Just Bought a Plumbing Company? Your Insurance Review Checklist

After buying a plumbing company, read the water damage terms first, because water claims define this trade. Then check five more things: residential or new construction restrictions, which policy covers the seller's past jobs, the license and bonds, the vans and drivers, and tools kept away from the shop. The table below also covers underground and gas work and workers' comp. This checklist is for searchers, Small Business Administration (SBA) loan buyers and holding companies who just closed on a plumbing business and inherited the seller's policies.

What should you check first after buying a plumbing company?

Use this table with the declarations pages, full policies with endorsements, and five years of loss runs. The general document list is in the pre-closing insurance checklist.

How does your policy handle water damage claims?

Water damage is the plumbing claim, for a reason: Insurance Information Institute (Triple-I) data show water damage and freezing among the most frequent causes of homeowners property claims, and when a homeowner's insurer pays for a leak it may try to recover the money from the plumber who did the work (subrogation). Your general liability policy is what responds to that demand.

Read four things in the policy:

• Special water damage terms. Some contractor policies apply a separate, higher deductible to water damage claims, cap them with a sublimit or exclude certain water work. These usually appear in endorsements, not on the declarations page. See why the endorsements matter more.
• Your own work. General liability forms commonly exclude the cost of redoing your own faulty work and damage to the particular part of property you were working on. Resulting damage to other property, such as ruined floors and drywall, is often what the policy is for, but the line depends on the form.
• Mold. Many policies exclude fungi or mold, which can follow a slow leak. Ask whether any coverage applies.
• Sewage and pollution. Claims involving sewage backups can raise pollution exclusion questions, depending on the wording. If crews do drain and sewer work, ask whether a contractors pollution liability policy is needed. See new owner review: pollution liability.

Water claims also hit your loss history hard. A few large ones can push a plumbing account toward higher deductibles or the excess and surplus lines market (specialty insurers that take harder risks, often on less standard terms) at renewal. See admitted vs excess and surplus lines.

Are there residential or new construction exclusions?

Underwriters treat residential new construction, condos and townhomes as higher hazard because of long-tail defect claims. Some contractor policies exclude or restrict that work, or limit it to a share of revenue. If the seller described the business as "service and repair" but crews also rough in plumbing for a home builder, the policy may not match the work.

• Compare the policy's classification and description of operations with the actual revenue split: service, remodel, new residential, commercial.
• Check builder and general contractor contracts for additional insured, waiver of subrogation and primary and noncontributory requirements; see additional insured, waiver and primary noncontributory, explained.
• Some large projects use a wrap-up program, where the project owner or general contractor buys liability insurance for all trades on the site. Know which jobs are wrapped and what your own policy excludes for them.
• Excavation, sewer lateral and gas line work can trigger explosion, collapse and underground (XCU) exclusions on some contractor policies. Confirm coverage if crews dig or work on gas.

Which policy pays for leaks from the seller's past jobs?

The classic plumbing claim from an old job is slow: a fitting weeps inside a wall for months and the damage shows up two years after installation. That is a completed operations claim. The part of general liability that handles it is called products and completed operations. Under the standard form, it covers injury and damage away from your premises caused by your finished work. It has its own aggregate limit (the most it pays in a policy year), separate from the general aggregate.

In a stock purchase, the company's old and current policies stay with it. In an asset purchase, your new company's policy covers "your work", meaning work done by you or on your behalf. The standard wording does not mention work done by the company you bought from, so a leak from the seller's past job may fall between policies. The seller's old occurrence policies can respond only to damage that happened during their policy years, which is usually before closing; a slow leak that began earlier can raise questions about which years apply. For failures after closing, the usual answers are a discontinued operations policy bought by the seller and written confirmation from your carrier. See completed operations claims from the seller's past jobs and who is liable for work the seller did, and ask deal counsel how your purchase agreement allocates these claims.

Get the seller's job records, warranty terms and permit history before they disappear into a storage unit.

Who holds the license, and do the bonds carry over?

Plumbing licensing is set by states and, in some places, cities or counties. Many require a licensed master plumber or qualifier tied to the business, and in owner-run shops that is often the seller. Some jurisdictions also limit how many journeymen or apprentices one licensed plumber can supervise, so losing a license holder can cut how many crews you can legally run, not just who pulls permits. Separate credentials can apply to specific work, such as backflow testing or gas piping, so list which employees hold which licenses and when each renews. Know who the qualifier is, how long they will stay and who can replace them. See when the seller holds the contractor license.

License, permit and contract bonds are usually re-underwritten after an ownership change, and a bond is not insurance for the business: the surety expects the company and its owners to repay any claim it pays. See do surety and license bonds transfer.

What about workers' comp, vans and tools?

Workers' comp. In states using National Council on Compensation Insurance (NCCI) rules, the seller's experience generally transfers to you even in an asset purchase, and the ownership change generally must be reported within 90 days. Make sure the class codes match the work, and remember that splitting one person's payroll between codes needs actual time records. Uninsured subcontractors can be added to your audit. California, Pennsylvania and Delaware use their own classification systems, and in North Dakota, Ohio, Washington and Wyoming, workers' comp comes from a state fund (or self-insurance in some of those states), not private insurers, so confirm the rules in each state where crews work. See new owner review: workers' comp and workers' comp for plumbers.

Vans and drivers. Retitle any vehicles still in the seller's name, schedule every van on the commercial auto policy and pull motor vehicle records for every driver. Add hired and non-owned auto coverage if staff drive their own cars for errands or supply runs.

Tools and stock. Drain cameras, jetters, pipe threaders and van stock often need an inland marine policy, since a property policy may cover them only at the shop. Check the theft conditions for tools left in vans overnight. See inland marine for plumbers.

How might a water claim play out after you buy?

A hypothetical example. A holding company buys a plumbing company in an asset deal and keeps the seller's carrier for its new entity. Ten weeks after closing, a supply line the buyer's crew installed in its first month fails in a second floor bathroom, flooding two floors. The homeowner's insurer pays $90,000 and sends a subrogation demand. The buyer's general liability policy responds, but its endorsements carry a $25,000 water damage deductible that nobody noticed, compared with a $1,000 deductible for other claims. That $25,000 comes out of the month's cash, and the claim sits on the loss runs at the first renewal. Reading the endorsements in the first weeks after closing would have flagged it, so the buyer could budget for it or ask the market for different terms. If you have not read yours yet, start there.

Plumbing accounts are judged on water losses, so a clean record matters at renewal. Written installation standards, pressure testing and leak checks before leaving a job help. See how safety programs can support better terms. A Morrow review can read the water damage terms and exclusions against the work your crews do.

Keep reading

• Completed Operations Claims From the Seller's Past Jobs: Who Pays?
• When the Seller Holds the Contractor License: Insurance and Bond Risks
• Do Surety and License Bonds Transfer When You Buy a Business?
• Declarations Page vs Full Policy: Why the Endorsements Matter More
• Just Bought an HVAC Company? Your Insurance Review Checklist
• All guides for new business owners

Frequently asked questions

Does general liability cover water damage a plumber causes?

Often, yes, for damage to other people's property, subject to the policy's terms. Many forms exclude the cost of redoing your own faulty work, and some contractor policies add higher water damage deductibles, sublimits or exclusions. Read the endorsements.

Why is my plumbing company's water damage deductible higher than the regular deductible?

Some carriers apply a separate deductible to water damage claims because they are frequent and costly in this trade. It is set by endorsement, so it may not appear on the declarations page. Ask whether other markets offer different terms at renewal.

Am I liable for leaks from jobs the seller did before I bought the company?

It depends on the deal structure, your purchase agreement and state law. In an asset purchase your policy may not clearly cover the seller's past work. Ask deal counsel about liability and your broker about which policy would respond.

Do I need a new plumbing license bond after buying the business?

Often, yes. Bonds are usually re-underwritten or reissued after an ownership change, and a new license generally needs a new bond. Check with the surety and the licensing authority before the old bond lapses.

What does an explosion, collapse and underground exclusion mean for plumbers?

Some contractor policies exclude damage from explosions, structural collapse or damage to underground pipes and cables caused by your work. If crews dig, work on sewer laterals or handle gas lines, confirm whether that exclusion applies and whether it can be removed.

References

• Insurance Information Institute: Facts and Statistics, Homeowners and Renters Insurance
• ISO: CG 00 01 12 07 Commercial General Liability Coverage Form (carrier-hosted copy)
• NCCI: ABCs of Experience Rating
• NCRB: Basic Manual Rule 2, Premium and Payroll (NCCI rules, North Carolina edition)

This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.