If you are a contractor, chances are you’ve had some experience with construction insurance, whether it be bonding, workers compensation, or general liability. Sometimes companies require a policy from you in your role as a subcontractor. Often it is required by licensing and construction boards and municipalities.
In construction, no two contractors have the same insurance policy—your business is unique and so is your coverage. It’s essential that you know the basics of what you have and what you might need in the future to ensure you have the broadest protection.
Below are three general tiers of contractor coverage. These don’t represent every coverage and you might need specific coverage from a different tier, but you can use these groupings to determine which insurance products to investigate.
Tier 1 – Contractor Essentials
This tier is for contractors or tradesmen who need just the essentials. Their operations are small, the projects they work on don’t require extensive insurance and bonding, and the business doesn’t have substantial assets that could be lost.
Contractors General Liability
Contractor's liability insurance covers claims arising out of damage a contractor causes to a third party. This is one of the most important coverages a contractor can get, because it covers the liability risks associated with your ongoing operations (while at the job site).
Products & Completed Operations Insurance
This specific coverage is an essential part of a contractor's insurance program but is often excluded from general liability policies. While general liability insurance covers your ongoing construction, completed operations insurance covers the liability of your work after the project is finished.
Equipment Coverage (If You Own Tools)
Equipment coverage, formally known as inland marine coverage, protects your equipment from natural events and theft. The policy can cover most contractors’ equipment, from hand tools to heavy machinery, located anywhere in the U.S. It can be purchased as a stand-alone policy or an add-in to your contractor's business owner policy (BOP).
Workers Compensation (If You Hire Employees)
Workers compensation insurance covers the employees of a company if they are injured while fulfilling their job duties. In a contractor insurance program, this is oftentimes the most expensive part of insuring your business. Although rates vary based on what type of contracting trade you are in, it is crucial to find a carrier that has services to keep your experience modifier low.
Keeping the experience modifier low does a couple of things: it is a good, long-term strategy to avoid paying more in insurance and it helps you bid on projects that require certain experience modification numbers. An insurance company that specializes in experience modifier reduction will be more diligent in following up with any of your open claims and take a more proactive approach to the injured employee's medical care. For example, these insurance companies try strategies that involve opioid avoidance education, occupational medicine, and return to work programs.
Property Insurance (If You Own Real Estate)
Property insurance covers specified structures and the property within them. This business insurance isn't specific to contractors and often isn’t necessary for many that work out of a leased space or home office. Larger contractors who own buildings and those who have storage facilities for their heavy machinery will need this insurance.
Commercial Auto (If You Own Work Vehicles)
Contractors often have pickup trucks or other vehicles that they use for their construction operations, which can range from one vehicle to hundreds. A commercial auto policy covers any property damage or bodily harm that was caused by those vehicles as the result of an accident.
This second tier of coverage is “Required by Contract”—meaning most contractors purchase these additional insurance policies because they are mandatory for certain (typically big) projects. Larger general contractors or project owners want to ensure their extensive assets are covered, so they will only hire contractors with the insurance that protects them.
Many projects could require additional coverage, most of the time we see requirements for the following in this tier:
$2-5 Million Liability Umbrella
Most larger construction projects require that you purchase an umbrella insurance policy that extends your liability limits beyond the usual cap of $1 million per occurrence.
The contractor umbrella policy usually raises the limits of your general liability, workers compensation, and automobile liability based on the amount of extended coverage you purchase. For example, if you had a $1,000,000 general liability limit and you purchased a $5,000,000 umbrella, you would now have $6,000,000 in total general liability limits.
Hired & Non-Owned
Hired and non-owned insurance covers auto liability associated with vehicles that you do not own or vehicles that you temporarily rent. Although many would consider this Tier 1 coverage, we categorized it as Tier 2 since this coverage does not cover owners and thus doesn’t affect the self-employed tradesmen.
For example, if one of your employees got into a car accident while performing a task for your business, you will be named on the ensuing lawsuit. The more damage caused by the accident, the more likely your business will face the risks and costs of litigation.
Leased Equipment Coverage
Contractors with larger operations oftentimes are required to purchase an insurance policy that covers any of their leased equipment from damage, loss, or theft.
We often see contractors request this coverage with a $50,000 limit so they can rent different pieces of equipment to complete projects or offer additional services.
As your construction company begins to hire employees and grow its operations, you will have to address the risk of employee lawsuits arising out of employer misconduct. Some examples of that misconduct could be sexual harassment, wrongful termination, discrimination, hiring practices, and many more. An employment practices policy can offer this protection, as well as covering third-party allegations and employee actions toward others outside of your company that put your business at risk.
This is a highly recommended coverage if you have more than a handful of employees; it is also especially important if you are rapidly growing or planning to make layoffs.
Tier 3 – Large Projects
While the coverage we’ve categorized as Tier 3 can be beneficial to contractors of any size, they are especially relevant to those trying to bid on large jobs or doing work for exceptionally large companies.
Although most pollution insurance policies are purchased on a stand-alone or monoline basis, sometimes pollution or environmental coverage can be added to your existing general liability policy. This insurance policy would cover a loss caused by contamination resulting from your contracting operations or during the transportation of waste materials. While larger contractors purchase this coverage with significant limits, some contractors' liability insurance policies have the option to include a small limit of $25,000.
Contractors E&O or contractors professional liability insurance is important if your business regularly provides construction consulting or hires subcontractors. This policy would cover acts of errors and omissions from services you performed. For example, if one of your subcontractors does a job improperly, you can be responsible for fixing the damage that they cause.
Insurance challenges for specific trades
Although contractors of all trades usually purchase the same types of insurance policies, what differs is the cost of each policy and how difficult it is to find. Additionally, each trade has unique exclusions and limitations that are important to consider. Here are a couple examples of industries we work with and the challenges they face when purchasing insurance:
This is one of the hardest contractor trades to insure. The policies can not only be expensive, but many times are full of exclusions and limitations. Sometimes after reading a particularly bad general contractor insurance policy, you might wonder if any risks are covered at all.
They aren’t all bad, though. Many insurance companies do offer quality insurance policies for general contractors, but you need to consider the following:
Subcontractor Exclusions – Many insurance companies are putting the CG 2294 subcontractor exclusion on their general liability insurance policies. This limits certain claims that happen because of your subcontractor’s actions. We highly suggest reading our article to learn more about this as it can affect how your business is protected.
This exclusion might be something you have to live with if you’re new to the trade and do certain types of construction (such as a homebuilder), but if you are an established contractor, many carriers no longer include this exclusion.
Uninsured Subcontractors – Any uninsured subcontractors that you use will be added to both your commercial general liability policy and your workers' compensation payroll on the insurance audit. The costs range but can be high enough to significantly harm your business if you use many uninsured subcontractors without planning for the additional costs.
Premises Limitations – Some general liability policies for general contractors include premises limitations that limit coverage to the premises described in the endorsement. This means if you start a project without informing the insurance company, there is no coverage for that project.
As you can imagine, we do not suggest having this on your policy because it creates significant exposure if you fail to update the insurance company of a new project.
Roofing contractors are in another tough trade to get insurance for. The general liability coverage is moderately difficult to find, but the workers comp is one of the toughest policies to get out of all the construction trades. Although there is no way around it, here are some tips to get the best deal on your insurance program:
Avoiding accidents is the best way to save on premiums – Since workers compensation is the largest insurance cost for any roofing company, avoiding accidents and maintaining a low experience modifier is the single best way to lower the cost of insurance. Proving that your business has gone a couple of years without any claims could save you around 30% in workers' compensation premiums, and the underwriter might give you an additional premium discount on top of that.
Limit the number of uninsured subcontractors if possible – Insurance companies frown upon utilizing too high of a percentage of uninsured subcontractors. Not only does it add to your costs because their pay shows up on your insurance policies, but insurance companies view uninsured subcontractors as high risks because you have little to no control over how they run their business (safety, quality control, etc.). This is why using too many uninsured subcontractors will result in higher premiums than a company that doesn’t use any uninsured subcontractors.
Carpentry contractor insurance can be relatively easy to source, depending on the type of carpentry that your business performs. If your business does frame carpentry, you should talk to us about your specific needs. However, if your business focuses on things like cabinets and trim carpentry, there are plenty of insurance carriers that can write this type of trade.
As with any woodworking trades, underwriters worry about the fire risks with shop sawdust collection systems and safety risks since your employees will often be dealing with saws.
Plumbing contractors have plenty of options when it comes to insurance. It is not a particularly hazardous industry from either a liability or workers compensation standpoint. Although, if you are doing plumbing in high-rise buildings or working on utilities, you might run into some issues that plumbers who are not doing those projects would normally face and must get your insurance through an E&S insurance company.
For plumbers, we highly recommend that you purchase completed operations liability on your general liability insurance policy. Some of the most significant claims faced by plumbing contractors involve a completed project causing water damage to the building. In many cases, these claims are covered under the completed operations liability section of the commercial general liability policy.
Electrical contractors have plenty of options when choosing an insurance company. Most insurance companies in the construction industry will quote an electrician with quality coverage. The exception to that is contractors involved with industrial projects or those who are working at heights of more than two stories.
For electrical contractors, we highly recommend making sure that your general liability insurance policy includes completed operations insurance. Claims involving electrical contractors oftentimes involve an electrical fire after the project is completed. In this scenario, completed operations liability would cover the claim.
Handyman insurance is an interesting policy to underwrite. Handymen can perform a wide variety of jobs, including drywall work, cabinet installation, trim work, window/door installation, deck building, fence repair, and many other tasks. On top of that, each handyman brings different skillsets to each job. That makes insuring this type of business difficult, but there are great insurance options for handymen. Here are a couple of suggestions before you purchase or renew your handyman insurance:
Check the exclusions – The main goal of underwriters is to limit the wide variety of job types handymen are doing to ensure that it is truly a handyman and not a roofer trying to get a cheaper insurance policy. On all handyman liability policies, there will be a list of prohibited operations. Know that sometimes this is unavoidable, and make sure to not perform any type of work that is prohibited unless you want to risk not having coverage for that work.
If you subcontract out work, you might not fit under the handyman classification – Many contractors originally rate themselves as a handyman, but upon further investigation, they are really a remodel contractor (for the purpose of insurance rating). If you subcontract out a significant amount of work or subcontract out licensed trade professionals (electrical, plumbing, HVAC, etc.), you should be rated as a remodel contractor instead of a handyman.
HVAC businesses have an easier time purchasing insurance than many other trades. There are plenty of options to choose from and the cost of insurance is lower than other construction trades. HVAC contractors who do high-rise installations or take on certain industrial work may face certain challenges with purchasing insurance.
Painting contractors can usually get a competitive insurance quote from an insurance carrier in the construction industry. The challenges painters have usually manifest on the workers compensation portion of their insurance program. Although there are some challenges to overcome for interior painting, exterior painting is a more expensive classification than inside painting only because painters are oftentimes exposed to working from heights. If you need workers compensation and are running into issues securing a reasonably priced workers compensation policy, follow these tips:
Consider purchasing workers' compensation and general liability from different insurance companies – We have been known to suggest that companies should use their workers' compensation policy to get a better deal on their other insurance policies. For painters, this is not the right strategy. You might need to purchase workers compensation from a more specialized workers compensation insurance company, especially if you are doing exterior painting. This is because plenty of insurance companies will quote the liability, but few specialized workers compensation carriers will quote the workers compensation policy. Just know that being a painter means you might have to take a different approach to finding insurance.
Have a safety program and make sure the insurance company knows about it – Another way to keep the workers compensation premiums low is to have a robust employee safety program to prevent your employees from becoming injured on the job. Having this formal safety program in place makes your business more attractive to insurance carriers and helps lower the cost of insurance.
Whether it be the owner of the property, the general contractor, or a vendor, dealing with additional insureds is an unavoidable part of being a contractor.
An additional insured endorsement adds the listed person to your policy to limit their liability exposure and protect your business during a construction project.
Using Independent Contractors
The frequent use of independent contractors presents some problems with a contractor's insurance program.
Even though many companies pay their labor as independent contractors (1099s), these workers can be seen as regular employees in the eyes of the legal and insurance industry. The distinction between employee and independent contractor is most commonly determined by the amount of control that you have over that specific person and is an issue that should be brought up with an employment attorney.
In other words, even if a worker is paid as a 1099 independent contractor, it can later be determined that the worker was an employee…which means you are responsible for their workers compensation and workplace liability.
Therefore, you should know how your insurance will respond to your unique business structure. With many insurance companies, you must pay to cover independent contractors as if they were your employees, as well as pay a higher rate for “uninsured subcontractors.” We suggest talking with us or your existing insurance broker to determine how your independent contractors or “uninsured subcontractors” will be charged upfront to avoid any surprises or extra money due.
Many construction operations use subcontractors to add additional capacity to their projects. Many firms, most commonly general contractors, can even subcontract 100% of their work out to different subcontractors.
Make sure you know what your insurance policy says about covering subcontractor work. For example, if a subcontractor causes damage to a client’s property or their faulty workmanship causes a personal injury, the contractor who subcontracted the work will oftentimes be involved in the lawsuit. For this reason, many insurance companies add a limitation to their contractor’s insurance policy, called the CG2294, that excludes subcontractor liability. Understanding your policy limitations on subcontractor liability is critical to any contractor looking to lower their risk.
Additionally, have your subcontractors include you as an additional insured on their policy for an extra layer of protection. If you get listed in a lawsuit for an issue they caused, the subcontractor’s insurance will cover your liability.
Recommendations For Contractors
Small contractors are often trade contractors with fewer than 10 employees. These contractors often take jobs as subcontractors and specialize in a specific type of project. The first insurance policy a small contractor should get is a business owners policy (BOP). This is a low-cost insurance policy with a lot of coverage included.
For example, in addition to the general liability and property coverage, a contractor’s BOP typically comes with additional coverage for your hand tools and property when in transit.
Heavy construction contractors might have trouble getting on a BOP program due to the business size and higher exposure to risk, but it is always a good idea to ask your insurance broker if you qualify for a BOP program. In addition to your business owner's policy, you will need a workers compensation policy if you have employees.
Although there is no definitive size requirement to be a medium-sized contractor, this generally applies to contractors with 50 to 200 employees. These contractors work on larger jobs that often require specific insurance policies.
Ask upfront how flexible the insurance company is when complying with the insurance requirements of your general contractor or project owner. For example, will the insurance carrier accommodate different additional insured endorsements?
Even if a carrier is marginally more expensive, it might make sense to spend a little more if they offer a greater ability to help you meet job requirements. We suggest giving the carrier contracts that you have bid on in the past to see if they can accommodate the endorsement requirements.
Medium-sized contractors should also start looking at additional coverages, such as employment practices, cyber, pollution, contractors E&O, and inland marine.
Large contractors require the most specialized insurance programs. Owners of large construction firms purchase the same coverage as medium-sized contractors, plus require specific policies such as wrap-ups and OCIPs.
I realize this is a lot of information to take in so if you have any specific questions, I encourage you to call me directly at 781-289-7445 x120. We would be happy to review your existing policies and make recommendations where needed. or visit our website at www.rizzoinsurance.com . Lastly, you can text us at 781-289-7445 for more information by including a picture of your existing policy(s).