What Is Contractor Insurance?
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 a policy is required by companies you are subcontracting for, and frequently it is required by licensing and construction boards.
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 a specific coverage from a different tier, but you can use these groupings to determine which insurance products to look into.
Tier 1 – Contractor Essentials
This tier is for contractors or tradesmen who need the bare essentials. Their operations are small, the projects they work on don’t require extensive insurance and bondings, and the business doesn’t have substantial assets that could be lost.
Contractors General Liability
General 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.
Tier 2 – Recommended Coverages
This second tier of coverages are “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 coverages, 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 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 a 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 most likely 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 cover 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 coverages in what 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 very 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.
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.
One problem contractors face is that each additional insured might request coverage on a different form…and sometimes these forms date back to the ‘80s.
This is an important reason why you need to choose an insurance carrier that has multiple additional insured endorsements filed and a broker with experience using these forms. Otherwise, you might not be able to comply with job requirements and lose work.
Common Additional Insured Endorsements
Additional Insured – Owners, Lessees or Contractors – Scheduled Person or Organization (CG2010 4/13)
Additional Insured – Owners, Lessees or Contractors – Completed Operations (CG2037 4/13)
Additional Insured – Owners, Lessees or Contractors – Automatic Status When Required in Construction Agreement With You (CG2033 4/13)
Additional Insured – Owners, Lessees or Contractors – Automatic Status For Other Parties When Required in Written Construction Agreement (CG2038 4/13)
To learn more about a specific additional insured endorsement, go to AmWins Insight.
Using Independent Contractors
The frequent use of independent contractors presents some problems with a contractors 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 actually an employee…which means you are responsible for their workers compensation and workplace liability.
This is why you should know how your insurance will respond to your unique business structure. With many insurance companies, you have to 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 your 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.
To learn more, check out “What Is A Business Owners Policy (BOP)?”
In addition to your business owner's policy, you will need a workers compensation policy if you have employees. If you are a sole proprietor with no employees, you can read here for ways to save money through a ghost policy or an affidavit of exempt status.
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? Does the broker have other, similarly-sized clients with the same insurance carrier?
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 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.