Insurance Gaps to Check After Buying a Water Damage Restoration Company

Start your gap check with the endorsements, not the limits. Five things deserve a written question to the carrier: damage to the part of the building the crew is working on, a mold exclusion on the liability policy, a pollution exclusion that may reach sewage, asbestos or lead dust, nothing for customers' belongings in the warehouse, and drying equipment valued at depreciated cost. This guide is for owners who just bought a restoration company and want to know where the seller's program may not match how the crews really work.

Where should I look for gaps in a restoration company's insurance?

None of these is certain to be on your policy. They are the places to look, in the order a claim would test them.

Why is mold the first gap to check?

Because moisture is the whole job and mold can follow incomplete drying. The Environmental Protection Agency (EPA) says it is impossible to get rid of all indoor mold, that no federal limits exist for mold or mold spores, and that moisture control is the key. A customer who finds mold weeks after a job may look to the restoration company.

One widely used liability endorsement removes coverage for bodily injury or property damage that would not have occurred, in whole or in part, but for fungi or bacteria in or on a building, including contents, and for the cost of testing, cleaning up or remediating them. Another restores a limited amount of that coverage, usually through a separate sublimit. A form lookup page notes that contractors often negotiate the limited version back in. Whether your inherited policy has either one, or a carrier's own mold wording, can only be read from the policy.

A hypothetical example. A crew dries a flooded basement in a rental house. Two months later the owner finds mold behind a wall and says drying was incomplete. The buyer's first questions:

• Does the liability policy carry the exclusion?
• Is there a limited mold sublimit, and how large is it?
• What do the drying logs show?
• Is there a professional liability policy?
• Does the claim fall in a policy period?

A policy with a full exclusion may leave the company paying the claim itself, which is a debt service problem as much as an insurance one.

Some states also license mold work. See contracts, licenses and bonds for a restoration company.

Do sewage, asbestos and lead dust fall into a pollution gap?

They can. The standard liability pollution exclusion removes coverage for injury or damage from pollutants. A general definition treats any irritant or contaminant (solid, liquid or gas) as a pollutant, and smoke, soot, fumes, chemicals and waste can count. A restoration crew can meet several candidates: sewage or contaminated water, mold, asbestos or lead dust released during tear-out (removing wet drywall and flooring), and cleaning or antimicrobial chemicals. A total pollution exclusion goes further by removing the exceptions, including the contractor exception.

A separate contractors pollution policy exists for these exposures. What it covers varies by carrier, so ask for the wording and the retroactive date (the earliest date of work a claims-made policy will cover). A new policy that starts that date on its own start date leaves earlier jobs out. See how to review pollution coverage as a new owner.

Lead-safe and asbestos rules can also reach older buildings. Those duties are covered in contracts, licenses and bonds for a restoration company.

What about stored belongings, equipment and vehicles?

Walk the warehouse with the schedule in hand. Count the units on the floater against the units on the shelves and in the trucks, ask for the highest stored-contents value in the past year and compare it with any bailee limit, and check each trailer's rated weight against the auto schedule.

Then read the wording. Customer property moved to your site is in your care, custody or control, which the standard liability form generally excludes, so many owners need bailee coverage. The library page on bailee coverage for a restoration company goes deeper. Equipment is usually insured on an inland marine floater, and one conditions form values property at actual cash value unless the coverage form or an option says replacement cost, which can leave you short after a theft. The standard business auto form has no newly acquired organization provision, so it does not automatically cover another company you acquire. Separately, a vehicle bought after the policy starts is covered or not depending on the covered auto symbol, so confirm that each truck is scheduled or fits the symbol. For more, see reviewing equipment coverage as a new owner.

Where do subcontractors and paperwork open gaps?

If rebuilding is subcontracted, one endorsement deletes the subcontractor exception to the "your work" exclusion. With it, damage to finished work is not covered even when a subcontractor did the work, although damage to other property and bodily injury are unaffected. Even without that endorsement, the standard form excludes damage to your own finished work when your own employees performed it, so a rebuild that has to be redone is generally a business cost, not an insurance claim. If your company does reconstruction through subs, ask whether that endorsement is on the policy and whether each sub's certificate shows adequate liability and workers' compensation insurance. See do your subcontractors carry the required coverage.

Professional work is a second paper gap. Moisture readings, drying logs and estimates are relied on by owners and insurers. A professional services exclusion of the engineering, architectural or surveying kind removes injury or damage from those services, and whether a mistake in drying records falls on that side of the line is a question for the policy wording. Some carriers use their own professional services wording instead of the Insurance Services Office (ISO) form, so ask for the exact exclusion text. A professional liability policy is usually claims-made, so the retroactive date and the tail (an extended reporting period after the policy ends) matter. See prior acts and tail coverage after an acquisition.

Which problems feel like gaps but are not insurance gaps?

Several worries cannot be solved with a policy. Business income coverage responds to direct physical loss to property, not to a program cutting assignments after a slow response month or to a personal referral relationship leaving with the seller. Those are diligence and budgeting items, so test them in the quality of earnings work and with your lender. Promises a salesperson made about a customer's deductible, and old assignment of benefits (AOB) paperwork, are regulatory and receivable questions that depend on the state. Take them to deal counsel, and see contracts, licenses and bonds for a restoration company.

How do I find these gaps before a claim does?

1. Ask the carrier or broker for the full endorsement list, not only the declarations page. See declarations page versus full policy and endorsements.
2. Ask for each answer on mold, pollution, subcontractors and professional work in writing.
3. Walk the warehouse and the yard, then compare stored property, equipment and vehicles with the schedules.
4. Compare the policy with your top five customer and program contracts.
5. Ask for quotes on the missing pieces, and compare coverage terms, not only price.

A Morrow review can flag these items and request quotes where it makes sense. Quotes depend on carrier underwriting, and nothing is in force until a carrier binds it. The wider exclusions picture is in exclusions that quietly kill coverage. For the core stack, see what insurance a new restoration company owner needs.

Keep reading

• Just Bought a Restoration Company? What Insurance Do You Need?
• Which Licenses, Contracts and Bonds Come With a Restoration Company?
• What Drives Insurance Cost for a Restoration Company?
• Insurance Exclusions That Quietly Kill Coverage
• Completed Operations Claims From the Seller's Past Jobs: Who Pays?
• All guides for new business owners

Frequently asked questions

Why would a restoration company's liability policy exclude mold?

Mold is closely tied to the work, and carriers can narrow coverage for it. A widely used endorsement removes coverage when mold or bacteria contributed to the damage, and another adds limited coverage back. Whether either is on your policy is a matter of reading the endorsement list.

Does a pollution exclusion apply to sewage cleanup?

It might. Pollution exclusions are written around irritants and contaminants, and whether a specific sewage or chemical loss falls inside depends on the policy wording and the facts. Ask the carrier directly and ask whether a separate contractors pollution policy fits.

What if the seller never carried professional liability?

Check for it. Not having one is not proof of a problem. Ask a broker whether the work you do creates a professional exposure and, if so, what a policy would exclude and what retroactive date it would carry.

Can I fix a gap in the middle of the policy term?

Often you can add or change coverage mid-term, but the carrier must agree and may price it. Coverage begins only when the carrier binds the change, so confirm the effective date in writing.

Who is responsible for the seller's finished jobs?

It depends on the deal structure, the purchase agreement and state law. In a stock purchase the company itself stays the same, so its past jobs, liabilities and policies stay with it, and you now own the company. In an asset purchase, how past jobs are handled depends on the contract and the law, and under the usual occurrence trigger a new policy generally responds to damage during its own period.

References

• EPA: A Brief Guide to Mold, Moisture and Your Home
• InsuranceXDate: CG 21 67 Fungi or Bacteria Exclusion (form lookup page)
• InsuranceXDate: CG 24 25 Limited Fungi or Bacteria Coverage (form lookup page)
• InsuranceXDate: CG 21 49 Total Pollution Exclusion Endorsement (form lookup page)
• InsuranceXDate: CG 22 94 Exclusion, Damage to Work Performed by Subcontractors (form lookup page)
• InsuranceXDate: CG 22 79 Contractors, Professional Liability (form lookup page)
• IRMI: Pollution exclusion (glossary)
• EPA: Renovation, Repair and Painting Program

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.