Just Bought an HVAC Company? Your Insurance Review Checklist

After buying a heating, ventilation and air conditioning (HVAC) company, start with six checks: the license and bonds, the seller's past installs, workers' compensation class codes, the fleet, pollution and refrigerant exclusions, and the mix of residential and commercial work. Those six cover most of the expensive surprises in this trade, and the table below adds a seventh, tools and equipment. This checklist is for searchers, Small Business Administration (SBA) loan buyers and holding companies who just closed on an HVAC business and inherited the seller's policies.

What should you check first after buying an HVAC company?

Work through this table with the declarations pages, full policies and five years of loss runs in front of you. The pre-closing insurance checklist covers the general document list; this one is specific to heating and cooling contractors.

Who holds the license, and what happens to the bonds?

In many states and cities, an HVAC or mechanical contractor needs a licensed individual, often called the qualifier, tied to the business. In owner-run shops that person is frequently the seller. If the seller leaves, retires or falls ill before someone else qualifies, the business may not be able to pull permits or bid licensed work. That bites hard in HVAC, because equipment replacements usually need a mechanical permit pulled under the license, so a gap can stall the changeout work that pays the bills. Some licensing boards also expect technicians to hold the federal refrigerant certification covered below. Insurers ask about all of this too. The full playbook is in when the seller holds the contractor license.

Bonds follow the license and the owners. They are usually re-underwritten after a sale, and a bond is not insurance for the business: the surety expects to be repaid if it pays a claim. See do surety and license bonds transfer. Some cities and counties also ask for their own registration or bond before a contractor can pull mechanical permits there, so list every jurisdiction where crews pull permits and check each one. Licensing rules vary by state and locality; confirm yours with the licensing board and deal counsel.

Will claims from the seller's past installs land on you?

They can. A cracked heat exchanger or a badly vented flue can send carbon monoxide into a home years after the install, and a clogged condensate line can flood a ceiling. The part of general liability that handles this 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.

Which policy responds depends on the deal. In a stock purchase, the company's own policies, past and present, 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 whether it covers the seller's old furnaces and rooftop units is not clear cut. The seller's old occurrence policies can help, but only for injury or damage that happened during those policy years (generally before closing). For failures after closing, the usual answers are a discontinued operations policy bought by the seller and written confirmation from your own carrier of what it will cover. See completed operations claims from the seller's past jobs.

Keep the seller's job records: addresses, dates, equipment installed, permits and inspections. They can be useful evidence when an old job is blamed; your carrier and defense counsel decide how to use them.

Is workers' comp priced for the work your crews really do?

Workers' comp premium is generally a rate per $100 of payroll for each class code, multiplied by payroll in that code, then adjusted by the experience mod. In states using National Council on Compensation Insurance (NCCI) rules, codes classify the business, not each job, but construction businesses are one of the situations where more than one basic code can apply. In many NCCI states, one code (5537) covers heating and cooling installation, service and repair together, so do not expect a split between install and service crews. Three questions usually matter more. Does duct or sheet metal work belong in a separate code? Do office and sales staff really qualify for the lower rated clerical and outside sales codes? And do the codes match the work crews actually do? Ask your broker what each code on the policy covers in your state.

• Splitting payroll needs records. Under NCCI rules, one employee's pay can be split between codes only if your records show the actual time and pay in each. Estimates or percentages do not count, and without records the pay goes into the highest rated code involved.
• Office staff must really be clerical. A dispatcher who also drives to job sites may not qualify for the clerical code.
• Audits fix codes after the fact. If the auditor finds the work does not match the codes, the insurer reassigns them, which can bring an audit bill.
• The mod usually comes with the business. Even in an asset purchase into a new company, the seller's experience generally transfers to you in NCCI states, and the ownership change must be reported, generally within 90 days.

California, Pennsylvania and Delaware use their own classification systems and may draw these lines differently, 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. See workers' comp class code corrections and workers' comp for HVAC contractors.

How are refrigerant, carbon monoxide and mold claims handled?

This is the coverage question most specific to HVAC, and the answer lives in the exclusions.

• Pollution. General liability usually excludes most pollution, with narrow exceptions in the standard form, and many contractor policies add broader exclusions. Contractors pollution liability is a separate policy built for contractors' work. See new owner review: pollution liability.
• Carbon monoxide. A claim that a furnace you installed or serviced leaked carbon monoxide can raise pollution exclusion questions, and insurers and courts have not always treated it the same way. Check whether your policy carries a total pollution exclusion endorsement, which is broader than the standard form, and ask your carrier in writing how your policy treats carbon monoxide from your work.
• Mold. Many policies exclude fungi or mold, which matters when a condensate leak or poor duct work leads to mold claims.
• Refrigerant rules. Under Clean Air Act section 608, the Environmental Protection Agency (EPA) requires technicians who maintain, service, repair or dispose of equipment that could release ozone-depleting refrigerants to be certified, and prohibits intentionally venting refrigerants, including common substitutes. Fines and penalties are often outside what insurance will pay, so confirm technician certifications as part of your review.

A hypothetical example. Six months after closing, a family is treated for carbon monoxide exposure after the buyer's technician services their furnace. Their lawyer demands $150,000. The general liability carrier reserves its rights (it defends for now but says it may deny coverage later) under the pollution exclusion while it investigates. Had the buyer asked its carrier in writing, in its first weeks of ownership, how the policy treats carbon monoxide, or added contractors pollution coverage, it would know where it stood that week. Instead, it is waiting to learn whether a settlement could come out of cash set aside for debt service.

Does the policy fit residential and commercial work?

The same company can look like two different risks to an underwriter. Residential service means many homes, many small jobs and allegations of in-home damage or theft. Commercial work means bigger contracts, rooftop units, crane lifts and contracts that demand additional insured status, waivers of subrogation and higher limits.

• Check for restrictions on residential construction, condos or new tract homes, which some contractor policies limit.
• Compare commercial contract requirements against your policies; see how to check customer contracts against your policies.
• If crews design systems as well as install them (design-build), many general liability policies exclude professional services. Ask whether contractors professional coverage is needed.
• Commercial contracts often require umbrella limits. Make sure the umbrella sits over the auto and employers liability as well as general liability.

What about the vans, drivers and tools?

Service fleets produce frequent claims, and in owner-run shops vehicles are sometimes titled to the seller or a family member. Retitle them and schedule them on your commercial auto policy; see vehicles still titled to the seller. Pull motor vehicle records for every driver, set a written take-home vehicle policy, and add hired and non-owned auto coverage if staff ever drive their own cars for work.

Tools and stock usually need an inland marine (contractor's equipment) policy, because a property policy often covers them only at your premises. Read the theft conditions: some policies limit theft from unattended vehicles unless the vehicle was locked and shows signs of forced entry.

Keep reading

• When the Seller Holds the Contractor License: Insurance and Bond Risks
• Completed Operations Claims From the Seller's Past Jobs: Who Pays?
• Workers' Comp Class Code Corrections: Fixing a Common Overpayment
• New Owner Review: Pollution Liability
• Just Bought a Plumbing Company? Your Insurance Review Checklist
• All guides for new business owners

Frequently asked questions

What is a discontinued operations policy, and should the seller buy one?

It is a general liability policy bought by the seller after it stops operating, covering injury or damage from its past work that happens after its regular policy ends. In an asset purchase it can fill the gap your own policy may leave for the seller's old installs. It responds only to injury or damage during its own policy term, so ask how long the seller will keep it in force and whether the purchase agreement requires renewals. It is usually negotiated in the purchase agreement, so raise it with deal counsel before closing, or ask now whether the seller bought one.

Do I need pollution insurance for an HVAC business?

Many HVAC contractors do, because general liability usually excludes most pollution and often mold. Whether you need a contractors pollution policy depends on your work, your contracts and your existing exclusions. Ask your broker to show you the exclusions in writing.

Will the seller's license bond stay valid after I buy the company?

Do not assume so. Bonds are usually re-underwritten or reissued after an ownership change, new owners typically sign new indemnity agreements, and a new license may need a new bond. Check with the surety and the licensing authority.

Why did my workers' comp audit come back higher than the estimate?

Common reasons are payroll growth, employees placed in lower rated codes without records to support the split, and uninsured subcontractors counted as payroll. An audit sets the final premium from actual payroll and correct codes.

What records should I get from the seller of an HVAC company?

Job lists with addresses and dates, equipment installed, permits and inspection records, warranty and service agreements, loss runs, open claims, vehicle titles and technician certifications. They help defend old claims and support your renewal.

References

• EPA: Section 608 of the Clean Air Act (stationary refrigeration)
• EPA: Section 608 Technician Certification
• ISO: CG 00 01 12 07 Commercial General Liability Coverage Form (carrier-hosted copy)
• NCRB: Basic Manual Rule 2, Premium and Payroll (NCCI rules, North Carolina edition)
• NCCI: ABCs of Experience Rating

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.