Art Grace was a little perturbed. The owner of Krutsch Heating Inc., Taylor, Mich., was surprised that a helper working for his company had filed a workers’ compensation claim, stating that he had injured his back for life. And, despite videotape evidence from a private investigator that the worker lifted weights in the morning and performed as a male stripper at night, Grace’s insurance company gave the worker $50,000 instead of fighting the claim.

“And we wonder why our workers’ compensation costs skyrocket,” lamented Grace.

It isn’t just high workers’ compensation claims that have contractors reeling. It is the meteoric rise of all insurance premiums.

In a recent article in The New York Times, an insurance expert stated that the national average cost of insurance has increased approximately 50 percent in the last three years. The state in which costs are said to be rising fastest is California, where costs are up almost 100 percent in the past three years.

To HVACR contractors, these statistics are not surprising, but they are alarming. As business owners attempt to control the costs of doing business, many are finding insurance costs are uncontrollable. Contractors are seeking relief in any way possible.

In Grace’s case, his insurance premiums constitute between 6 and 7 percent of his operating budget. With average profit margins in the HVACR contracting trade estimated at slightly above 2 percent, insurance expenses are definitely a significant factor when it comes to profitability.

Horror stories of companies having to lay off employees to reduce premiums or prevent the firm from going out of business are becoming commonplace. The New York Times published the story of a Sacramento, Calif., snowplow manufacturer. The owner had to fire his four grandsons because the annual costs for insurance premiums for his eight employees jumped by nearly $36,000, a 40 percent jump from the previous year.

Mike Weber, president of Thomas & Galbraith Heating and Cooling Inc., Cincinnati, experienced a similar increase in premiums.

“Our health care insurance expired on February 28, 2003. The renewal year (starting with March 1, 2003) had an increase in premium cost of 38 percent,” he said.

Last year, the Air Conditioning Contractors of America (ACCA) surveyed its members on health insurance premiums and polled them on how rates have changed in the past three years. According to the results, on average, contractors paid 61 percent more for employee health insurance premiums in 2002 than they did in 1999.

In addition, ACCA reported that responding contractors spent 7.1 percent of their total operating expenses on health insurance premiums in 2002, an increase over the past two years of 18 percent.

Increasing rates for three basic forms of business insurance — property, liability, workers’ compensation — will be explored in this article, as well as health insurance rates. All have all seen dramatic rate increases in recent years.

Property Insurance

Property insurance is designed to protect a business against physical damage to, or loss of, certain assets. Assets include the area in which a business operates and the property housed there. In the case of catastrophes like fire, explosion, theft, or vandalism, property insurance helps cover costs to repair damaged property or replace what has been lost.

Depending on the policy, some of the assets covered might include:

  • Buildings and other structures, leased or owned.

  • Furniture, equipment, and supplies.

  • Inventory.

  • Intangible property (goodwill, trademarks, etc.).

  • Mobile property, including automobiles and trucks.

    Insuring company vehicles is always a concern. Auto accidents not only affect the health and well-being of employees, but they also take a heavy toll on insurance premiums. Derek Boyd, senior vice president of Horizons Insurance Group Inc., Dallas, noted, “Auto insurance is expensive in the Dallas area due to the high traffic and number of uninsured drivers. Somewhere between 20 and 30 percent of drivers do not carry insurance, and we all pay for this.”

    According to the most recent vehicle crash statistics from the U.S. Bureau of Transportation, an estimated 6.3 million crashes in 2001 resulted in over 3 million injuries and over 42,000 fatalities. With an estimated 35,000 to 40,000 HVACR contractors in the United States, there are bound to be some contracting companies involved in those statistics.

    “Techs drive lots of miles and get tired,” said News’ consultant Larry Taylor, owner of AirRite Air Conditioning Co. Inc., Fort Worth, Texas. “It seems that other drivers in the area do not have insurance coverage, even though the law requires it. If we have an accident involving an uninsured motorist, we have to fall back on our insurance, and there is normally nothing we can go back on them to get.”

    In some extreme cases, insurance companies are turning down new policyholders because of the economic conditions. In New Jersey, the New Jersey Department of Banking and Insurance (DOBI) announced in February that it would not grant a two-month reprieve to New Jersey Manufacturers Insurance Company (NJM) from taking new policyholders. NJM’s request is “further proof of the growing auto insurance crisis in New Jersey,” according to the American Insurance Association (AIA).

    “The fact that one of the largest insurers in the state is so overwhelmed that they need to turn away good customers clearly demonstrates how dysfunctional the auto insurance marketplace is in New Jersey, and how desperate this system is for reform,” said AIA Vice President and General Counsel David Snyder.

    Craig Jones, owner of Slasor Heating & Cooling in Livonia, Mich., said that contractors can lose a lot of money on lost or stolen equipment.

    “Some key areas of coverage include 100 percent replacement cost of tools and equipment stolen from job sites or vehicles,” said Jones, noting there is also prorated value based on the age of the tools. “We had two trucks broken into, and only then found out that we were covered at a depreciated value for our tools — and not covered for the technician’s own tools, even in our van. And we thought we had good insurance with great rates!”


    In Webster’s New World College Dictionary, the definition of liable includes this phrase: “legally bound or obligated, as to make good any loss or damage that occurs in a transaction.” Business owners are more familiar with the consequences from actions by their employees while “on the clock.”

    If damages occur to a building or injuries to an occupant as a result of an error in equipment installation or maintenance, the contracting company may be held liable. In the worst-case scenario, businesses and their owners can be targets of lawsuits to recover costs of damages or injuries.

    Here are a few “liability exposures” for the construction trades:

  • Design errors caused by the contractor, such as means and methods, and field changes to construction drawings and blueprints.

  • Contractual liability imposed by the subcontracted architect-engineer from the single-point-of-responsibility delivery system, such as a design-build contract.

  • Environmental damages imposed by a subcontracted environmental services firm performing remediation services.

  • Quality control and quality assurance services, whether provided by a consultant via subcontract or provided directly by the contractor for construction inspection and value engineering.

  • Site supervision imposed with regard to scheduling/coordination of project activities and overall health and safety coordination on the job site.

  • Liability imposed upon the contractor due to the financial inadequacy and/or deficiencies of the architect-engineer’s insurance program (i.e., limits of liability typically of $1 million; pollution exclusions and other limitations of coverage).

    Perhaps the biggest liability issue at the moment for HVACR contractors involves mold coverage. The topic has been discussed many times over the past few years, and contractors are now paying additional costs to include mold liability coverage in their general liability policies. Others have been unable to find any mold coverage at all, due in part to a number of high-profile court cases involving homeowners and business owners and insurance companies centering on the health effects of mold found in homes and businesses.

    “The insurance marketplace for residential contractors has shrunk tremendously since the mold scare and concern over construction defect claims,” said Boyd. “As far as mold is concerned, the carriers anticipate that many of the mold claims that have been paid by homeowners insurance companies will look to subrogate against someone, and HVAC and plumbers will be at the top of the subrogation list.

    “They [contractors] are going to see mold coverage excluded. They can purchase it back, but it is rarely done except for larger contractors. They need to watch out for this as well as other exclusions on the general liability policy.”

    Taylor added that mold coverage has already changed the insurance markets, and that the Deceptive Trade Practices Act (DTPA) will have a big impact on mold coverage.

    “The next big issue, in my opinion, will be DTPA,” he said. “For example, what we don’t tell a customer can get us in as much or more trouble than what we tell them, even if they sign a waiver that we told them. This practice is on the rise against contractors, in my opinion — and this will make being a contractor much harder.”

    Workers’ Compensation

    Workers’ compensation insurance is required in all states except Texas. It covers employees’ medical expenses and lost wages if workers are hurt while on the job. The laws vary from state to state, and some experts argue that the laws are open to various interpretations.

    One contractor believes that the HVACR industry needs to have a “one-size-fits-all” workers’ code.

    “Workers’ compensation insurance is costly, depending on the workers’ compensation code that an employee is classified as — and the earning for regular versus overtime hours,” said Bob Wilkins, owner of Wilkins Mechanical, Bedford, N.H. “The HVACR industry really does not have a code that truly identifies what we do.”

    According to the Insurance Information Institute of New York, the average cost of workers’ compensation has risen 50 percent in the past three years. That increase would be acceptable for one beleaguered California business owner.

    In California’s Santa Cruz County, the owner of a house cleaning business saw her workers’ insurance costs rise from $16,000 to $40,000 in one year. Her insurance agent warned that the total could reach $52,000 next year. That equates to a 325 percent increase in two years.

    “I had to pay a $10,000 deposit when my rates went up, and that almost put me out of business,” owner Jackie Wright was quoted in The Mercury News. “I’m 61 years old. I can’t retire and I can’t sell my business.”

    In the same story, The Mercury News gave some insurance rate comparisons for various professions. In 1995, the workers’ compensation rate for a roofer (making under $20 per hour) was $12.43 for every $100 of payroll. The figure rose to $45.19 in 2002.

    According to the Workers’ Compensation Insurance Rating Bureau of California, workers’ compensation rates have also risen dramatically for HVACR service technicians.

    John Boyce, owner of Airco Service Inc. in Tulsa, Okla., commented that workers’ compensation treatment is drawn out too long, making for higher claims.

    “Doctors assigned to workers’ compensation cases are stretching out minor injuries for weeks, with follow-up visits after a patient says they are OK,” said Boyce. “And they prescribe therapy that is not needed, and give drugs to patients.”

    Health Insurance

    Asking employees to bear some of the financial burden of health insurance plans has gone a long way to alleviate some of the costs of employee insurance plans. But putting an extra burden on household budgets can drive good employees away.

    It is estimated that 40 million people in the United States work without health insurance. There may be a direct correlation between that number and the rising costs of health insurance premiums paid by employers.

    For example, respondents to the ACCA 2002 Contractor Health Insurance Benefits Analysis said they have paid 15 to 18 percent more each year for health insurance premiums since 1999.

    Of the 268 contractors who completed the survey for the analysis, 96 percent of them said they offered health insurance benefits, up slightly from 93 percent in 2000. The number of health benefits offered to employees by contractors during that three-year time period decreased by 63 percent.

    According to the Employee Benefit Research Institute (EBRI), one in five small-business owners modified their employee health benefits in 2002. The EBRI stated, “Of those that made a change, nearly two-thirds increased workers’ co-payments or deductibles, 30 percent raised the percentage of premiums the employee pays, and 29 percent cut back on the package of benefits offered. More than a third switched insurers.

    “Employers also reported that the cost of health benefits has affected their business in other ways. Some employers reported that they reduced or eliminated pay raises or bonuses, reduced other employee benefits, or delayed investments.”

    Craig Jones knows what insurance costs him the most.

    “Our costliest by far is health care, what with double-digit increase each year for recent memory,” said the owner of Slasor Heating and Cooling. “I believe one of the causes is rising prescription drug coverage costs. Some drugs have huge costs,” he said, referring to antidepressants and blood pressure medications, among others.

    “Our insurance company sends us periodic notices of these costs to help justify the expense. Some of these drugs have a $30 co-pay and each prescription costs upwards of $300, $400, or $500.”

    So what is an HVACR contractor to do? Next week, The News explores strategies to combat skyrocketing insurance costs.

    Sidebar: Quoting Insurance Costs – A Hypothetical Case

    [Editor’s note: Dennis Boyd, senior vice president of Horizons Insurance Group Inc. of Dallas, was asked to quote an insurance package for a contracting firm based on the following information.]

    A hypothetical contracting business, located in Dallas, is shopping for insurance. The owner and sole proprietor leases a small 10,000-square-foot office-warehouse. His primary market is residential service and replacement, with some small light commercial service accounts. He covers a 30-mile radius around his 75207 zip code. He employs 12 workers (eight service technicians, an office manager-bookkeeper, receptionist, salesperson, and student helper).

    He has 10 service vans and two other company-owned vehicles, for himself and his salesperson. The techs take their vans home at night and on weekends when they are not working and cannot use them for personal use.

    “First of all, the insurance marketplace for residential contractors has shrunk tremendously since the mold scare and concern over construction defect claims,” said Boyd. “As far as mold is concerned, the carriers anticipate that many of the mold claims that have been paid by homeowners insurance companies will look to subrogate against someone, and HVAC and plumbers will be at the top of the subrogation list.” He outlined the following coverage:

  • Commercial package policy: “This consists of property insurance and general liability — and can have additional coverages added, including employee theft and possibly an installation and equipment floater,” said Boyd. “The liability is based on tech payroll so I have used $260,000 [does not include office staff or sales staff] with no subcontracted payroll.

    “I have used $150,000 in property coverage for contents and building improvements. Based on your model, and the previous estimates, I estimate the cost to be $11,700.

    “An equipment floater for some small owned equipment and leased equipment could be added for an additional $1,000. This would also include a $25,000 installation limit for materials at a jobsite.”

  • Business auto: “The following assumptions have been used: $500 collision deductible and comprehensive coverage included, a $500,000 liability limit with uninsured-underinsured motorist coverage, and trucks-vans ranging from new to 4 years old,” said Boyd. “The vehicles will cost on average $2,000 a piece to insure for a year. This will anticipate average or better losses over the past few years, as well as good drivers. Total cost: $24,000.”

  • Workers’ compensation: Boyd noted, “This is based on payroll and separated by class code. I will assume a 1.00 experience modifier with minimal losses over the past five years. I assume payroll is thus: techs, $260,000; clerical and sales, $90,000; and executive officer or owner, $62,400 [maximum amount]. Premium: $20,000.”

  • Umbrella: “This is an optional coverage, but many commercial contracts will require it,” stated Boyd. “For an each additional million dollars of coverage, it will cost between $1,000 and $1,500, based on the size of the contractor.

    “A number of other policies could be purchased including employers’ liability coverage, covering sexual harassment and discrimination. Most contractors of this size typically do not purchase these policies.

    “These assumptions assume that the contractor has had average or better losses over the years and has been in business more than a couple of years.”

    — John R. Hall

    Publication date: 08/25/2003