Contractor Insurance: Protecting Your New Business
Insurance can be a difficult road to navigate, especially for new contractors. There are several factors that you need to consider when looking at the different coverage options, limits, contractual agreements, legal requirements, and more. That’s why we created this guide to help navigate the complexities of insurance and make it easy for you.
We will cover the different types of coverages you can purchase, but first you need to look at what is required for you to do business. Each of these questions will be answered in the insurance coverage that it refers to:
1. Are you performing any commercial jobs?
If yes, then you will most likely have a contract that will require you to carry certain coverages and limits.
2. Do you have W-2 employees?
If yes, some states require you to carry Worker’ Compensation.
3. Do you have vehicles that are owned by the company?
If yes, then you will be required to carry Auto insurance.
The gist is that if you do not have a contractual obligation or have government requirements such as Workers’ Compensation or Auto, then technically you are not required to carry insurance. However, if you are sued or held liable for anything, your company can be taken from you and you can be held personally liable for any damages. Insurance is a way to protect you and your company and make you whole incase of a loss.
If you plan on bidding or working on commercial projects or jobs or will be working as a subcontractor, you will enter into a contract that will require you to carry specific coverages and limits. This can be limiting for new contractors since these coverages required can get expensive. If you have contractual obligations for certain coverages, it’s best to work with an insurance broker that can negotiate better rates and can sometimes work with the company requiring the coverage limits to reduce the limits on the contract for what is industry standard.
BUSINESS INSURANCE COVERAGE OPTIONS
Business Owners Policy (BOP)
A BOP is specifically for small contractors and provides basic coverage at a discounted price. It packages together General Liability, Commercial Property, and Auto. One of the great things about BOP’s is that they usually do not require an annual audit so if you make more than what you estimated, you will not have to pay the difference at the end of the year.
General Liability (GL)
General Liability is the most common type of insurance for contractors and covers you for claims for 3rd party property damage or bodily injury to others because of your “negligence”. In some states, General Liability is required to even get your business license. If you rent an office space, your lease will often require you to carry GL in case anyone visiting your office has an injury, it will be covered under your policy and the property owner will not be held liable.
Example: You are a plumber and while fixing a leaky sink at a customers home, you trip and accidentally damage the customers wall. Your General Liability policy will pay the homeowner or a contractor of their choice to fix the damage.
Commercial Auto insurance is different from personal Auto insurance in that commercial Auto insurance has a single limit that covers all property and liability claims. Industry standard is a $1,000,000 limit to help protect your company.
There are two types of property insurance, contents and building. If you rent your office space, they will require you to carry property insurance and you can insure the contents of your office space which is anything that is not permanently attached to the building.
If you own the building, Property insurance will cover the building.
Be careful when you decide which Property coverage you select for your property because if your roof is damaged or you undervalue your home on your insurance policy, you can be penalized and only receive a fraction of the claim money.
If you live in an area that is affected by tornadoes, hurricanes, or hail, you will need to purchase Wind and Hail coverage which has a separate deductible than your normal Property policy.
If you are injured on the job, most personal health insurance policies have an exclusion for work related injuries. Workers’ Compensation will cover work related injuries and even pay a portion of a workers salary if they have to take time off of work due to a work related injury. Some states require Workers’ Compensation if you have W-2 employees.
If you have 1099 employees but you are paying them directly and not through their established company, the government can consider them actual employees of the company and you can be liable for any work related injuries they sustain.
Umbrella insurance provides another layer of limits over your GL and Auto insurance limits. Sometimes this is required in commercial contracts but this coverage is inexpensive and helps protect you and your company if there is a huge loss that exceeds the limits of your GL and Auto policies.
This policy covers moveable equipment and tools over a certain dollar amount. This includes forklifts or other heavy machinery, lawn mowers, and anything else that is not considered a “tool” and can be moved to a jobsite.
Your tools for the most part are covered by your Auto insurance policy if they are stolen from an auto owned by the company, by your Property insurance if the tools are stolen from your property where they are stored.
However, if your tools are stolen from a vehicle not owned by the company, it can be a messy situation and finger pointing between the personal auto policy and your business insurance. So, you will want to add a Tool Rider onto your Inland Marine or Property policy that will cover your tools while off site.
Note that for tools that cost more than $1,000, you will need to provide a schedule of each tool in order for it to be covered on the policy.
Contractor bonds are guarantees of work to be provided to a certain standard. You will often see companies say “insured and bonded” which means they have such a good reputation that an insurance company was willing to offer the guarantee of their work.
Contractor bonds are hard to get for new businesses since insurance companies like to see a track record of your work that can be verified. Most large commercial jobs will often require their contractors to be bonded.
Bonds will be paid out by the insurance company if the contractor was unable to finish the work that was outlined in their contract or if the work was performed at an unsatisfactory level.
WHAT IS A CERTIFICATE OF LIABILITY?
If you perform commercial work, you will most likely be asked to provide a certificate of liability or “cert”. This is a summary of your coverage and limits and has to be created new each time a new customer requests and after each policy renews.
COST OF CONTRACTOR INSURANCE
Insurance premiums or the cost of insurance varies depending on size of the company, how prone your industry is to insurance claims, total cost of property, etc.
To make it easy, a contractor that is starting a new business will most likely get a BOP which is an average cost of $1,200/year).
Usually the full payment of your premium is due upfront but you can work with finance companies to spread that cost over a year but you will pay interest.
HOW TO BUY BUSINESS INSURANCE
For new or small businesses, insurance companies such as Nationwide, Travelers, Hartford and others have online quoting that make it easy and inexpensive to purchase BOP’s or and other coverages. As you grow, it’s better to use aninsurance broker that can help find coverages that include more risks that will be paid out if there is a loss, they can help manager safety so you are OSHA compliant, they can help get claims paid or fight for you, and be your advocate all around to make sure you are getting the best of everything.
BUSINESS INSURANCE AUDITS
This only applies if your insurance policy has an audit clause. Only General Liability and Workers’ Compensation have audits. This means that at the end of the policy year, the insurance company wants proof of your revenue and payroll for the policy year. Since the cost of the policies is based on what your expected revenue and payroll, they want to make sure that you paid the correct amount. This can be good or bad depending on if you overstated or understated these when getting your insurance quote.
COMMERCIAL VS RESIDENTIAL WORK IN INSURANCE
As you grow and no longer qualify for a BOP, you will have more options for insurance carriers and you will purchase your coverage as an individual coverage, not a packaged policy. This means that each coverage will be analyzed separately by underwriters. Certain insurance companies do not like to insure/cover contractors that do any type of residential work because residential work has a history of high claims.
INSURANCE BROKER VS. INSURANCE CARRIERS
Insurance carriers are the companies that write the coverage, decide the premium, and actually cover you in case of a loss. Many insurance companies only allow you to purchase their insurance products from an insurance broker/agent. However, some insurance companies allow companies to go directly to them to purchase their insurance products. For new or small business contractors, you are able to go directly to the insurance companies websites and get quotes. As you outgrow the revenue threshold of those direct companies, you will have to use an insurance broker to find the best insurance for you.
Insurance brokers/agents have access to several different insurance companies. Once you are large enough, you will want to ask several different insurance brokers to find insurance for you since some of them have access to certain insurance companies that other brokers do not have access to. Be careful about which insurance brokers you work with because some of the ability to help with OSHA, claims, safety, and other aspects that can help decrease your insurance premiums while other brokers are just there to make money from selling you an insurance policy.
BEST INSURANCE COMPANIES FOR CONTRACTORS
For new or small business contractors, there are several companies that offer online quoting and have some of the best coverages available. Nationwide is the largest carrier for contractor insurance. Our other recommendations are The Hartford, Next Insurance, and Thimble.