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A failed septic system can cost a homeowner thousands of dollars to fix, and major performance problems aren’t at all uncommon. The EPA surveyed local reports on septic performance and came up with a broadly defined failure-rate ranging “from 10 to 20 percent,” states the EPA’s Onsite Wastewater Treatment Systems Manual of 2002.
Moreover, ignoring or postponing repairs isn’t really an option: A home lacking a functioning septic system quickly becomes uninhabitable.
What to do?
One appealing solution is that of an extended warranty. Some vendors offer assorted limited product and installation warranties, but it’s been difficult for anyone to provide comprehensive coverage end-to-end—which is what the homeowner needs. A couple of attempts have been made, however. For example, in the late 1990s the Washington Onsite Sewage Association (WOSSA) undertook a warranty offering that looked so viable, at least initially, that the national organization, NOWRA, considered ways of marketing it coast to coast. WOSSA’s Bill Stuth recalls, though, that after several frustrating years of attempting to overcome cost-structure problems, the underwriter dropped out and no other firms came forward. “The financial structure, commissions, the percentages,” made the plan “too top-heavy with fixed overhead of more than 60%,” Stuth says. The inadequate remaining balance of funds, needed to cover losses, made the program “too risky.”
In 2001 a specialty insurance firm in Connecticut launched a residential septic warranty called ProSept. It lasted just six months, discontinued after the prospect of sizeable claims caused the underwriter to withdraw.
Good Septic System Inspections are Warranted
Clearly, the toughest hurdles for warranty plans are: a.) how to forecast losses so that an underwriter can afford the risks; and b.) how to reduce losses by establishing good maintenance and clear-cut liability.
Attempting to overcome these obstacles, a newcomer called Septic Shield Inc. has recently tried taking a rather different approach and has high hopes of success. Late in 2005, Septic Shield began offering coverage for septic system inspections. Company president Scott Carmody explains that the professional survey of a system is absolutely critical to the viability of any would-be warranty. Thus, he says, in his program the warranty coverage specifically focuses on the accuracy of this system survey or inspection. Carmody’s carefully designed, checklist-based pre-warranty survey evaluates the system’s current status and lays out the expected maintenance needs. Then, if a warranty is subsequently offered, the contract spells out homeowner obligations to ensure that maintenance will be performed.
It’s very analogous, he says, to used car warranties. Auto dealers offer these only after a vehicle has been checked “and cleared by mechanics,” he says. The owner must keep up the maintenance-and-servicing agreement, or the warranty is voided. For doing so, the owner gains assurance that costly repairs will be covered. Agreements like this always describe “owner participation,” he says—do’s and don’ts aimed at helping out the buyer and reducing the dealer’s risks. Not all warranties are good deals for the customer, of course, but on the whole there’s a win-win.
Similarly, he says, septic system owners “need to understand that their systems are machines—not just a tank in the backyard.” This being the case, he adds, “You have to ‘check under the hood’ once in a while to make sure it’s working as it should.” Simply inspecting a system’s operation periodically “can add several years of life to it,” he says.
Under the Septic Shield plan, an owner may buy coverage for repairs and replacement should failure result from any malfunction during the three-year coverage period. (That time frame is a typical minimal interval between routine pumping and inspections.) The maximum payout is limited to $12,500, covered by an underwriter called General Fidelity Insurance Company. Septic Shield fees (which cover both the inspection cost and warranty) range from $486 to $799, depending on whether the system is new or used.
These costs will likely be substantially offset, Carmody believes, by the enhanced market value of a home with documented septic-system care and a warranty in place.
“Just as on any warranty,” he emphasizes, “there are clear dos and don’ts on what we will and won’t cover.” However, these terms are ultimately good for homeowners and for the industry alike, he believes, because the pre-warranty inspection process will make owners better-educated and more conscientious about upkeep. “They read the exclusions and find, ‘Oh, I can’t pour hot grease down my drain?’ Before reading that,” he says, “they probably also didn’t know that you can’t use the mound as a motorcycle jump, or drain field as a parking place, and things like that.” Discovering the exclusions gives the owner “important things to think about”—whether a warranty is purchased or not. Toward this end, Septic Shield will also provide buyers an informative owner’s manual detailing obligations.
In order to assure the highest-quality work during the pre-warranty inspection phase, Carmody has lined up a nationwide service network; other providers are welcome to apply too, and he encourages them, but they will have to demonstrate strong credentials. He has also enlisted the Texas Onsite Wastewater Association (TOWA) to perform assorted warranty tasks and is negotiating similar relationships with state associations in Florida, Wisconsin, Michigan, Virginia, and Kentucky. Carmody believes he’s providing “an excellent opportunity” for “the budding inspector profession.”
His primary business, Carmody Data Systems Inc., provides software for septic system management. There’s a synergy here, he says, that “will dovetail perfectly” with Septic Shield. His customers (often regulatory bodies) currently oversee nearly 300,000 septic systems in fourteen states. A large base of performance data from them will enable his underwriter to recalibrate risks and premiums as the industry matures. Full integration of inspection documentation, of regular monitoring reports, of component performance data, and of regulatory and maintenance conditions, he adds, should also spur higher expectations in the industry across-the-board.
As of late 2005, Carmody was still ironing out the “kinks” and advancing cautiously. “It’s not perfect yet,” he says, “but it’s a really good start. And we will be able to follow it up with whatever info comes in from the warranty inspections and from the claims. We have the ability to process all of that quickly because of our experience with Carmody Data.”
The Return of ProSept
The short-lived ProSept program, mentioned above, came from a Connecticut insurance firm, the Powderhorn Agency. Owner Gary Missigman—whose primary business is insuring 50,000 or so residential heating-oil tanks—reports that he is now in the process of reviving ProSept. He anticipates offering septic warranties beginning early in 2006.
Some 80% of Powderhorn’s oil-tank customers, he notes, own septic systems too; thus, the business logic of providing septic warranties to the same customer base is hard to resist. “There are a lot of similarities between them,” Missigman finds. In parts of his New England market, insurance for oil tanks is actually mandatory at the time of a buy-sell agreements. Similarly, he notes, septic tanks are receiving “a lot more play at the time of a buy-sell than ever”— meaning that local realtors and lenders seem to like the proposed warranty as a win-win and will help push it.
Despite the disappointing first try five years ago, Missigman is convinced of both the marketability of warranties and viability for underwriters. Two of the latter have shown serious interest, he reports, and, based on their in-depth analysis of septic failure data, both “are “more than willing” to help him relaunch ProSept. A rollout will coincide with the Pumper & Cleaner Environmental Expo scheduled Feb. 16-18 in Nashville, TN.
ProSept will initially concentrate on Pennsylvania and New Jersey, then expand to a few southeastern states, then to Michigan and Washington. “We’re very, very anxious to get this thing up and running,” Missigman says.
Prewarranty inspections for his program—being, again, the critical factor in loss-control—will conform to rigorous standards set by industry associations and will be performed “by certified inspectors.”
As with Carmody’s plan, ProSept will offer a three-year warranty term requiring the owner to follow prescribed maintenance and have re-inspections every three years or so. Prepaid coverage can be obtained in one- or three-year payment increments (rates not yet determined). Payout limits are pegged at $25,000 per claim, “probably with a $500 deductible,” he says, although details are still being worked out.
Sales will be handled through the real estate and septic industries, especially through inspectors.
System “Life-Cycle Management” is Coming…
The missteps that ended two previous warranty programs may, of course, capsize these as well. However, there’s considerable optimism that the industry can learn from past experiences. Underwriters still face a chicken-or-the-egg puzzle: Without having data on past failures, they’re leery of assuming risks that, if uncontrolled and underestimated, could quickly mount into six- or seven figures. On the other hand, insurers realize that a potentially enormous warranty market probably exists but will never come about unless someone ventures to accept some nominal, reasonable risks.
Likewise, homeowners will never buy-in on a large scale, especially to a new service, without seeing proof of substantial underwriting commitment, testimonials, and evidence of fair payouts. Hence, both Carmody and Missigman anticipate gradual growth and ongoing program refinements.
Lastly, for system inspectors, the impact of a booming warranty market would probably be revolutionary. For one thing, as Carmody noted, the added discipline and higher stakes involved in doing warranty work should improve the quality and consistency (and therefore inherent value) of inspections—to everyone’s gain. He observes: “The seller, Realtor, buyer, and the septic industry,” will all one day be pushing for certified, highly proficient inspectors. The old era of a $50 drive-by “quick peek” by a non-specialist won’t cut it anymore. Such perfunctory but inadequate work (typically arranged by home sellers, who have little stake in the system’s future), are now regrettably commonplace. In time, though, thoroughgoing inspections and the logging of past maintenance will become the norm, he believes, driven by home buyers—who, after all, are the ones facing some truly scary risks.
DAVID ENGLE, a writer based in La Mesa, CA, specializes in construction-related topics.
OW - January/February 2006 |
