Contractor Insurance: What Coverages Are Essential?

Owning a contracting business comes with inherent risks. To protect themselves, their business, and their clients, general contractors should carry several types of insurance. While the specific requirements vary by state, there are some standard insurance policies that all contractors should have. These include general liability insurance, workers' compensation insurance, and commercial auto insurance. Depending on the nature of their work, contractors may also need to consider additional types of coverage, such as builders risk insurance, pollution liability insurance, and professional liability insurance.

Commercial General Liability Insurance

General liability insurance can protect your business from expenses associated with common mishaps, such as customer property damage and injuries. It is often required by project owners, licensing agencies, and commercial leases. This type of insurance is important for contractors as it can protect them from unexpected financial losses resulting from accidents or injuries on their construction site. For example, if a customer slips and falls on a construction site, general liability insurance would cover the medical expenses and any legal fees that may arise. It can also cover other claims, such as defamation, libel, false advertising, and copyright infringement.

Errors and Omissions (E&O) insurance, or professional liability coverage, is included in general liability insurance. This can help cover costs in a business disagreement or if you are accused of making a mistake that causes someone to lose money. For instance, if you are accused of project cost overruns, professional liability coverage can help cover the related expenses to defend yourself.

When choosing general liability insurance, it is important to consider the different policies available and the specific needs of your business. The cost of general liability insurance can vary depending on the risks that your business faces, such as the types of projects you work on, their location, your payroll, and the number and types of vehicles you use. It is also important to ensure that you have the necessary licenses and insurance requirements for your state.

Workers' Compensation Insurance

In the construction industry, physical labour brings a high risk of injuries, which could result in hefty medical bills and downtime. Workers' compensation insurance can provide financial protection for contractors and their employees in the event of an accident or occupational illness. It covers medical expenses, including emergency room expenses and ongoing medical care such as physical rehabilitation. It also provides disability benefits while the employee is unable to work and can even offer death benefits to dependents if an employee dies from a work-related injury.

Additionally, workers' compensation insurance typically includes employer's liability insurance. This protects contractors if an employee decides to sue the business owner over an injury, covering attorney's fees, court costs, and settlements.

The cost of workers' compensation insurance varies depending on factors such as the number of employees, the type of work, the location of the business, and claims history. On average, construction companies and contractors pay around $254 per month or $3,054 annually for this type of insurance.

While sole proprietors are not always required to carry workers' compensation insurance, it is recommended that they consider purchasing this policy for their financial protection. Contractors should also be aware that rules and requirements can change over time, so staying informed about their state's regulations is essential.

Automobile Liability Insurance

The importance of this insurance lies in its ability to protect contractors from financial liabilities in the event of property damage, bodily injury, or death caused by their vehicles. For example, if a contractor's vehicle accidentally damages a client's property or causes injury to a third party, the contractor could be held liable for the resulting expenses. Automobile liability insurance would cover the legal costs and compensation in such cases.

In some states, commercial auto insurance is a mandatory requirement for vehicles registered to a business. Even in states without this requirement, carrying automobile liability insurance is essential to protect the business and its owners from potential financial ruin.

The scope of automobile liability insurance typically includes coverage for legal bills, medical expenses, and property damage resulting from vehicular accidents. It is worth noting that personal auto insurance policies usually do not extend to business use, so contractors who use their personal vehicles for work-related purposes should consider obtaining hired and non-owned auto insurance (HNOA) to ensure adequate protection.

When selecting an automobile liability insurance policy, contractors should consider factors such as the industry they operate in, the level of risk involved, and the specific state requirements for insurance coverage. Obtaining this insurance can provide peace of mind and demonstrate a commitment to quality and reliability in their business operations.

Builders Risk Insurance

A standard builders risk policy does not typically provide coverage for workplace accidents, injuries, or liability. However, it can be customized to include optional endorsements, such as flood and earthquake coverage in some states, to meet the unique needs of each construction project.

The cost of builders risk insurance depends on various factors, including the cost, location, timeline, and square footage of the project, as well as the expertise of the contractors and the quality of materials used. It typically accounts for 1% to 5% of a business's total construction budget.

When selecting a builders risk insurance policy, it is important to work with an experienced agent or broker who understands the unique risks associated with construction projects. It is also crucial to carefully review the policy to identify any coverage gaps and understand what is and isn't covered.

Contractors Pollution Insurance

Contractors face a variety of pollution exposures, and a pollution incident can seriously damage a contractor's operations, balance sheet, and reputation. Therefore, it is essential to have Contractors Pollution Insurance (CPL) to protect against claims arising from pollution conditions resulting from the operations of the contractor or its subcontractors.

CPL insurance provides coverage for third-party bodily injury and property damage, defence costs, and cleanup. It covers a range of pollutants, including liquid, solid, or gaseous contaminants or irritants, such as fumes, smoke, vapour, waste, chemicals, mould, bacteria, and asbestos.

There are different types of CPL policies available:

• Blanket policies: These protect against qualifying incidents from covered operations within the policy term, usually annually.
• Project basis policies: These cover claims arising during a specific project and may include tail coverage for incidents that happen during the coverage period even after the policy has expired.
• Occurrence policies: These provide coverage for incidents that occur within the policy period, even if the policy is canceled.
• Claims-made policies: These cover incidents that occur and are also filed during the policy period.

The cost of CPL insurance varies depending on the specific needs of the contractor and the industry they work in. However, CPL insurance typically has a minimum self-insured retention of $5,000 and a minimum premium ranging from $1,500 to $5,000.

Frequently asked questions