RISK PROBLEMS/SOLUTIONS

ARTISAN CONTRACTORS

By LeRoy H. Utschig, CPCU, ARM

Many different kinds of contractors fall under the broad definition of artisan contractors. Plumbers, cabinetmakers and electricians are a few examples. Many of the loss exposures faced by these contractors are quite similar. Property coverage for their building and contents, general liability, workers compensation, business auto and a commercial umbrella are the insurance contracts typically written for artisan contractors. Some agents do not order proper coverages for their artisan contractor clients. The focus of this article will be to point out exposures that many artisans have, and the coverage available for these exposures.

Care, custody and control

Artisan contractors do work at their customers' premises. Some or all of the customers' premises or equipment may be deemed to be in the care, custody and control of the contractor. Many articles and court cases have attempted to define what property is or is not in the control of a contractor at the time a loss occurs. Although the problem seems to stem from the care, custody and control exclusion of the commercial general liability contract, its origin really lies in insurance regulations.

Prior to the late 1940s and early 1950s, insurance regulations required that only one line of insurance could be written per insurance company. For example, only property insurance companies could provide property coverage. Only liability insurance could be written in a casualty insurance company. Care, custody and control was deemed to be a property loss exposure, and only a property insurer could write the coverage. Casualty insurers could not include coverage for care, custody and control in their liability contracts. Even though enabling legislation during the late 1940s and early 1950s allowed casualty insurers to write care, custody and control coverage, tradition prevailed and the standard commercial general liability contract used by many insurers continues to contain a care, custody and control exclusion.

The basic problem is that if a contractor damages his/her customer's property, the contractor's general liability insurer will decline to provide coverage, citing the care, custody and control exclusion of its general liability contract. There is a difference of opinion regarding how the exclusion should be applied. In my opinion, it is a never-ending discussion. Although it is not my intent to interpret the application of care, custody and control exclusions, as an aid to understanding the situation, I will cite several actual cases where the care, custody and control exclusion applied to a given loss. Then, I will give several ideas regarding how to properly insure the care, custody and control exposure for an artisan contractor.

The first actual loss example involves a painting contractor in Wisconsin during the early 1970s. The owners, who had hired the contractor to paint the exterior trim on a brick house, went elsewhere during the weeklong job and gave the contractor the keys to the house. Because the house was encased in a lot of vines, part of the painting job was to remove them. The painter used blowtorches to do this. The flame from the blowtorch went through a crack in the brickwork igniting some combustible material on the inside of the brickwork. The contractor did not notice the small fire when he quit working for the day and locked the house. That night, the house burned to the ground.

The painting contractor's insurer denied coverage for the loss of the entire house. I was working for the insurer at the time and I still remember the discussion regarding the issue of coverage for this loss.

Another loss involved a heating and air-conditioning contractor who was removing a cooling unit from a customer's roof. Just as the unit was moved off of the building, one of the cables holding it frayed and broke. The excessive weight on the remaining cables caused them to break also, and the air-conditioning unit fell to the ground six floors below. The unit was completely destroyed.

The contractor's insurer denied coverage for the damaged air-conditioning unit.

Another loss involved a janitorial service in Illinois during the 1980s. An employee of the janitorial service was buffing the floor of a customer's long hallway. The actual buffing head flew off and drove the buffer's spindle right into the floor. The insurer for the janitorial service denied coverage, citing the care, custody and control exclusion.

Coverage recommendation: Any firm that does work at a customer's premises has some degree of a care, custody and control loss exposure. My experience is that there are two ways to address the coverage issue. Some insurers have an inland marine form that can cover care, custody and control loss exposures. Other insurers have a care, custody and control endorsement for a commercial general liability contract. Typically the limit on the latter is $5,000 or $10,000.

Installation floater

Some insurers offer a very good installation floater. An installation floater's primary purpose is to cover the contractor's loss exposure to the item(s) being installed. Coverage is provided while the item is being transported and during its actual installation. Most installation floaters cease to cover an item once it has been installed.

A contractor's exposure does not necessarily end when it has installed the item. My suggestion is that the contractor has an exposure until it has been paid for the installed item.

We can illustrate this point with a fictitious example. A cabinetmaker installs $20,000 worth of cabinets in the customer's house. The installation is completed on a Monday and Monday night the house burns to the ground. The customer does not have enough insurance to cover the value of the house, and he tells the cabinetmaker that he has no intention of paying him. Some readers will say that the cabinetmaker should sue the homeowner. Legally, that is possible. However, litigation can take years, and it is a tremendous drain on a person.

My suggestion is that the cabinetmaker's installation floater be endorsed to state that the coverage ceases when the insured has been paid. In the illustration just given, the cabinetmaker would have been paid for his work and it would have been up to the insurer to go through the time- and effort-consuming process of trying to get the money from the customer.

Tool floater

A tool floater is designed to insure a contractor's equipment, such as sanders, drills and power wrenches. Larger items such as skid loaders and backhoes can be insured by using a contractors' equipment floater. (Small tools can also be insured on a contractors' equipment floater.)

Replacement cost: If an excavating company totals out one of its backhoes and the insurer pays for the loss, there might be a huge difference between what the insurer pays for the damaged machine and what the insured needs to pay for a new, replacement machine. Replacement cost coverage is available on an inland marine contractors' equipment form. When this coverage is added to a contractors' equipment form, the insurer will pay for the cost of buying a new machine to replace a damaged older one.

Coinsurance

A business can have a loss to one of its expensive pieces of equipment and find that the insurer will pay for only a portion of the equipment's value. Unless you have a clause(s) to the contrary in your account's contractors' equipment form, it is safe to assume that every inland marine contract contains a 100% coinsurance clause. This means that, to avoid a coinsurance penalty, every covered item should be insured for 100% of its value. Many contractors' equipment forms apply the coinsurance penalty per item. An example is the firm that has several items damaged. With the coinsurance clause applying per item, an insured could recover in full for some of the damaged items, but not for others that were underinsured.

Agreed amount

Agreed amount insurance is available on contractors' equipment forms. As with property insurance, an agreed amount clause prohibits an insurer from applying any coinsurance penalty. Most insurers do not make a charge for this provision. However, virtually every insurer that I am aware of will require some information verifying that correct values are being used to establish the amount of insurance to carry.

Automatic coverage

Contractors' equipment forms typically have a provision for automatically insuring equipment purchased by the insured. Coverage for 30 days is typically provided by this clause. This is a free coverage that comes with the contract. Insurers have a limit that they automatically apply to this coverage. You might consider raising the limit that applies to newly acquired equipment. Here is a fictitious example to aid you in understanding this.

Plumbing, LLC, has four backhoes. Each of them is worth about $100,000. The business then orders a new backhoe worth $125,000, which is delivered to the business on a Saturday. An employee tries it out and because some of the controls are in different locations than on their other backhoes, the employee tips the machine into a deep ditch. The total value of the loss is about $51,000. After considering the loss, the insurer offers $25,000--the policy limit for newly purchased equipment.

The limit applying to newly acquired equipment can be changed. My recommendation is that the limit be at least equal to the value of the most expensive piece of equipment on the contractors' equipment policy's schedule. In the example just given, $100,000 would have been a more appropriate limit.

New equipment typically costs more than the used equipment on the insured's policy. Consider making the newly acquired equipment limit equal to the anticipated cost of buying new, similar equipment.

Shippers' interest

In the late 1980s a photocopy service business sold and serviced copy machines on a customer order basis. At the request of one of its largest customers, the business ordered several very expensive copy machines. The supplier indicated that the machines were in stock and would be shipped the following morning. Several days went by and the machines did not arrive. The common carrier that was bringing the machines had been involved in an accident and all of the machines were damaged. The photocopy business was asked to pay for the damaged machines.

An initial thought is that the common carrier should pay for the damage. A small tornado had flipped the truck off of a bridge and dropped the rig several hundred feet down onto some rocks. Truckers are not responsible for losses due to an Act of God. Windstorm losses are considered to be caused by an Act of God. Therefore, the trucker was not responsible for the loss.

The supplier had shipped the goods, f.o.b. origin. F.o.b. stands for free on board. It helps designate when the ownership of the goods passes from the seller to the buyer. In this case, as the goods were shipped f.o.b. origin, the title to the goods transferred to the photocopy business at the time the common carrier's truck left the shipper's loading dock. Hence, the photocopy business was responsible for the damaged machines. The photocopy business did not have any insurance to cover this loss.

Coverage for damage to incoming shipments can be accomplished by using one of several insurance contracts. A common way to insure incoming shipments is to use a shipper's interest policy. Another way is to put the appropriate limit on an installation floater. *