the need for environmental coverage is created by water-related work, not necessarily mold-remediation work. The reason for this is that mold exclusions do not apply to only mold-remediation jobs; they apply to any claim for mold damages on a blanket basis. Therefore, any firm working with water in the built environment, including roofing, plumbing and drying, in addition to those subcontracting or self-performing mold remediation, now needs an environmental-insurance coverage to fill the gap in the business liability insurance package created by the mold exclusions now appearing in virtually all general liability insurance policies.

It also does not matter if the work is being subcontracted or self-performed, there is still a need for the prime contractor to be properly insured. The purchase of a separate Contractor's Pollution Liability insurance is now necessary to bring the insurance coverage on the firm back to where it was before the mold exclusions on general liability insurance policies stripped coverage away.

Restoration Contractors Face a Very Restricted General Liability Insurance Market
One of the general operating rules in the insurance business is that an underwriter should not provide insurance to a firm where exclusions in the policy being sold leave the insurance buyer uninsured for a significant part of the loss exposure of the business. Because of this unwritten ethical and practical rule, insurance underwriters are becoming increasing nervous about providing liability insurance on firms that have the potential to be sued for mold related damages. This fear seems to have hit the restoration contracting industry harder than any other class of business. For restoration contractors, the more the traditional general liability underwriter knows about a restoration contractor performing drying and mold remediation services either as a general or subcontractor, the more likely it is that the restoration firm's general liability insurance policies will not be renewed by that underwriter because of the "unwritten rule."

In addition to the fear of mold damages, the restoration industry across the board suffers from premium inadequacy in the eyes of insurers if the firm is classified as a "janitorial" firm for rating purposes, when in fact many restoration firms are providing services more closely related to "contracting." Any business that presents the chance for an increasing number of claims in the face of inadequate insurance rates is a prime candidate for the non-renewal of their insurance policies.

Prior to the fear of toxic-mold claims in the United States and Canada, the majority of restoration contractors were at least partially classified as janitorial firms for the purposes of premium pricing. Where some restoration firms would be best described as "janitorial," a firm that works with hammers or hires subcontractors with hammers is not a janitorial firm by any stretch of the imagination. Throw into the service mix drying services, mold abatement, or any project involving negative air pressure containment or personal protective equipment, and the janitorial classification would appear to be wildly inaccurate. That is the conclusion many general liability underwriters are coming to today, and are therefore refusing to renew the general liability insurance policies of restoration contractors that fall into the hammer swinging/drying/mold abatement services mix.

Once a restoration firm is rejected or non-renewed by the traditional insurance market, it is very likely that the firm and its insurance agent will be looking to purchase both general liability and environmental insurance from a handful of providers in the environmental insurance market place. In addition to some sticker-shock, restoration contractors will be faced with more stringent underwriting requirements. These underwriting requirements include:

  • The documented loss history of the account (four liability claims for $500 each will be will be viewed much more critically than one claim for $25,000)
  • The documented training of employees
  • Solid financial statements
  • A lengthy application

    Get Expert Help
    One of the first steps in obtaining a liability insurance package from the environmental insurance market is to find a qualified environmental insurance agent to assist in the process. Environmental insurances are very complex and, unlike general liability insurance, lack standardization. Only about one out of every 75 insurance agents in the United States have ever sold even a single environmental insurance policy. Insurance agents cannot pick up a book to learn about environmental insurance. Insurance licensing exams and study guides in most states do not even mention the words "environmental insurance." With more than 80 different environmental insurance policies available in the marketplace with hundreds of customized endorsements, the need for specialty expertise in environmental insurance is obvious.

    To find the expertise necessary to obtain the best choice of coverage most retail insurance agents will need to turn to a specialty environmental wholesale broker. Finding specialized experience is especially important because it is entirely possible in environmental insurance to pay top dollar for an insurance policy that excludes everything the firm does for a living, in contradiction to the "unwritten rule" mentioned earlier. Out of the 500,000 licensed insurance agents and brokers in the United States, there are fewer than 200 insurance agents that can be considered proficient in environmental insurance. These individuals have years of experience and various degrees of training specifically in environmental risk management and insurance. They also tend to be employed by the largest insurance brokerage firms and spend most of their time working with the largest companies in the United States. Therefore, these retail environmental insurance specialists are generally not available to service the needs of the restoration business. Because of their more or less exclusive focus on the complex world of environmental insurance, environmental insurance specialists tend not to be the best insurance agents for the traditional lines of insurance needed by restoration contractors including the workers' compensation, property and automobile insurance.

    Keep Your Local Insurance Agent
    The best servicing solution to address the new sophisticated insurance needs of restoration contractors will be to team a local independent insurance agent with the services of a specialty environmental wholesale brokerage firm that has trained and educated brokers on staff to help with the general liability and contractor's pollution liability policies. It important to realize that just because a wholesale broker holds him or herself out to be a source of environmental insurance, that is no guarantee that the individual wholesale broker has any more capability, training or skill in the product line than the local insurance agent. Therefore, it is important to ask a few questions about the background of the insurance brokers that will be working on the firm's general liability environmental insurance placements. Some of the best environmental insurance specialists in the world are wholesale brokers. Combined with the expertise of a local insurance agent, a restoration firm can build an expert service team that provides for all of its insurance needs.

    Insure Your Entire Operation
    There will be a tendency for restoration firms looking into the purchase of environmental insurance to attempt to restrict the coverage purchased in order to save money on premiums. Some of the more popular strategies involve insuring only jobs in which their client is demanding mold coverage while leaving the firm uninsured for other jobs; creating a subsidiary to do mold work while the remainder of the business remains uninsured for mold; and insuring only mold-related jobs while leaving all of the other services provided by the firm uninsured. These strategies are never in the best interests of the firm.

    The most efficient buying strategy for environmental insurance will always be to aggregate as much loss exposure onto one policy as possible. For restoration contractors, that means insuring their entire operation. Where the focus on mold insurance may only be on self-performed mold-remediation projects, contractors should remember a mold claim could come in from subcontracted remediation, or from drying, plumbing, roofing or window work. The incremental cost to insure the whole firm is usually a bargain in relation to the additional coverage gained. Restoration contractors will find it increasingly difficult to purchase stripped-down environmental coverage as their insurance agents become more aware that their own professional liability insurance is likely to also have a mold-related-claims exclusion. Without professional liability insurance for themselves, insurance agents will want to insure their clients properly for mold-related events and will be increasingly reluctant to sell environmental insurance policies with glaring gaps in coverage.

    This Insurance Problem Is Unlikely To Go Away
    The introduction of universal mold exclusion across the entire retail insurance market place was driven by a handful of insurance companies that sell their insurance products to other insurance companies. This type of an insurance transaction is called reinsurance and it is most easily thought of as one insurance company insuring the loss results of another insurance company. Although there are twenty four hundred property and casualty insurance companies licensed in the US, there are less than twenty reinsurance companies with any clout in the market place. Due to their need to be reinsured, (which is often driven by state insurance commissioners and financial rating agencies) the twenty four hundred insurance companies are very likely to blindly follow the lead of just a hand full of reinsurance companies. If the reinsurance policy on the insurance company excludes mold, then all of the policies that insurance company sells will exclude mold as well. Reinsurance policies have excluded mold since 2003.

    The reinsurance companies' risk-management solution for mold-related losses seems to be working. Claims managers and restoration contractors report that in some markets, mold claims and jobs are down as much as 75 percent from 2002 levels. Based on these results, insurance companies can call their mold-exclusion risk-management strategy a success. Therefore, they are unlikely to back away from it and insure mold on traditional policies ever again.

    Eventually, traditional general liability underwriters will realize that the reinsurance their company buys also has mold exclusions, which will force them to non-renew their existing books of restoration contractors, due to the inherent mold exposure and the unwritten ethical and practical underwriting rule discussed earlier. This has been happening in the restoration business over the past two years.

    The New Reality
    The restoration business is undergoing a period of change driven by the introduction of universal mold exclusions in the insurance industry. This is likely to be a permanent change in the insurance marketplace.

    To find appropriate business liability insurance, which also covers their newly uninsured loss exposure to mold related claims, restoration contractors that perform water work will need to access customized insurance products within the complex world of the environmental insurance market place. The best approach to this will be to team a knowledgeable local insurance agent with the skill sets of a specialized environmental insurance wholesale broker.

    Tips For Thriving In The New-Reality Marketplace
    1. Make the changes to the insurance program on a timely basis. Do not let the actions of a general liability underwriter non-renewing the company's insurance policies put the firm in a crisis mode.
    2. Try to avoid all general liability claims. Restoration firms with general liability claims frequency may not be able to find insurance at all. Hazardous materials contractors do not have claims frequency problems. Environmental-insurance underwriters fear that the next $2,000 liability claim for a bad drying job will turn into a toxic tort claim for a sick baby as a result of the contractors work. One claim, even if it is measured in the tens of thousands of dollars, will likely be ignored by the underwriters. It is the frequency of claims that concerns them.
    3. Run a tight financial ship. Environmental underwriters will likely be interested in the firm's financial performance. The balance sheet and income statement has to be good enough to get a loan for $10,000. The reason for this is environmental policies have self-insured retentions of at least $10,000; smart underwriters want to see the firm has enough money to pay the premium and the self-insured retention.
    4. Prepare an accurate application. The application is a warranty statement on behalf of the contractor and is often incorporated into the policy itself. This means it will be referred to during a claim situation in order to establish that accurate information was provided to the underwriter, prior to purchasing coverage. Also, in the new reality for restoration contractors, a handful of environmental underwriters will have to handle what is likely to be a landslide of new insurance applications from restoration contractors. The good applications will receive favorable terms and conditions on their business insurance, while the shoddy applications will be round filed as quickly as possible.
    5. Work with an expert. Using a specialty broker with experience in environmental insurance policies will ensure that appropriate coverage is placed for the best possible price. Maximizing coverage for contractors will protect both the contractor's and the insurance broker's assets.