The Risky World of a Roofing Contractor
A summary of a speech delivered by Simon Fenn at the CRCA 2015 AGM
This article reviews historical issues affecting the roofing industry; roofing liability claims; insurable and uninsurable risk in roofing specifically and introduces an explanation of the risk management process, on the opinion that the ICI roofing industry must at all times embrace disciplined risk management if it wishes to improve insurance availability.
Despite the best efforts of the ICI roofing industry, roofing remains a difficult class of business with which Insurers must grapple: many mainstream insurers still choose to walk away. Don’t be misled, many brokers will still call seeking opportunities to quote your insurance but by comparison there remain very few insurers willing to consider a roofing contractors’ business. Whilst the cost of general insurance today for the roofing industry is more affordable, the insurance industry is cyclical and the availability of insurers, coverage, capacity and competitive pricing will become a challenge again. It is essential; no, it is critical that roofing contractors infuse the disciplined practice of risk management within their corporate culture.
A proven risk management process sets the groundwork to put the roofing contractor on a better footing to negotiate broader insurance protection over the years to come. A sequence of events led to heightened insurance problems early in the millennium for the roofing industry:
- 2001 – Reliance Insurance Company’s liquidation impacted the CRCA insurance programme;
- 2000-2003 – The stock market downturn and scandals including Arthur Andersen and dot com failures such as Worldcom;
- 2001 – The multi-million dollar Toronto Liberty Walk townhouse fire from roofing operations and several other roofing related fires across Canada.
- 2001 (approx.) – ACE Insurance discontinued the CRCA Roofing Insurance Programme.
- September 11, 2001 Terrorist attacks on the World Trade Centre.
This build-up of events exacerbated conditions and created global economic uncertainty. Significant liability insurance rate increases were commonplace across businesses along with much more restrictive coverage and draconian conditions precedent to coverage. Most roofing contractors were confined to two insurance facilities, each offering restrictive terms that were in some cases unacceptable to some Owners. Roofing liability rates at the time across Canada ranged from $35 to $50 per thousand dollars of gross revenue.
By 2005 the roofing industry started arriving at its own remedies:
- OIRCA employed Fenn & Fenn to negotiate a traditional liability insurance scheme.
- RCABC formed RCAIC – a captive insurer;
- Quebec and Alberta formed roofing reciprocal insurance schemes;
Roofing Liability Claims
It’s no news that fire represents the leading cause of catastrophic losses in roofing across Canada but it is low frequency. A sampling of large Ontario based roofing fires included:
- Liberty Walk Townhouse Project, Toronto;
- Kettle Fire at a secondary school, Guelph;
- Retirement home fire, Sudbury;
- Church Fire, Aurora;
- Fire, Listowel (2 firefighters perished).
The Listowel fire brought about rigid new Ontario Fire Code Regulations governing hot roofing applications that took effect in January 2015. To add fuel to the fire (sorry) in a matter of 4 short weeks approaching, during and following the 2015 AGM there were four fires, two in Alberta and two in B.C. that were alleged to have been caused by roofing operations. There have been several other fires caused by roofing operations in Ontario and Quebec in 2015 right up to and including December.
Water damage claims are more frequent than fires and have grown in cost significantly compared to earlier in the millennium. Under the OIRCA liability programme water damage claims costs have increased approximately 92% since 2005 with fairly constant frequency. A report by the Canadian Institute of Actuaries on Water Damage Risk and Canadian Property Insurance Pricing in February 2014 suggests:
“Water Damage is the leading cause of loss with respect to both the number of claims and the paid dollars of claims”.
In fact the insurance industry continues to be embattled by water damage losses worldwide including notable losses in Canada including Thunder Bay, Toronto and Calgary and today we are witnessing new water damage coverage restrictions and limitations in property insurance coverage terms and conditions.
A sampling of other types of roofing liability claims Fenn & Fenn has handled over more than ten years of service to OIRCA follows:
- Roof collapse: improper loading of materials.
- Asphalt spill: due to tanker valve explosion while filling kettle.
- Bodily injury: due to falling roofing materials.
- Water damage: food processing plant.
- Plant shutdown: minor fire during re-roof preparations – major loss of use claim.
- Vehicle overspray.
- Bodily injury: dripping asphalt.
- Water Damage: library books including antiques.
- Axe fell through roof: dance class floor damage.
- Water damage: shopping mall including loss of use.
The disciplined practice of risk management is essential in roofing, especially as many re-roof projects include a significant loss of use/business interruption exposure that can severely impact available liability insurance limits.
Aside from physical risks, the contract determines the extent of risk being assumed by each party especially the indemnification agreement. Very often a disproportional often unreasonable and sometimes non-admissible-in-law amount of risk is transferred to the roofing contractor. Insurance does not cover all risks despite the common use of the terms “all risk” or “comprehensive”. The broader the scope of the contract indemnification agreement: the broader the scope of risks you self-insure.
It is critical that the roofing contractor reads and negotiates its contracts in order to reduce risk assumption. Competitively that’s a hard pill to swallow as there will always be at least one competitor that bids despite the contractually transferred risk.
Everything stems down to “risk”. Risk can be defined as:
- Hazard: The potential to cause harm or do damage (EG. A shark)
- Risk: The likelihood that the harm or damage will occur and the severity of its consequences (EG: Swimming with vs. without a shark cage).
Insurance only covers a very small amount of risks faced by a roofing contractor: mostly injury costs; ill health, physical damage and business interruption.
Examples of non-insurable risks include:
- Management – Labour relations;
- Penalties, blacklisting;
- Customer relations;
- Contract dispute;
- Statutory Breach;
Some insurance products are emerging that address a portion of some of these risks such as Legal Expense Insurance.
Examples of Construction and Roofing specific non-insurable risks include:
- Long Term quoting;
- Shutdown by authority;
- Inadequate Training;
- Aging workforce;
- Workers’ Compensation Costs;
- Raw Material shortages;
- Employee Morale.
New exposures to risk emerging to challenge the roofing industry include Cyber Attacks and the use of Drones/UAVs in the roofing industry. When you consider the roofing contractor’s world, risk must be better organized and managed in the interest of corporate survival, the safety of employees, protection of property of others and prevention of injury to the public. Risk must be managed.
Risk management is a continuous cycle of risk identification, assessment, quantification followed by controls and mitigation measures, in order to prevent loss. When loss occurs, the risk that caused the loss should ideally be re-examined and the risk management process started over, in order to improve on the measures that evidently failed.
The Risk Management Cycle:
- Risk identification & risk assessment (severity, frequency, magnitude etc.) then,
- control or mitigation measures (training, new handling procedures, purchase of insurance, subcontracting, transfer of the risk to others or total avoidance such as torching directly to a wooden deck). Then,
- review of the measures implemented and in the event of failure: re-commence the risk identification cycle.
Risk Management should be infused into the corporate culture in order to be most effective
The Risk Matrix:
Part of the risk assessment process involves the development of a risk matrix which works in a chart format based on frequency and severity of loss, see example below. Low frequency & low severity risks can be mostly retained or self –insured. High frequency & low severity risks may be manageable, some retained, some transferred to insurance or to others most accountable for the risk.
High severity & low frequency risks are dangerous but should mostly be risks that can be managed or mitigated in some way, such as a torch fire.
High frequency & high severity risks have the potential to cause severe damage to the roofer’s business: these should be avoided.
The 4 Quadrants of Risk
Risk can also be categorized into 4 quadrants:
Mostly insurable risks:
Bodily Injury etc.
Loss of Use/Business Interruption
Inappropriate use of social media
Inadequate IT security (cyber).
Long term quoting
Raw material availability
Conclusively, by introducing disciplined risk management into your organization and ensuring your insurance brokers and insurers are aware of these measures, more insurers will have confidence to quote your roof contracting business. A proven risk management process sets the groundwork to set the roofing contractor on a better footing to negotiate broader insurance protection.