Originally published: 12.01.07 by David Myer
Understanding property/casualty insurance coverages can help you stem serious loss potential for your business.
Recently the editors at HVACR Business asked our firm, Dawson Insurance, to put together a short series of articles dealing with insurance and surety issues. The first article, Key Questions Take Mystery Out Of Insurance (October 2007), dealt with how to select an agent that can truly serve your insurance and surety needs. In this article, I will address writing a proper program for property/casualty insurance coverages.
Over the course of my 35 years in the insurance industry, certain topics seem to come up again and again and appear to be very confusing to insurance clients. Below I have addressed some of these topics and how to deal with them. They are listed in no particular order of importance, but in all cases if they are not dealt with properly, they can lead to serious loss potential for your business.
General Liability Design Error Exclusions
Whether or not you are in the design/build business, nor believe that you are doing any type of design work at all, you should understand that general liability policies normally contain exclusions for any loss arising out of the preparation and approval of plans, maps, designs, and drawings. At the same time, most subcontract agreements establish some basis for holding you responsible for review of plans and drawings and for requesting corrections when such drawings are thought to be faulty.
In order to protect yourself you should:
1. Go over the design-error exclusions with your agent and make sure that you are clear on how the exclusions match up with your methods of operation and the contracts that you generally sign.
2. Ask the agent to have the design-error exclusion modified so that vicarious liabilities for errors made by others are now covered under your policy.
3. Obtain a quotation for design coverage on a separate basis. This is widely available on a competitive basis in the insurance marketplace.
I’m looking at a policy on my desk that is fairly typical in terms of exclusions. In the general liability sections there are 16 major exclusions covering three-and-a-half pages. One-and-a-half pages deal strictly with pollution, so you can see that this is a major topic of concern with insurance companies. Contractors in the hvacr industry are very much in the gun sights of attorneys and the insurance industry when it comes to claims for any type of pollution.
What is a pollutant? From the stand point of the insurance carrier, any solid, liquid, or gas that turns up in a place where it is not naturally supposed to be found will constitute a pollutant. As such, insurers will often try to exclude any type of damage that arises from that substance interacting with its environment.
There are several things that you can do about these exclusions:
1. Make sure that your agent is very clear with you on exactly what is excluded and what is covered so far as pollutants are concerned.
2. In many cases you may be able to buy back a sub-limit of coverage for pollution and for the results of it such as mold or contamination damage.
3. Buy a pollution policy on a stand-alone basis. These are quite commonly found in the insurance marketplace and are often coupled with a policy covering design error as explained in the paragraphs above.
4. Be very careful when reviewing contracts, as many owners will attempt to pass on liability for previously known pollution issues to you through your repairs and service work.
Owner’s Protective Policies
Many contracts today ask for you to supply the owner or the general contractor with a separate liability coverage written in their name and providing protection only to them. These policies are written to cover the general contractor or owner’s own liability arising out of your activities on a particular project, and to cover the general contractor or owner’s own acts or omissions in connection with its “general supervision” of you. To a certain extent, this is double coverage in the instance where you are also adding the owner or general contractor as an additional insured to your policy. However, the owner/general contractor is looking to have a separate limit in their own name, and possibly a separate defense attorney as well.
Builders Risk and Installation “Floaters”
This coverage is quite commonly required of you in construction contracts and you may in fact have an automatic limit built into your insurance program. The installation floater is generally used to cover additions and renovations to an existing structure, while the builders’ risk is more generally used for building entire structures. However, the forms are often combined in today’s marketplace.
In general, they are intended to cover the materials that will be used to complete your project while they are on the job site, in temporary storage away from a premises that you own or regularly occupy, or while in transit. However, the devil is in the details when it comes to this coverage. The first thing to look for is a definition of when coverage ceases. There may be as many as six different cessation points built into a form, and they are meant to track with the construction agreement or purchase agreement that you are using on the project. Therefore, we believe that coverage should be written whenever possible to expire no sooner than when you are finally paid for the job.
Other areas that need attention might be exclusion for hot/cold testing; exclusions for materials while being “rigged,” lifted, etc.; exclusions for payment of soft costs; exclusions for work below the surface of the earth (not necessarily underground but merely being done in an excavated area). You should ask your agent to provide you with a copy of the general installation or builders’ risk form that they intend to use for your firm. Go over the exclusions with the agent and make certain that each construction contract matches up with the coverages that you are carrying, or ask to have the appropriate exclusions removed for that contract.
Occurrence Vs. Claims Made Coverage
One of the topics that comes up again and again is the difference between occurrence and claims made coverage. In general, it has to do with what policy we look to for payment of a claim. Under “occurrence” language you look to the policy that was in effect at the time the damage occurred. Under “claims made” wording you look to the policy that was in effect at the time the suit or demand for damages is served on you. The occurrence form is much preferred for a number of reasons, but you will find that there are some coverages that are written strictly on claims-made forms. Some of these would be professional and design-build liability, many forms of pollution liability, and products and completed operations liability for some of the more difficult areas of hvacr operations. When someone is proposing to move you from a claims-made policy to another policy form or to another insurance carrier, make certain you and your attorney understand the effect on future claims.
Such transitions can have extremely negative consequences for you and can leave you with no insurance coverage at all if not properly handled.
Hold Harmless /Indemnity Agreements
As we are all aware, almost all construction agreements attempt to transfer liability from the owner or general contractor to the subcontractors through the use of hold harmless, indemnity, and defense agreements. While the American Institute of Architects, the Associated General Contractors of America, and other organizations have attempted to standardize such indemnity/hold harmless/defense wording, you should never sign an agreement without having your attorney review these sections of the contract.
Why go to the expense of involving your attorney?
1. These agreements generally require you to defend and indemnify for all types of damage. There is no insurance policy that covers all types of damage, and this leaves you as the insurer in the cases where your policy excludes the damage that needs to be addressed.
2. The wording in these standardized contracts is by nature written to cover all 50 states. However, the statutes on indemnity agreements vary widely by state. Your attorney needs to modify the wording of the contract to comply with the statutes as found in your state.
3. Many of these agreements do not require that you defend the general contractor or owner, but rather that you simply repay them for their damages after they defend themselves. This clearly leaves you in the position of having an owner or general contractor spend whatever they feel is necessary to get out of a claim, and then simply hand it to you for payment. The operation of hold harmless/indemnity and defense agreements is one area that can immediately bring your firm to its knees financially if you are left holding the bag on a major claim.
Over the last five years, insurance carriers have become very focused on making sure that the risks of loss are transferred from their clients to those that are working downstream on any particular construction project. The owner tries to shift all risk of loss to the general contractor or prime contractors, and they in turn try to shift the risk of loss to subcontractors. A proper risk transfer program would accomplish two things for you:
1. It will remove losses from your loss history that should be paid by subcontractors and suppliers.
2. If your insurance carrier does not believe that you have proper risk transfer, they may charge you for the operation of your subcontractors as though they were direct employees. The effect on you can be a huge increase in your premium.
The basic elements of proper risk transfer are:
1. Requiring a certificate of insurance from all subs and suppliers that indicates coverage limits that comply with the requirements of your own insurance carrier. Please note that these requirements are often built right into your policy wording.
2. In all cases require an additional insured endorsement naming your firm as the additional insured and including completed operations and products coverage. Note you must require that you receive the actual additional insured endorsement, and not merely rely on being named on a certificate of insurance. In most cases, being named on a certificate does not actually add you to the policy. The only way to be certain that your interests have been endorsed on the coverage is by getting a copy of the endorsement itself.
3. Require that the subcontractor or supplier’s policy is to be the primary coverage and should not require contribution by your own insurance policies in order to cover a claim.
4. Require at least 30-days notice of cancellation, non-renewal, or reduction in coverage that would affect your additional insured status.
5. In your own subcontract or supplier agreements and purchase orders, you should include a strong hold harmless, indemnity, and defense agreement running in your favor. Your attorney can help you draft such an agreement. With these essentials of risk transfer in place, you will have the best opportunity to protect your loss ratio and therefore guard against increases in insurance rates.
The last item I want to discuss: mobile equipment. Many of you use truck-mounted cranes or other types of equipment in your everyday business. In the past, some of these pieces of equipment were classified as autos, and others could be covered under the combination of a general liability policy and an equipment floater. However, in very recent times most insurance carriers have adopted new definitions of what constitutes an auto and what constitutes mobile equipment. Additionally, carriers have changed how you need to insure self-propelled equipment that is subject to highway use or truck-mounted equipment. You need to be especially careful if you have your general liability, auto, and umbrella coverages in some combination with separate insurance carriers. If you are not careful, you may find out that you have no liability coverage for the operation of these pieces of equipment or vehicles. You should review each piece of mobile equipment and each motor vehicle with your agent to be certain under which policy the coverage for liability falls.
Hopefully this article has highlighted some areas that are not generally well understood by those in the hvacr industry, but which can have severe impact on your bottom line if not handled properly. Also, these are by no means all of the exclusions that need to be addressed especially in the general liability coverages. You should be certain that your agent is focused on what you do and precisely how you do it, and how the exclusions in your various policies may affect your business. Only then can you make informed decisions about matters of insurance coverage.
Articles by David Myer
Understanding property/casualty insurance coverages can help you stem serious loss potential for your business.