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Insurance Poll

What is most important to you when purchasing insurance?

Policy content - 67.9%
Price - 7.5%
Financial strength of the carrier - 3.8%
Customer service - 9.4%
Having a dedicated agent - 1.9%
Buying online, convenience - 9.4%

Total votes: 53
The voting for this poll has ended on: 01 May 2018 - 00:00

Q&A with Thomco Underwriting

Q&A with John Clark, vice president of specialty lines for Thomco, a leading national program administrator in Pest Control Insurance, and Keith Steinberg, supervisor of Thomco's pest-control unit.

John Clark, VP Special Programs

Keith Steinberg, Underwriting Supervisor

Q: How would you classify the various kinds of pest-control operations?

John Clark: There are four major categories. First, you have general pest-control operators, who treat properties for roaches, ants and rodents. Next, you have termite-control operators, who treat structures for termites and also inspect properties for termite damage. Then you have the lawn and ornamental classification, consisting of pest-control services that treat yards-grass, bushes, etc. Some also treat trees. The fourth classification consists of fumigators, who differ from the other classes in how they kill pests. When they treat a home for termites, they put a tent over the house and pump in fumigante. They also fumigate containerized freight. Fumigating grain silos is the only way you can kill pests in them. In regard to how the market is broken down, I'd say the termite operators might account for 60% of it by premium volume.

Keith Steinberg: Right. The termite and the fumigation accounts also pay more for coverage.

John Clark: Premiums are typically based on receipts, and you see more termite-control jobs than you do general pest-control jobs. The termite-control classification probably is larger than any of the other three in terms of number of businesses too.

Keith Steinberg: Geographic location affects the numbers. In the Southeast and Southwest, where it's warm, you have more termites. In the upper Midwest and the Northeast, you find fewer termites because they can't survive the winters. In those areas you see more general pest-control operators.

John Clark: There are a lot of termite-control operations in California and Arizona too. Despite the arid climate, termites thrive there.

Q: How large are these operations?

John Clark: The accounts we see usually have about $150,000 in annual receipts.

Keith Steinberg: Right, but there also are one-person, part-time operations that may have $25,000 to $30,000 in annual receipts as well as accounts with revenues in the tens of millions. I'd say the average is probably $150,000 to $250,000.

Q: So for the most part, these are small-business operations.

John Clark: Yes. Many operators first work for a large outfit, get some experience and then decide to go out on their own. We see a lot of new ventures, where there are one or two employees.

Q: How much of this business consists of franchises, like Orkin?

Keith Steinberg: The niche is really geared to independent entrepreneurs. You have the Orkins and the Terminixes-but if you open the phone book, you'll see a lot of individually owned businesses.

John Clark: Pest control really presents an opportunity for somebody who wants to start a business.

Q: Do you deal with the Orkins and the Terminixes?

John Clark: We write a couple of individual franchises for Orkin, but the bulk of them are self-insured.

Q: How big is this niche?

John Clark: There are probably 25,000 pest-control operators nationwide. I believe in Florida alone there are about 6,000, and about the same number in California. In colder areas, you don't see as many.

Q: Given the nation's growth in the Southeast and the West, I assume this niche is expanding.

Keith Steinberg: Yes. The new ventures, the smaller accounts, seem to be going gangbusters. The guy who worked for Orkin for 10 years and then goes independent-we see tons of those.

Q: What are they required to have?

Keith Steinberg: Each state sets the limits. Typically, they're pretty low, like $50,000 to $100,000 on an occurrence basis, which is crazy. Most pest-control operators obtain limits of $1 million per occurrence, and $2 million or $3 million aggregate. If they're doing any kind of work for a general contractor-they often do a lot of construction pre-treatments, for example - the contractor will require $1 million limits.

Keith Steinberg: We also market through state associations. Many have magazines in which you can advertise.

John Clark: Also, most of the state associations have conventions, and they're always looking for exhibitors. Conventions are good places to network. The pest-control operators who attend typically are higher up in their organizations.

Q: What makes for a good account?

John Clark: The most important thing to look at is the percentage of receipts derived from termite inspections. If it's more than 25%, that can be problematic, because termite inspections really drive the losses in this niche.

Sometimes pest-control operators conduct side businesses, like snow plowing in the Northeast, that raise issues. They're really entrepreneurial, so you have to keep track of their other activities. If they can get insurance on a minor side business, we'll write them. But if it looks like the guy is really a carpenter doing pest control, we're not going to insure him. You want to keep that "other exposure," as determined by receipts, down to about 10%.

Q: Anything else agents should look for when qualifying prospects?

Keith Steinberg: I would say the other key thing is the industry experience.

Q: What's the most important information to gather for submissions?

John Clark: You need to get a breakdown of exactly what they're doing. The key is the breakdown of their receipts.

Keith Steinberg: Also, find out what they're licensed to do and what they're actually doing.

Q: What information do agents need to get about credentials?

Keith Steinberg: We just want to make sure pest-control operators have a current license in the state in which they're operating for the categories for which they want coverage.

John Clark: If we can get a pestcontrol operator's license number, we usually can use it to verify exactly what they are doing from a state database.

Q: What kind of information is required about policies and procedures?

John Clark: We don't require safety manuals. I mean, the states regulate this. We want to make sure, however, that they are following the manufacturer's labels on how to mix and apply the chemicals.

The EPA regulates the chemicals. We have forms in our policy that basically say, "If you're not using EPA-registered and approved chemicals, then you have no coverage." It's such a highly regulated industry that we don't really have to get into safety or environmental issues in a major way. But we do make sure that they are not remixing chemicals and that they're following the manufacturer's guidelines.

Keith Steinberg: The beauty of this class of business is that the state essentially takes care of safety and environmental issues for you. Their inspectors ensure that pest-control operators keep accurate records, etc., and we can verify that a pest-control operator is in compliance with state regulations.

Q: Is E&O coverage usually written for this niche?

John Clark: The biggest E&O exposure is from termite inspections. And normally we just include coverage for it in our general liability policy.

Q: What's the premium range?

John Clark: We have accounts whose premiums range from $600 to $200,000. I would say the average is probably about $2,500. That's for the general liability/E&O liability. When agents add in everything else - the auto, comp, etc. - they're probably looking at a $6,000 to $8,000 account.

Q: To what degree do these organizations retain risk?

John Clark: We normally write coverage with a $500 minimum deductible. Depending on circumstances, we can go up to $5,000, but pest-control operators usually don't retain a lot of risk.

Q: What features should a good program for pest-control operators provide?

John Clark: You need to have the E&O coverage for termite inspection. You must have job-site pollution cleanup, and then you need to have transit pollution for chemicals hauled in vehicles. Anything else, Keith?

Keith Steinberg: That's pretty much it, other than for completed operations, which is obviously part of the GL coverage.

Q: Is the pollution coverage usually written separately?

John Clark: We provide it as part of the GL.

Q: What policy provisions should agents point out to clients?

John Clark: Exclusions vary by carrier. Some limit E&O coverage for termite inspections to claims reported within two years of an inspection. Some have sublimits on that coverage or on the pollution coverage.

Q: What are the major sources of claims in this niche?

John Clark: I'd say 80% to 90% of the claims we see are from termite inspections. The pest-control operator does a termite inspection for a real-estate closing and says everything is OK. Two or three years later, the homeowner discovers termite damage while doing some remodeling. The E&O coverage responds to such claims. The claims can be quite large, depending on the extent of the damage. We've had claims where we've basically bought houses. They can run into hundreds of thousands of dollars.

Termite inspectors have a state form to complete. If they fill out the form correctly, then we normally have a good defense. The form essentially certifies to the buyer that the house is termite-free. On it, the inspector is supposed to draw a sketch of the house and to note any damage, as well as any areas that were inaccessible and hence not inspected. So if the inspector noted moisture problems that the owner needed to correct, but the owner failed to do so, the inspec tor can cite that failure if termite damage later occurs. Besides inspecting the property for termites, the pestcontrol operator also normally offers to kill any termites detected.

Q: What risk management procedures do insurers require?

John Clark: We just make sure pest-control operators have adequate training. The states do a great job in setting continuing education requirements. If pest-control operators comply with state training guidelines, we're normally OK.

Q: What are the main service needs these accounts have?

John Clark: The biggest is certificates of insurance. For instance, a contractor arranging for termitecontrol treatment on a building under construction will insist on proof of insurance.

Keith Steinberg: We also get requests to add contractors or other parties to a pest-control operator's coverage as additional insureds. Our policy automatically provides such coverage when required by contracts that pestcontrol operators are required to sign to obtain work. We get many requests for waivers of subrogation too.

Q: What resources or knowledge do agents and brokers need to do business in this niche?

Keith Steinberg: Again, the thing to do is get involved with an association and learn the industry's lingo. You should get to know the chemicals involved, so if a pest-control operator tells you he doesn't treat for termites but you find he has a chemical for that purpose, it will raise a red flag.

John Clark: Most state associations have conventions in January, where an agent might be able to sit in on classes about termite treatments, termite inspections, the latest "hot" issues, etc.

Last Updated on Wednesday, 22 July 2009 04:56


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