Painful as it is to pay the premiums on shop insurance, it only takes one unexpected mishap to realize how important and valuable it is to have-or how much a disaster it would be not to have it.
It may be clear that shop insurance is necessary and that all shop insurance policies are not the same, because all shops are not the same. But what do insurance companies really care about? And, how are the insurance needs of a performance or hot rod shop unique?
We asked Jonathan Klinger, Hagerty Insurance public relations manager; John D. Heckman, AAI, managing producer for Grundy Insurance; and an acquaintance who is an insurance risk management inspector to explain some of the nuances associated with insuring hot rod, restoration and performance shops.
Two things are for sure: habits matter and so does where you are. But there’s more to it than that.
Shop insurance policies can include garage keepers, property, and commercial general liability including coverage for products and completed operations.
Major insurance underwriter companies tend to group all automotive shops into the same “Automotive Repair Shops” category, but a handful make a distinction and offer policies that are tailored to what they consider “Specialty Shops”.
“Hagerty offers several different types of policies to qualified businesses within the classic car and hot rod industry,” says Klinger.
According to Heckman, Grundy’s “Restorer and Builder” program grew from the fact that its founders are familiar with the industry because they are “car guys” and know those shops operate very differently from other repair shops. That makes a big difference to insurance underwriters as well.
“The average body shop working with an insurance company is paid a flat rate for each type of repair,” says Heckman. “A restoration shop is just opposite. They’re artists. Their shops are clean. Workers are conscientious and ultimately, the shop’s loss ratio is lower.”
Those are the kind of observations insurance company risk management inspectors make to determine overall risk as well.
When it comes time to insure automotive shops, policies can be written to cover various aspects of the business such as tools, equipment and other tangible assets; intangibles such as loss of revenue; the building itself (if owned by the business); and other property in the building.
But there can be a big difference in policies regarding how the property that belongs to customers (i.e., their cars) is valued when inside the shop.
Most insurance companies offer Garage Keepers insurance, which protects vehicles that are in the shop, but that belong to other people. Often those vehicles are covered based on Actual Cash Value, which is defined as replacement cost less depreciation.
But custom cars don’t depreciate; they appreciate.
Grundy, Hagerty and others have recognized how different the custom car market is and instead value vehicles at what is known as an Agreed Value policy.
“This applies to projects and completed vehicles and takes into account that project vehicles increase in value as the project progresses,” says Klinger.
Heckman agrees. “If something happens when a car is in the Care, Custody and Control of the shop, the goal is to get the car owner back to that value prior to the event,” he says. “There is no depreciation. We look at build records to determine what the shop spent restoring the car.”
Insurance is an exposure-based industry and exposure (risk) determines premium costs, as do levels and quantities of coverage and the location of the business.
To determine the level of exposure, the inspector explains that insurance companies perform a loss control evaluation, which includes assessments of a number of factors that affect the relative level of risk a business is exposed to. Some of these factors may include the type and condition of equipment, how customer-owned cars are transported and stored, shop policies regarding customers in service areas and mechanics’ certifications.
Regardless of who owns it, the age and condition of the building also affects risk, so inspectors evaluate factors such as materials used in the building’s construction, the condition of the roof, the wiring, plumbing and heating and the type and age of lighting fixtures. It then rates those factors as being at or near the best in class, or the worst in class.
Housekeeping is also important. That means the inspector will look for signs of neglect, like trip hazards, or a pile of oily rags and other potential fire hazards.
Geographic location affects premium costs because certain neighborhoods have a higher risk of crime than others; certain areas of the country have a higher risk of damage from natural disasters as well.
Every state administers its own insurance law and each state has a say in what rates are. Insurance companies use detailed software to evaluate rates by ZIP code of every community in the United States.
Other factors include the frequency of claims and record keeping.
But insurance companies look at an auto repair or body shop differently than how they view a custom restoration shop, the inspector explains.
“Usually there’s a rate-per-hundred-dollars of value on the building, but it’s also based on sales,” he says. “Basically, you can always buy insurance, but you’ll pay better based on how you run your business and how much attention is paid to safety, risk management, things like that.”
Insurance companies also pay close attention to whether or not the mechanics in a shop are certified. Automotive technician training is changing. In the past, accreditation for high school and vocational schools was based on subject areas offered, such as brakes or electronics.
The new model is based on three skill levels including Maintenance and Light Repair, Automobile Service Technician and Master Auto Service Technician. Although a license is not mandatory for auto mechanics (except that MVAC technicians need to be trained and EPA certified); there is growing acceptance of certification programs administered through the National Institute for Automotive Service Excellence (ASE).
High Risk Hazards
Geographically, the highest risk areas are flood zones and high-crime areas.
“Building location can make a large difference,” says Klinger. “Obviously, certain parts of large cities are much more prone to crime and vandalism than a rural area or small town where the crime (rate) is much less overall.”
Insurance companies obviously want to see situations with less risk; fewer hazards pose less risk. While fire, theft, flood, earthquake, wind-and human error-are all considered common hazards, federal, state and local programs generally cover flood and earthquake damages, as well as forest fire and hurricane damages.
“When we issue a policy to a business, all of the losses you mentioned are covered, including human error,” says Klinger. “It is important to note that ‘human error’ does not include faulty work caused by an employee such as scratching the paint when installing a piece of trim or incorrectly mixing paint that causes defects down the road. ‘Human error’ means faulty work caused by an employee that causes a different type of loss such as the wheel coming off due to improper installation, which would fall under completed operations and would most likely be covered under the Commercial General Liability Policy. Physical damage to vehicles, theft of tools, vehicles stored outside and human error are the most common types of losses.”
Protection of the business and the building is usually not covered during floods and earthquakes, although customers’ cars are protected by most policies. These situations are where limits of liability and exclusions come into play.
Hail is another risk in some areas, which can be exacerbated if a shop, in order to make room during working hours, happens to have its customers’ cars parked outside. To insure against theft, the cars come in at night, but the insurance inspector wants to know how the shop reacts when a storm is coming in the daytime.
They call the situation a “Congregation of Assets” that are at risk. (Of course, a similar situation arises when all the cars are inside and a fire breaks out.)
Another big thing any insurance company looks at is spray-painting and finishing. If a shop does that kind of work, it needs a properly ventilated spray booth that has proper electrical, lighting and a fire suppression system. From the insurance company’s perspective, lacking those things is a deal breaker. They will not insure. Period.
On the other hand, if a shop uses a paint shop down the road, the insurance company will be interested in who’s protecting the vehicle while the paint shop has it, as well as how it’s transported to the paint shop.
And, if the car burns up while at the paint shop, the customer will still hold the restoration shop responsible. Insurance companies call that situation Risk Transfer.
Generally, it’s not a problem, but documentation will be necessary to add the restoration shop to the paint shop’s policy in those situations.
Garage Keepers insurance is for customer cars. Insurance rules in every state say that once the car is in the shop, it’s in the Care, Custody and Control of the shop and it’s the shop’s responsibility.
“Many shop owners think it doesn’t matter whether they have a car in their care and are under the impression that they don’t have to insure them,” Heckman says. “That’s a fallacy. If a customer brings a car that’s insured into a shop and something happens, the customer can submit a claim under his policy and his insurance company will pay the claim.”
The term for what that insurance company will do next is called Subrogation.
“What happens is they will go to the shop owner and demand payment, saying something like, ‘We paid him. You’re responsible; you pay us.'”
Although customers should know to insure their own car, shops should be clear about what their policies are and aren’t.
“It is very important for shop owners to have a contract with their customers that includes specific insurance language,” Klinger says. “The owners should be expected to keep primary insurance coverage on their vehicle in addition to the shop owner having Garage Keepers coverage.”
There are two levels of Garage Keepers coverage: Direct Primary and Legal Liability. A Direct Primary policy covers damage to the vehicle regardless of who is at fault; whereas a Legal Liability policy only covers when the shop is liable for the damages (and not “Acts of God”).