Contractor Insurance Crash Course
Every business needs insurance, but for contracting businesses you need more than just general liability coverage. As a small business owner, you need to be on top of your insurance plan, as a gap in coverage can lead to disastrous results. Unlike larger businesses, you aren’t in a position to carry a large deficit across multiple quarters and the right insurance plan can save you and your employees a lot of stress and frustration when things go wrong at the worksite.
Only a tax professional can tell you what you need to meet state requirements, but for the basics we’ve detailed some of the common forms of business insurance and how worker’s compensation works. If you’re looking to start a business and don’t know where to start with your insurance, this should give you a good idea of what’s in store.
There are tons of different insurance plans available on the market, and the exact coverage and intended use case varies wildly. Make sure to talk to a local insurance agent (and check the relevant state legislation) before making any decisions, but go into the conversation with the right information. The insurance agent you talk to will be angling to make money, and the plans they offer might not be directly applicable to the industry you work in. As a starting point, however, you can look at common forms of liability and disaster insurance that should get you up and running.
General liability insurance is the baseline coverage you need to cover damages from unintentional actions or incidents. General liability insurance covers bodily injury, property damage, personal injury, and similar incidents that arise from standard business operations.
Professional liability insurance covers situations in which damages occur as a result of negligence. It’s intended to limit the financial burden of lawsuits levied in response to “professional mistakes.”
Business property insurance does what it says on the tin; it’s property insurance for your business. There are a few variations of business insurance which covers property loss and damages originating from different sources.
Another entry in the denotatively explicit insurance category, business vehicle insurance is insurance for your business vehicles. Having a separate (and better than most) auto insurance plan is important for service business owners, as your fleet is the lifeblood of your business.
Depending on the nature of your fleet, you can itemize your insurance coverage to allow for different degrees of coverage on each vehicle. This is great for businesses with specialized vehicles, but by no means necessary for all business owners.
Business interruption insurance is a form of post-disaster insurance that limits the financial impacts of disasters due to interrupted services. It’s typically a part of a larger ‘business owner’s plan,’ which is a form of packaged business insurance, and isn’t typically offered as a separate coverage plan.
Umbrella Liability insurance is intended to cover the gaps in other insurance plans in order to provide financial support in the case of unexpected (or hard-to-categorize) damages. It’s the insurance equivalent of a slush-fund and, it’s designed to kick in after other insurance plans have been exhausted. Generally, umbrella plans aren’t large enough to merit limiting coverage elsewhere.
Equipment Failure Insurance
Equipment failure insurance is especially relevant to service businesses that use specialized tools, as it covers the gap between business interruption insurance and property insurance. It’s intended to improve uptime by creating a financial fallback for new or rented equipment when cash isn’t available for procuring an immediate replacement.
Worker’s Compensation Insurance
As a soft rule, if you have employees who aren’t owners and you run a service business, you need worker’s comp. The exact laws vary wildly from state to state and the process of applying for (and utilizing it) is often needlessly obtuse, however worker’s compensation is an integral part of running a safe (and legally secure) service business. It’s a complex topic, and bringing it up with your lawyer is definitely worth it.
The main headache-inducing part of worker’s compensation is how the premiums are calculated, and the impact those premiums can have on your bottom line. An unlucky string of workplace incidents can easily impact your costs, but figuring out the exact impact in advance can be close to impossible.
Since worker’s compensation is such a specialized insurance field, it’s typically purchased separately from other forms of business insurance. Depending on the state you reside in, your worker’s compensation plan may come from a state-operated fund or a private company. In either case, your premiums will be based on your exact industry and your payroll, and will scale depending on the number of claims filed by your employees.
Even if you choose to forgo worker’s compensation (which is a bad idea), injured employees can still file claims for which you’ll be liable for, just without the financial protection of an insurance plan. Worker’s compensation can definitely be expensive, but trying to avoid that expense has a cost of its own.
Similar to auto insurance, workers compensation insurance has assigned risk pools for high-risk businesses that wouldn’t otherwise receive insurance from voluntary providers. Being in an assigned risk pool is incredibly expensive and it can sometimes happen by accident; do your research, and don’t be afraid to talk to your insurance provider if you feel your current plan isn’t equitable.
Every State Is Different
Enumerating every possible insurance plan and every legal requirement you might be subject to is a nigh-insurmountable plan. Every state approaches insurance differently and advice fit for Michigan isn’t applicable in California. It’s important to talk to an insurance agent (and probably your lawyer) before making any decisions.
Without a doubt, however, the costs of not having the proper insurance can be astronomical. Protecting your employees and your assets is your job, and you can’t predict the future. Finding the right balance between monthly premiums and effective coverage can be hard, but it’s well worth the time and effort that goes into it. Without insurance, damages can easily lead to drastic productivity drops, creating a financial spiral that’s hard to escape. Smart business owners avoid that.