Several changes took place in the insurance industry that have greatly affected your ability to obtain insurance coverage. This letter is to briefly explain what took place, describe the changes that have taken place in policy language, and give you a guide to protecting yourself.
In June of 1995 the Supreme Court handed down a decision in the case of Montrose Chemical vs. Admiral Insurance Company. This case has caused significant changes and problems in the insurance industry. It is difficult to explain in down to earth terms but I will try to summarize the situation. What the Montrose decision concludes is that there is progressive damage over time. So each carrier is responsible for the policy limits for each year they provided coverage. They may even be held responsible for damage that is just now reported, but for which the work was done during a prior policy year even if they were not the insuring company during that year.
If you bought an "old" occurrence based insurance policy from January 1, 1990 to January 1, 1991 you would be covered for your policy limits during the policy period and after the policy period for any work completed during the policy period.
Pre-Montrose decision Example: you purchased the above policy. You completed a plumbing job in May of 1990. You were insured with company ABC. In 1993 you are served with suit for damage arising out of faulty workmanship, construction defect etc. Since the job was completed during the above policy term, company ABC would responsible for providing defense and with an adverse judgment could be held liable for your policy limit during that policy term. Say for example you had $1,000,000 of liability. They would be on the hook for $1,000,000 for any covered loss.
Post Montrose decision example: Same situation above. However from Jan 1 1991 to Jan 1, 1992 you changed to company XYZ with $1,000,000 of liability coverage. And Jan 1, 1992 to Jan 1, 1993 you went to PDQ company with the same $1,000,000 of liability coverage. The plaintiff discovers the damage in 1993. They file suit against your company. The work was originally done in the 1990 policy year. So company ABC would be responsible for providing defense and with an adverse judgment could be held liable for $1,000,000. But since the damage is progressive and happened over the next two policy years, now company XYZ would be responsible for providing defense and with an adverse judgment could be held liable for $1,000,000 and company PDQ would be responsible for providing defense and with an adverse judgment could be held liable for $1,000,000.
In effect we have stacking of limits. And instead of only having $1,000,000 of coverage, your insurance companies are now looking at $3,000,000 of potential claim liability. As you can imagine this extremely jeopardizes the insurance companies losses and their ability to assess adequate premiums. And accordingly several companies have left the state and others have just stopped writing insurance for contractors.
The main problem has been in the area of residential insurance. More specifically apartment houses, condominium and homeowners associations. Several of these associations and complexes compile claim data over time and before the statute of limitations runs out file a class action law suit against any contractor who ever did work on the property. Even if you had nothing to do with the original construction. Several carriers are no longer writing any contracting risks that do any residential work regardless of what type of work it is.
Given these considerations, a myriad of new policies, endorsements, and exclusions have entered the marketplace. This guide is designed to help you protect your business and understand how these changes effect your liability coverage.
Broad Form Property Damage Endorsement
Under a standard General Liability policy, property under your care, custody and control is specifically excluded. This typically applies to risks who enter property to perform a job and have access to personal property.
Example: A janitorial risk is cleaning a home and while cleaning a cabinet
knocks over and breaks a vase.
Under a normal General Liability policy you would not be covered. You would only be covered if you had the Broad Form Property Damage Endorsement included on your policy.
Lost Key Liability
This endorsement is designed to provide coverage for loss of keys to property owned by the insureds clients. This mainly applies to Janitorial accounts. If the building owner provides you with a key to the building and you lose it, it can be quite costly to replace all the locks. Recently a client lost the keys to a building and the cost to replace all the locks was $2,000. This is not covered under the standard general liability policy.
Classification Limitation Endorsement
This endorsement can be found on many policies written for artisan contractors. This endorsement is designed to only cover the insured for operations specifically described in the description of hazards section. It is utilized so that the policy only covers the insured for their specific field of work. With this endorsement if a client lists themselves as a plumber, and that is the only class listed in the description of hazards, they would not be covered for work outside of this class. So if a plumber moonlights as an electrician and his policy only lists him as a plumber, he has no coverage for his work as an electrician.
Subcontractors Warranty
This endorsement is to make sure that if you utilize any subcontractor, you are not covered for their work unless you receive a certificate of insurance from that subcontractor. Their limit of insurance must be equal to or greater than your limit of liability insurance. The certificate must also list you as an additional insured on the subcontractors policy. But that requirement varies from carrier to carrier. You need to read the endorsement.
Prior Acts Exclusion
Simply stated, your policy will not cover you for any work that was completed prior to the inception date of your current policy.
Work in Progress Exclusion
Simply stated, your policy will not cover you for any work that was started and not completed prior to the inception date of your current policy.
General Contractors Exclusion
Excludes coverage when you act as a general contractor or direct supervisor for a project.
Condominium/Townhome/Tract Home Exclusion
Excludes any work arising out of your operations in conjunction with a condominium, town home, or tract home development. Some carriers have an absolute exclusion. Others only exclude coverage if you were the original contractor. So if you were coming in for repairs, you may be covered. Again one you really need to read.
Professional Service/Professional Liability Exclusion
You are not covered for providing or failure to provide a professional service. You need to read the policy for the definition of a professional service.
Railroad Exclusion
All general liability policies do not provide coverage for any work done within 50 feet of a railroad. If you do any work within 50 feet of a railroad you need a separate policy. Call your agent immediately.
Continuous and Progressive Damage Exclusion
This is a new exclusion to counter the Montrose type claims that are arising. This exclusion has not yet been tested in court, but it is implemented to avoid defending suits that occurred under other insurance policies.
Roofing Limitation
This form excludes damage resulting from wind, hail, snow, rain, ice or
- Contractor not taken prudent steps to determine any approaching adverse weather.
- Contractor not providing a suitable temporary covering, able to withstand the normal elements. (To be put in place any time the contractor leaves the site)
Subsidence of Land
Subsidence is not covered under the liability policy. Subsidence is defined as landslide, mudflow, earth sinking, earth rising or shifting.
Explosion, Collapse and Underground Endorsement
This endorsement provides coverage for these perils which are excluded on the standard general liability policy.
Other common Exclusions
- Absolute Pollution
- Punitive Damages
- Assault and Battery
- Asbestos
- Abuse or Molestation
- Lead
- Nuclear Energy
- Employment Related Practices
- In addition to the above common exclusions, your policy also contains important deductibles. If you are not sure what your deductibles are or how they affect your coverage, please contact your agent.
Policy Forms
There a number of policy forms being used today. The most common are the "New" Occurrence, "Old" Occurrence, and the Claims Made form. For the purpose of this section I am only going to discuss the basis of Claims Made vs. Occurrence.
In the previous discussion of the Montrose decision I touched on an occurrence policy. It is extremely important for you to know the difference between an occurrence policy and a claims made policy.
Under an occurrence policy, the carrier who may be held responsible for the claim is the carrier who insured the contractor during the policy period in which the work was performed.
Under a claims made policy, the carrier who may be held responsible for the claim is the carrier who insured the contractor during the policy period in which the claim is reported.
The problem with a claims made policy form is that coverage depends on four things:
- The occurrence/accident must occur as a result of operations conducted after the policy term begins.
- The occurrence/accident must manifest of occur during the policy period
- The claim must be made during the policy period.
- The claim must be reported to the company during the policy period or within the extended period of reporting, whichever is applicable.
An Extended Period of Reporting extends the time in which a claim may be reported to the carrier for defense and service of suit. These can be purchased for an additional cost, usually no less than 100% of the annual premium.
Usually all claims made policies are deemed continuous until canceled, therefore, if operations conducted during the first year of a policy give rise to a manifestation of damage during the third year of a policy and the claim is made during the fifth year of the policy, it will be a covered loss as long as it is reported to the company within the policy term or extended reporting period that applies. This does not apply if there were cancellations.
Policy Rating Basis/Audits
For the most part your policy premium is based upon your projection of annual payroll, gross receipts, and cost of subcontracted work. At the inception of the policy you are asked to estimate the annual payrolls, receipts etc. These figures are used to assess the exposure your operation will present during the policy year. At the end of the policy year, you will be asked for the actual amounts of payroll, receipts etc. After this audit is conducted, if your original estimate was more than the actual figures, you may be entitled to money back. However is your original estimate was under the actual figures you will be charged for the additional premium. There are also several policies that will only adjust upward. So regardless of whether or not your figures were less, no money will be returned.
There are also policies that will base your premium on the number of full time and part time employees you have during the policy period.
The importance of the rating basis is so that you and the company can determine the proper premiums. There are several agents who try to "low ball" your payrolls or receipts in order to initially write your policy. Then when the audit comes at the end of the year are faced with a earned premium due to the carrier. So always make sure you are aware of the rating basis of your policy. If you are not sure, always ask the agent and they can advise you.
Additional Insureds
More and more today additional insured endorsements have become more difficult to provide. Particularly if you are a sub contractor and a general has asked you to name them as additional insured with primary wording and waiver of subrogation. When you list someone as an additional insured, that endorsement provides coverage for that entity or individual under your policy if they are sued because of your negligence. In addition they will be notified of any cancellation of your policy. In most cases the generals ask you to add primary wording and waiver of subrogation. Primary wording makes your insurance the primary insurance for the general themselves. Waiver of subrogation means that your insurance company cannot subrogate back against the general for their negligence. In essence, you are taking on the liability for the general. And of courses any losses will affect your insurance premium for years to come.
If you are a general contractor, we suggest you obtain the primary wording and waiver of subrogation from your subcontractors.
Many carriers now are asking to be advised at the inception of the policy of any additional insured endorsements that will be needed during the policy period. They especially would like to know if you will have any that require primary wording and waiver of subrogation. There is usually a charge per additional insured, and an extra charge for the special wording. If you can advise us up front how many you will need we can negotiate the pricing for you or obtain blanket additional insureds for one set price. Sometimes it is hard to know if you will need this type of additional insured endorsements. But it helps us in finding you the best price and carrier. Some companies do not offer primary wording. We do not want to write you with a carrier that will not offer primary wording and then six months into the policy find you have a job that requires it. If you have questions about this please call us.
Tools
Tool coverage has become an increasingly difficult coverage to place. There has been wide spread theft of tools and determining a fair market value has been difficult. Most policies also include a locked vehicle endorsement which require that while they are kept in a vehicle, they must be in a fixed, locked compartment.
If you would like a quote on your tools, please send us an itemized list with the value of each piece of equipment. This may be difficult to do, but most carriers are no longer writing a misc. tool floater due to the theft problems.
Make sure not to leave them at job sites over night. And make sure that the site is fenced during the day to prevent people from walking on the site and then off with your tools.
Our agency currently writes over 500 contractors for workers compensation, bonding, auto insurance, and general liability. Our experience has shown that the accounts most penalized with high premiums are the ones involved in new residential construction. And more specifically those involved in multiple unit residential projects. We continually search to find you the best price and coverage available.
©2006 Professional Insurance Associates, Inc. All rights reserved. PIA
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