INSURANCE. A Series for Fire Sprinkler Contractors. By Ginny Kloepping, CIC. What You Need to Know Before You Buy

Transcription

1 INSURANCE A Series for Fire Sprinkler Contractors Part 1: What You Need to Know Before You Buy Part 2: Coverage Grants to Exclusions Part 3: Two Insurance Terms that are NOT Interchangeable: Occurrence and Claim Part 4: Standard Contract Insurance Requirements: What Is Generally Available and What Is Not Part 5: Understanding the Insurance Claims Process Know What You Can Do To Reduce the Cost of Your Claims FPC magazine 550 High Street Auburn, CA info@fpcmag.com

2 Insurance A series for fire sprinkler contractors on Commercial General Liability Insurance Part 1 What You Need to Know Before You Buy The Liability Insurance Policy is a contract that you need to understand, as it is designed to transfer some of your tort liability (negligence) to the insurance company in exchange for the premium paid. As a business owner, you will need to assess how much risk tolerance your company has and how much you can successfully transfer to others, either by contract or using insurance policies. General Liability Policies come in infinite variations, and with these articles, we hope to clear up some of the questions we hear from contractors and make the process of selecting what is right for your business easier to tackle. Typically, Commercial General Liability policies are distributed to contractors by agents and brokers, who are compensated either by a commission from the carrier or a fee paid by you. Depending on the state laws they may, in some situations, receive both, if they are providing services beyond the normal, such as risk management. These carriers can be admitted or non-admitted, but any insurance company should have a Rating (there are various carrier rating organizations) that qualifies for your customer s contracts (for example, AM Best rating of A with a financial strength of Vlll ). As it affects your interests, here is some of what you can expect with: Non-Admitted Carriers 1. Forms and Rates not regulated by State Insurance Department. 2. Surplus lines taxes vary by state, and may include stamping fees as well as filing fees charged by surplus lines agent filing the taxes. 3. Some ISO forms are used, but many nonstandard forms can also be used be sure to read these forms. 4. Some carriers incorporate the supplemental application, and any material submitted with it, as part of the policy and may cancel if there is a material change in the risk. 5. Many do not offer return premium audits. 6. In many states, non-admitted carriers do not have to follow State Insurance Department regulations regarding mid-term cancellations or non-renewals. Admitted Carriers 1. Regulated by Insurance Department Rates and Forms. 2. No Surplus Lines Taxes as Insurance Carrier pays taxes directly. 3. Standard Insurance Service Office (ISO) forms are used by ISO affiliated carriers and carriers will file and use some of their own forms, if approved by insurance departments. 4. Usually, audits will provide both additional and return premium. 5. State Insurance Department s mandate cancellation or renewal notice times and reasons. Either process starts with standard ACORD applications completed by your agent and you, a supplemental application designed to get industry specific information, and five (5) years of currently pulled or valued loss runs from prior carriers. Underwriters will review this information, view websites (make sure these are an accurate description of your operations), and sometimes get loss control professionals involved to discuss operations, exposures, and prior losses. Not all carriers provide loss control/risk management services. It is most important that during this process you tell your story, especially about what makes your business successful including your claims history, and, if you have had larger claims, details of these claims and if at fault what has been done as a result of a claim to prevent future losses. Underwriters are charged by the carrier to select risks that will perform well, so, with that in mind, any information regarding your operations and best practices instituted or changed to prevent losses will you get the best offering from the company. Your agent should have the quotation to you in writing and you should expect to see: 1. The carrier s name and their rating by one of the insurance company rating facilities. 2. The Limits of Liability. 3. Rates and Exposure basis (Receipts, Gross Payroll, or Specific Classes of Payroll Fire Suppression, Draftsman, Shop). Reprinted from FPC/Fire Protection Contractor magazine November 2010 edition

3 4. Premium (including any minimum or minimum earned). 5. List of Endorsements and Forms (copies should be provided and read). 6. Deductible (type and inclusions such as per occurrence excluding allocated claims adjustment expenses (ALAE) or per claim including all ALAE). When you bind your coverage, it should also be in writing and include policy duration as well as all the terms and conditions presented in the quote. Policies typically follow within a month s time and these should have the quoted forms, limits, deductibles, rates, and rating basis. About the Author: Ginny Kloepping, CIC, is an Underwriting Manager with the Fire Sprinkler Contractors Program for the RelMark Program Managers. She may be reached at ext. 213, vkloepping@relmark.net, Website: Reprinted from FPC/Fire Protection Contractor magazine November 2010 edition

4 Insurance A series for fire sprinkler contractors on Keys to Understanding the General Liability Insurance Policy Part 2 Coverage Grants to Exclusions The general liability insurance policy is a contract between the Named Insured and the Insurance Company to pay premium in exchange for a promise to pay for and defend losses that you are legally obligated to pay, as long as it is covered by the policy. Over the years, this contract has changed multiple times and been interpreted by many courts. Like the contracting industry s use of American Institute of Architects (AIA) uniform contracts, the insurance industry uses some of the Insurance Service Office (ISO) forms. ISO is supported by many insurance carriers and, in return, ISO develops rates and ISO forms that can be used by these carriers. The ISO General Liability Policy (CG 0001) is divided into a number of Sections and Sub-sections, which are cross referenced in numerous places, making it tedious to find answers to questions of coverage. It is the reason so many coverage attorneys are used by claims professionals to make a final coverage determination when a claim out of the ordinary is reported. It is still very important as a consumer to know how to look at this contract and understand the coverage provided, and, more importantly, what is excluded. If a word is in quotation marks, be sure to look at the definition in the policy, mostly in Section V, as these definitions can extend or limit the meaning and coverage offered. Section I Coverages This section has three parts, each with its own insuring agreement which is a broad statement of what is being covered followed by exclusions for that particular coverage offered. A. Bodily Injury and Property Damage B. Personal and Advertising Injury C. Medical Payments Supplemental Payments This section outlines the payments, typically outside the policy limit, to investigate and defend against claims. There are conditions outlined in this section that must be met for the carrier to provide these payments. Section II Who is an Insured This section outlines those included as an insured and in what situations coverage is provided for these entities. Section III Limits of Insurance It is in this section that each of the sub-limits, and their relationship to the other limits on the general liability policy, are explained. Section IV Commercial General Liability Conditions The Conditions section deals in the mechanics of the policy, including duties in the event of a claim or cooperation with the auditors. It also includes how the policy interacts with other available insurance as well as some of the carrier s duties, rights, and expectations based on the applications and information given to the carrier. Rates and exposures to loss vary greatly by classification of work done by your business and, for that reason, it is important to accurately describe your business to the carrier. The policy can be cancelled or non-renewed by your carrier if the types of work have been misrepresented. Some carriers take this one step further by endorsing the policy with a Classification Limitation Endorsement to make sure they are only insuring certain operations using specific class codes. With this type of an endorsement, the concern would be that a claim may be denied if the classification of work is not listed on the policy, such as non-sprinkler work that is subcontracted out to others. Section V Definitions This is, as it indicates, where the words or phrases used in the policy in quotation marks are defined. It is important to read the full definition in context with the portions of the policy where it is found, and look at the following: 1. Is there an exception to the definition? 2. Are there conditions that must be in place to determine coverage? 3. Are the conditions followed by the word OR? 4. Does the description use the words ANY or ALL? Now for the monkey wrench No policy would be complete without a large number of endorsements that are designed to expand, limit, or clarify the liability policy. These come in several forms: Reprinted from FPC/Fire Protection Contractor magazine December 2010 edition

5 1. ISO endorsements that will have either Commercial General Liability Form numbers CG (0001 to 3380) or Interline Form numbers of IL (0101 to 1207) followed by edition date of the form. Most exclusions start with CG21--. Some risk specific endorsements that may include exclusions or limited coverage start with CG Individual Insurance Carrier forms with a variety of prefixes, numbers, and edition dates (READ THESE CARE- FULLY). 3. Some carriers choose to use the CG prefix followed by their own number, and, to further confuse most of us, indicate that some copyrighted ISO material was used. (READ CARE- FULLY AS THERE MAY BE MORE CONDITIONS OR EXCLUSIONS ADDED TO WHAT ISO HAS WRITTEN.) Work closely with your agent to make sure you have the coverage you need for your business risk. Note: Underwriters are not permitted to do coverage interpretations, as these policies are written by ISO, insurance companies, and their attorneys and coverage for particular claims are determined by claims managers in conjunction with coverage attorneys, and, if there is a dispute, the courts may ultimately decide. About the Author: Ginny Kloepping, CIC, is an Underwriting Manager with the Fire Sprinkler Contractors Program for the RelMark Program Managers. She may be reached at ext. 213, vkloepping@relmark.net, Website: com. Reprinted from FPC/Fire Protection Contractor magazine December 2010 edition

6 Insurance A series for fire sprinkler contractors on Keys to Understanding the General Liability Insurance Policy Part 3 Two Insurance Terms that are NOT Interchangeable: Occurrence and Claim These terms will affect your bottom line if you have chosen the wrong one! Deductibles Per Claim vs. Per Occurrence If your liability policy has a deductible, per occurrence is the preferred type. All too often, the deductibles are quoted on a per claim basis and the difference in a multi-tenanted building can be disastrous to your bottom line, as the deductible will apply per claim or per claimant. With a per occurrence deductible, a single deductible would need to be paid back to the carrier, no matter how many claimants are involved. Consider a four-story building with multiple tenants on each floor, plus a building owner. Using a per claim deductible policy, if the water runs straight down, you may be dealing with five deductibles when a fitting comes apart or a head activates. But, as we all know, water travels the path of least resistance, so it may spread out to three tenants on the top floor and drip down on the next two tenants below, and so on. Each tenant becomes a claimant, or a claim, and the number of deductibles that you get charged with could soon double your premium paid. This same claim with a per occurrence deductible would be paid one time. On the subject of deductibles, you should also be aware that deductibles have several other variables. The deductible can apply to: S Property Damage (PD) or S PD and Bodily Injury (BI) or S BI, PD, and Personal and Advertising Injury Since most sprinkler contractor claims are Property Damage, we need to examine how the deductible will apply to those claims. Some deductible forms, like ISO form CG 0300, only require the reimbursement of the indemnity-actual damages or amount paid to the injured third party which is the best for your bottom line. Retro Date of Policy Effective Expiration End of Tail-to Date Loss report loss ***** Claim must occur during this period***** Chart 1 Date of Policy Retro Expiration and Effective Loss No Claim must occur during this Coverage period Chart Summary To summarize the above chart, if you had claims made coverage for both years and did not have the retro date back to the beginning of the first year, in the second example there would be no coverage. If you are switching back to an occurrence form, you should purchase an extended tail of reporting claims. Reprinted from FPC/Fire Protection Contractor magazine January 2011 edition

7 There are other deductible forms, however, that include expenses paid. These expenses are typically called ALAE (Allocated Loss Adjustment Expenses) and they are expenses specific to the claim, and include expenses such as: S Legal fees S Appraiser costs S Experts If ALAE expenses are part of your deductible, you get to pay for those expenses within your deductible, even when you were not at fault! The words Occurrence and Claims are also used to determine if a policy will respond to a loss. Occurrence Forms Most contractors general liability policies (some including errors and omissions) are written on an occurrence form, which in basic terms means that the loss must happen or occur during the policy period this can include work completed prior to effective date subject to statutes in the state. With this in mind, in today s economic times of businesses being sold and shutdown, if the loss occurs after the policy expires, there is no coverage. To solve this problem, often contractors who sell their business obtain coverage for completed operations, also known as Discontinued Operations Coverage Claims Made Forms On the tougher lines of insurance, like professional and pollution policies, some carriers want to limit their exposures, so the policy is offered on a claims made form. In simple terms, this means that the loss must happen after the retroactive date and be reported during the policy term (plus short reporting tail typically 30, 45, and sometimes up to 90 days). If you purchase coverage on claims made form, it is important that your retroactive date always be the date you started to buy the claims made coverage. See Chart 1 on opposite page. Be an informed buyer of insurance and ask questions of your agent. Do not accept less than a professional proposal indicating: S Type of coverage form occurrence or claims made S If claims made, the retroactive date and how long the tail is for reporting losses S Type of deductible per occurrence or per claim, what coverages it applies to and whether or not it included allocated loss adjustment expenses About the Author: Ginny Kloepping, CIC, is an Underwriting Manager with the Fire Sprinkler Contractors Program for the RelMark Program Managers. She may be reached at ext. 213, E- mail: vkloepping@relmark.net, Website: com. Reprinted from FPC/Fire Protection Contractor magazine January 2011 edition

8 Insurance A series for fire sprinkler contractors on Keys to Understanding the General Liability Insurance Policy Part 4 Standard Contract Insurance Requirements: What Is Generally Available and What Is Not Due to the ever-changing legal environment, insurance industry forms have been updated many times over the years in order to provide the coverage that was intended. The contracting industry is always looking for most efficient ways to get the job done and, as a result, may re-use terminology for insurance requirements that were used in the past, helping to create a nasty cycle. Break the cycle and make sure you are only being asked for coverage that is readily available. Ask the drafter of the contract if their agent is able to get this coverage for them. Attorney or Contractor drafts contract outlining insurance requirements for subcontractor to provide using insurance terms of coverage that are no longer available. Dispute or Loss Occurs possible claims, lawsuits, or coverage disputes Work with your insurance agent and attorney to resolve the contract issues before they become problems. Sub-contractor provides coverage available Result Breach of Contract possible ISSUES: Getting paid for work Lawsuit from client looking for coverage that may not be there. You know you have a problem when you are being requested to provide: Comprehensive General Liability Policy (Last found in 1986) Manufacturers and Contractors Liability Insurance (Also 1986 vintage) Broad Form Comprehensive general liability endorsement (1986) Additional Insured Form CG (replaced in admitted markets with newer versions in 1993, 1997, 2001, and 2004). Note version provides coverage for both ongoing and completed operations and does not limit the coverage for the owner or general contractors sole negligence. The big question is, if you can get this coverage, would you want to pay for losses caused solely by another? Contracts should require currently available forms Commercial General Liability Policy (ISO policy name since 1986) Additional Insured Owners Lessees or Contractors Scheduled Person or Organization Form CG (this is most current version) for ongoing operations (before job is completed). Older versions are: , , , and Additional Insured CG (This is the most current version) Similar to CG 2010, but it is Automatic Status when required in construction agreement with you. Older versions are: , , , Additional Insured Owners, Lessees, or Contractors Completed Operations CG There was only one prior version: This form is used for a scheduled additional insured, although some carriers will add blanket wording for those with written construction contracts. This form extends coverage to the additional insured for completed operations. Designated Construction Project(s) General Aggregate Limit CG Older versions are: and The 1985 version had a different name: Amendment Ag- Reprinted from FPC/Fire Protection Contractor magazine February 2011 edition

9 gregate Limits of Insurance (per project). Current version gives the flexibility of naming one additional project or using a blanket wording to make the aggregate applicable to all projects. Note the ISO form, unlike some company specific forms, does not dollar cap on total use of the aggregate limit. For example, if the aggregate limit is $2,000,000 to apply to each project, the cap may be $5,000,000 for all projects. Waiver of Transfer of Rights of Recovery Against Others to Us. CG Older Versions are: and This form can be used on a scheduled or blanket basis. Primary and Non Contributory Forms This is not available in ISO and most companies have their own version. Design Errors and Omissions Coverage ISO offers a Limited Exclusion Contractors Professional CG This coverage is limited to bodily injury and property damage, personal injury, and advertising injury. This coverage is also available on carrier-developed forms and should include coverage for the services you provide, for example: Fire Sprink ler and fire suppression systems design, engineering, testing, inspection, and installation services performed by you including the preparing, approving, failure to prepare or approve or consult with respect to maps, shop drawings, opinions, survey, field orders, change orders, or drawings and specifications In this economy, to protect your bottom line, you should review with your agent the insurance requirements prior to signing the contract to help eliminate any insurance reasons for a general contractor to withhold payments. Please note that the above are short descriptions of coverages and each policy has many endorsements, terms, and conditions that could affect your coverage. Please contact your agent and individual carrier for interpretation of coverage on your insurance policy. About the Author: Ginny Kloepping, CIC, is an Underwriting Manager with the Fire Sprinkler Contractors Program for the RelMark Program Managers. She may be reached at ext. 213, E- mail: vkloepping@relmark.net, Website: com. Reprinted from FPC/Fire Protection Contractor magazine February 2011 edition

10 Insurance A series for fire sprinkler contractors on Keys to Understanding the General Liability Insurance Policy Part 5 Understanding the Insurance Claims Process Know What You Can Do To Reduce the Cost of Your Claims Before the Loss Occurs The most important thing you can do prior to a loss is make sure you are insured with a carrier who has the expertise needed to handle a fire sprinkler claim. Many carriers who write sprinkler contractors will have their regular claim staff handle your loss. Others have fire sprinkler-specific claim professionals handling every loss. Whether you are dealing with a Carrier adjuster or a Third Party Administrator (TPA), you should find out who the key claim personnel are and if they handle the full spectrum of claims, or if they specialize in fire sprinkler systems. These are the people who will be making your claim decisions, such as: 1. Assigning an outside adjuster/appraiser to assess damages (not necessarily liability). 2. Assigning an expert (professional engineer, metallurgist, plastics expert, etc). 3. Retaining an attorney for defense or contract review. 4. Requesting all relevant paperwork (test certificates, contracts, other primary insurance). Working with a claim professional who does not know sprinkler systems would be like having your Dermatologist do an appendectomy on your child. Since your business is your brainchild and your livelihood, why take a chance? How to help yourself When you have determined who the key claim personnel are, ask these important questions: 1. Are you familiar with NFPA? 2. Do you know the difference between wet and dry sprinkler systems? 3. How many fire sprinkler claims are on your desk right now? In the past year? 4. Do you have claim personnel with fire sprinkler experience on call 24/7? Don t wait until coverage is bound; ask the questions before you bind your insurance. The best solution to reduction in costs is not to have any claims, as even without a deductible or self insured retention, there are soft claims costs that come out of your pocket, such as additional time required to go out to the site, supervisors time with paperwork, retraining, and safety meetings. Unexpected claims occur, even to the best contractors, and it is important to know what to expect. There are three basic methods of setting up your insurance program: 1. No Deductible Carrier pays claims and claim-related expenses. 2. Deductible With carrier paying expenses (ISO form). You will reimburse the carrier for claims paid to a third party up to the deductible amount. (Remember the advantages of per occurrence over per claim or claimant especially in multitenanted buildings.) 3. Deductible including expenses You would reimburse carrier for expenses and claim payments up to deductible amount. 4. Self Insured Retention Claims and expenses are paid by you. You usually will need to hire a Third Party Administrator to handle the claims until carrier takes over the claim. This takeover would depend on how the form is set up (size of claim and type of claim could trigger this takeover). Typically, there is some minor premium relief when you are accepting more of the claim and expense costs, but often it is a tool that the underwriter is using to control the loss ratio on the policy (Losses Incurred / Premium Earned). Prior to having a loss is also the best time to work with your attorney to develop contracts, or review and negotiate contracts, that you are being asked to sign. The terms you agree to in a contract today could either expand or limit the exposure you face tomorrow. Reprinted from FPC/Fire Protection Contractor magazine March 2011 edition

11 After the Loss Occurs There are a number of ways to help your Claims Professional defend your business and either reduce or eliminate the cost of the claim. 1. Prompt notification to the company representative and agent when a loss occurs. 2. Work closely with your claims representative to determine the cause of loss. 3. If you are at the site, do not make statements accepting liability! It may not be your fault. 4. Protect the evidence Do not give it to the manufacturer, or other parties, for testing until, and unless, your Claims Professional authorizes this. 5. Have all the paperwork associated with the job ready for the Claims Professional to review: contracts, change orders, test certificates, closeout documentation. 6. Know who was involved in the job Employees, other companies? Make sure to let your claims adjuster or defense attorneys know who was involved so that they can interview them to determine if formal statements should be made to help defend your position. 7. Complete incident report (sometimes provided by carriers). 8. If one of your subcontractors was involved, have your contract and a copy of their certificate of insurance ready for your insurance carrier. Finally, if, during the process, you have discovered a better way to do the next job, discuss those changes in procedures with your loss control representative, as they may have other options to consider, and let your agent know that you are implementing changes that should prevent future losses of this type. About the Author: Ginny Kloepping, CIC, is an Underwriting Manager with the Fire Sprinkler Contractors Program for the RelMark Program Managers. She may be reached at ext. 213, E- mail: vkloepping@relmark.net, Website: com. Reprinted from FPC/Fire Protection Contractor magazine March 2011 edition