What Fire Alarm Contractors Need to Know About Insurance Nuances and Risk Management
Dan Upper, Account Executive, HUB International Ontario ULC David Laks, Vice President, Senior Risk Services Consultant, HUB Risk Services Division
Fire alarm companies and their technicians carry an outsized level of responsibility compared to other building trades, given their role providing a critical link between the ignition of a fire, response and its suppression.
Failure of that link, or the fire alarm system, can have devastating consequences. It makes “failure to perform” a risk that companies must aggressively manage against. That includes a liability insurance policy that is designed correctly and specifically includes a “failure to perform” extension.
It too often is lacking, making it a leading reason for claims against fire alarm firms. That’s a problem not just for them and their technicians but for everyone downstream, from building owners to jurisdictional authorities. No one wants to discover the absence of the “failure to perform” extension after an actual fire.
Alarm companies comprise a zero-failure industry, given their need to balance technical skills with public safety. Knowing their exposures is one thing, whether it’s design liability (probably the highest severity), scope creep (often an unintended technician-driven liability resulting from performing above and beyond work orders), or failure to document and retain records (losing a critical defense in the event of a claim).
It’s equally important, though, for firms to be prepared for another area of serious risk: The gaps in their commercial liability insurance (CGL) coverage that can create serious problems if the system fails. Here’s what they need to know.
The importance of the ‘failure to perform’ extension
There’s a general lack of clarity among fire alarm clients and even some brokers about this extension of the CGL policy.
Some have very explicit (and often exclusive) wording covering the extension boundaries, timeframes, coverage scope and reporting deadlines. Others are more ambiguous, with verbal assurances but no specific, documented policy language on terms for coverage of any loss – or the presumed guarantee of insurance.
It’s important to understand the distinction between the CGL policy and the failure to perform extension, which is less easily managed in fire alarm work than in other trades. In most, extensions apply to claims over whether damage resulted from workmanship or a true accident. If a fire alarm system fails in its entire purpose of fire detection and notification, it’s not the result of an “accident,” strictly speaking, but of a failure of the system to do the job for which it was intended.
Hence the importance of the performance extension; without it, coverage under the standard CGL policy might not apply, creating a serious exposure.
It matters. Here’s why.
Numerous exposures are present during every stage of the alarm system design, installation, initial and ongoing testing, servicing and monitoring (of central station functions). The design function, the source of the most severe claims, is considered a professional liability and covered by an errors and omission rider to the CGL policy. At every other stage, however, different risks are created. The failure to perform extension is essential to all of them:
- Installation: Here, the technician's work is integrated into the larger life-safety system essential to every building occupant. If the completed system doesn’t perform to required standards (which could be the manufacturer's specifications, the applicable code, or representations made to the client) a resulting claim would have nothing to do with a dropped tool or a wiring accident. It would stem from the finished product not doing its job.
- Inspection and testing: Here, technicians may sign off that a system is in compliance and functioning as required. If a deficiency is missed and the system later fails to perform as needed, the certification of that inspection is central to any resulting claim. As the loss results from a system that fails to meet the represented level of performance (not a discrete physical accident) during the inspection itself, the failure to perform extension is triggered.
- Continuing service and monitoring: Technicians are frequently the last professionals to have touched a system before an incident occurs. Building owners, insurers, and authorities having jurisdiction (AHJs) will look closely at service records when a system underperforms. Having failure to perform coverage in place protects the technician and the firm while these questions are worked through. Further, it protects the client relationship by ensuring a legitimate claim can actually be paid.
Foster a culture of risk management
Ultimately, fire alarm contractors are part of a zero-failure industry. While the insurance market in general is currently quite soft, protective services like this are extremely high risk as the cost of system failure is massive property damage and potential personnel injury. As a result, premiums for protective services liability insurance are stable, but haven’t dropped much in the face of a softening overall market.
Such conditions make it essential for contractors to make risk management a key priority, integral to their organizational structures. Ultimately, liability mitigation here comes down to the quality and defensibility of the work itself, and the systems a company builds around that work to demonstrate that quality. The more effective it is at it, the better it can manage and reduce claims and have a positive story to tell carriers – and clients, too.
Here are some of the biggest exposures to focus on:
- Design liability: A system that’s incorrectly designed may pass initial inspection even if inadequacies that don’t show up unless there’s a loss. It may meet code minimums but is insufficient for the building’s particular conditions – which matters for litigation and claims investigation purposes. Various measures can offset the risk: conducting formal design reviews before submission, ensuring those reviews are well-documented, and retaining all records permanently as a key defense record should challenges of a system design occur.
- Installation and/or workmanship deficiencies: Any number of workmanship failures can be undetected until triggered. Everything from improper circuit wiring to panel programming errors can be under the surface, and catastrophic failures can result. Water intrusion through improperly sealed penetrations or non-compliant placement of notification appliances can all generate claims. Among the risk-mitigation measures: Implement and enforce quality standards that meet code minimums, and schedule and document field inspections at specified project milestones. Also, avoid compressing commissioning and acceptance testing due to project schedules.
- Monitoring failures, communication gaps: A central station monitoring system that generates a local alarm but fails (undetected) to transmit to the monitoring station can be a fire alarm company liability if a delayed or failed emergency response results. Communicator failures are a liability that can persist undetected, especially with older configurations and when annual inspections either do not test for or do not document successful transmission tests. The risk can be offset by making the transmission test mandatory and documented component of every inspection, testing and maintenance visit. Also, cater to clients by first notifying them in writing for any interruption in monitoring and document service restoration.
Fire alarm companies and technicians work at the intersection of technical skill and public safety, responsible for installing, inspecting and maintaining systems that are trusted to perform exactly as designed when it matters most.
Being attuned to the nature of the risks and the essential role of risk mitigation strategies is an imperative for the business. So is understanding the nuances of the types of insurance necessary for everyone’s protection.
Fostering a culture where risk management is a priority is one imperative. But contractors also need to be smart and review their policy wording carefully with a licensed insurance broker familiar with the fire and life-safety industry, as exact terms, limits and exclusions vary by insurer and jurisdiction.
HUB International is a leading global insurance brokerage and financial services firm providing comprehensive insurance, risk management, employee benefits, retirement and wealth management solutions. With more than 21,000 employees and over 700 offices across North America, HUB combines the resources and expertise of an international organization with the personalized service of local insurance professionals. Its specialists work with businesses, organizations and individuals to understand their unique risks and develop tailored solutions that help protect people, property and operations while supporting long-term resilience.
About the Authors:
Dan Upper - RIBO, BA, Account Executive, HUB International Ontario ULC Dan Upper's interest in Protective Services Liability is personal: his own family has experienced two home fires caused by appliance failure. That experience shapes his approach to his work as an Account Executive with HUB International Ontario ULC's Commercial Insurance Team, where he continually showcases his commitment to reliability and client satisfaction. His expertise in Protective Services Liability, coupled with his genuine approach to client interactions, ensures tailored solutions that resonate with clients' needs to deliver unmatched value and service.
David Laks - Vice President, Senior Risk Services Consultant, HUB Risk Services Division
David Laks is Vice President, Senior Risk Services Consultant on the HUB Risk Services team. He brings 30 years of experience in risk control consulting. He develops and implements solutions in the areas of property loss control, building envelop analysis, risk mitigation, construction management, training, business continuity, and regulatory compliance. Prior to joining HUB, Mr. Laks was the Loss Control Manager with a Fortune 100 food manufacturing company responsible for all aspects of property risk management. He developed the corporate loss control program and prioritized the over 1,000+ open recommendations for the 300+ locations.
Currently, Mr. Laks is a member of the Professional Engineers of Ontario (PEO, Society of Fire Protection Engineers (SFPE) – Ontario Chapter, and the International Institute of Building Envelope Consultants Institute (IIBEC).
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