These are the different types of insurance you need or may want as a contractor.
Contractors may pay thousands of dollars a year in insurance. Some of it, like workers' compensation insurance, is mandatory, while others provide a just-in-case safety net both for funding repairs and replacements and helping you recover from lawsuits. This guide will walk you through the types of insurance, what they cover and how they can protect you.
Workers' Compensation Insurance: Mandatory
Annual workers' compensation premium cost: $650 - $7,600
Nearly every state in the union requires businesses to carry workers' compensation insurance. Even where it’s not mandatory, it’s still an excellent investment, especially in a high-risk field like construction. A study by the Stanford University Department of Civil Engineering found that even a simple broken bone can result in direct costs of $50,000; with indirect costs, like training a replacement and project delays, that goes up to $55,000.
Workers' compensation insurance covers injuries your employees get on the job due to accidents, workplace violence, terrorist attacks and natural disasters. Each state has its own legal requirements for what a policy covers, and they can vary by broker as well, so check your policy to see what exactly is covered. In the case of injuries resulting in disability, the insurance can cover income replacement as well.
In addition, it protects your company against costs of a lawsuit should an employee sue you for additional damages from the injury, or if they sue a third party (such as an equipment manufacturer) who then tries to sue you to recoup their losses. For example, an employee who injured himself with a saw may sue the manufacturer, claiming the saw was defective; the company may then sue you, claiming you did not train or maintain the equipment properly, and that led to the malfunction. This is called a third-party-over suit.
If you hire over three employees who are not in your immediate family, you most likely need to get workers' comp insurance. (The exact number varies by state.) Some states also regulate from whom you can buy this insurance, so be sure to check your state laws.
Your workers' compensation policy should be audited each year. This means that at the end of your policy period, the policy is reviewed based on your safety record and current business situation. If you decreased your number of employees or had an accident-free year, your rates may go down. If you’ve had some safety issues or grown the business, your policy might need to be increased, which could cost more.
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Contractor General Liability Insurance: Mandatory
Annual premium cost: $380 - $1,500
Like workers' compensation insurance, most states require contractors to take out liability insurance. Even in states that don’t, it’s a wise precaution, as it protects your business from expenses you could incur if a non-employee is injured on your site or property.
General liability insurance covers medical bills and may also cover damages, such as loss of income or damage to property, including structural damage. In the extreme case where an accident causes a death, compensation to the surviving immediate family is covered.
It also protects you in cases of lawsuits over the accident. Sometimes, this insurance covers lawsuits for injuries the plaintiff claims were caused by poor workmanship or negligence by you or your employees. However, not all general liability insurances cover this. If your policy does not, you may want to consider professional liability insurance as well.
There are two kinds of general liability insurance policies for contractors. A claims-made policy covers a specific time period, regardless of when the accident happened. Say, for example, your client was injured in May and you pay for the doctor's bills on your own. In June, you take out the policy. In July, the client bills you for physical therapy associated with the accident. Those bills are covered by the insurance, as well as costs resulting from the lawsuit the client files in July. An occurrence policy only covers accidents that happen during the time the policy is in effect.
In general, subcontractors you hire should have their own liability insurance, but some contractor liability insurance plans cover subcontractors you hire for a project while they are on your property.
Contractor Professional Liability: Desired
Annual premium cost: $900 - $1,500
Like general liability insurance, contractor professional liability insurance protects you against lawsuits and covers damage and injuries. However, this insurance specifically covers problems that happen because of an error made by you, an employee or a third party you hire. For example, if you are putting up a sign for a gas station and, three weeks later, it comes apart in a windstorm because it was not bolted together properly, this insurance will cover the repairs for it and the damage the sign caused to property or people when it went flying off.
These policies also cover pollution liability – such as if a miscalculation causes hazardous materials to drain into a river – and economic loss associated with the repair, such as a restaurant closing because of leaks in an improperly installed roof.
This insurance can be purchased on an annual basis or by project.
Builder's Risk: Highly Recommended
Annual premium cost: Varies by project
This is an unusual insurance policy in that either the owner of the project or the contractor can purchase it.
Builder's risk insurance provides a wide umbrella of coverage, protecting the insurable interests in materials, fixtures, and some equipment involved in the building or renovation of a structure. It can also cover temporary structures, scaffolding, construction forms and cribbing. You can add to the policy to cover soft costs, such as loss of business income, interest on loans and other losses caused by a project delay due to an insurable cause.
The following are generally not covered in builder’s risk insurance:
- Contractor equipment not specifically mentioned in the policy
- Steam boiler explosions
- Earthquakes or earth movement
- Sabotage, employee theft or losses due to government action
- Anticipated losses, such as known weather conditions
This coverage is not just for the contractor, but for anyone listed on the policy. Thus, the eventual owner and other invested parties named on the policy also receive compensation. You can list subcontractors on the policy as well.
Each person receives compensation according to their losses. For example, if an accident results in the loss of part of the roof and a wall, your roofer would be compensated for his losses in materials; you may be compensated for the loss of materials for the wall, plus labor for rebuilding it and the interest on the loan you took out to pay your employees until you received payment at closing; and the building owner may be compensated for the damage to his truck that was at the scene, plus the loss of income caused by the grand opening being delayed a month.
Who Owns the Policy?
It's important to determine whether you or the owner should take out the policy. While both of you are protected, whoever buys the policy is in charge of it. They pay the premiums, receive notifications of cancellation or non-renewal, can change the policy, receive return premiums, and are solely responsible for the deductible. Basically, it’s a trade-off between cost (premiums and deductible) and control.
Often, the contractor can get a better rate or coverage than a property owner. Whichever you decide, be sure to get it in writing. Most often, builder’s risk insurance is specified in a contract.
If you choose to let the owner buy the policy and for some reason they fail to do so or cancel the insurance, you can get a contingency coverage that protects your interests alone.
As with any business, there are plenty of risks – and plenty of insurances to cover costs associated with those risks.
- Commercial property: $250 - $1,650 a year. Covers your business and equipment even when not on the job.
- Commercial auto insurance (mandatory): $1,850 - $2,850 a year. Like auto insurance but for your commercial vehicles, it covers damage as well as driver liability, depending on the policy.
- Employment practices liability insurance: $800 - $3,000 a year. Protects you from claims associated with sexual harassment, wrongful termination and discrimination. It can also cover lawsuits if you inadvertently infringe on another business’s advertising, copyright or brand.
- Inland marine insurance: $500 - $700 per project. This insures materials and property while they are in transit, such as when you move lumber or a mobile office to a construction site.
- Umbrella insurance: $450 - $2.050. As the name implies, this is a coverall for damages or liabilities not covered under other insurance policies.
How to Reduce Your Costs
Insurance is a costly necessity. While it can save you hundreds of thousands of dollars in an emergency – quite possibly saving your business – it’s also a recurring expense that pulls on your operating budget. Here are some ways to get the most from your policies and reduce their costs.
Practice safety: Just like with personal insurances, the less of a risk you are, the better premiums you can acquire, and the cheaper your insurance remains over time. This is especially important in a high-risk industry like construction. Some insurance companies offer safety programs with their policies. Like safe driver programs for auto insurance, these are tips and trainings you go through to receive a lower premium.
Get quotes: Don’t go with the first company you contact. Get quotes, compare policies and get a feel for each company's service. Choose the agency that can best meet your needs at the cheapest price.
Bundle: Some insurance companies bundle policies, such as commercial property and commercial auto insurance, or commercial property and contractor general liability insurance. Bundling can save you money while providing the same coverage.
Negotiate builder’s risk insurance: Take advantage of the fact that you or the owner can purchase builder’s risk insurance. In your contract, specify who will take out the policy. If you decide to do it, negotiate some or all of the cost in the contract or use it as a bargaining chip.
Review the policy before you sign: Probably the most expensive mistake you can make in insurance of any kind is assuming something is covered when in fact it’s either not mentioned or specifically excluded. Also, be sure you understand the terms. For example, there’s a difference between structures and buildings; a building is a structure that will eventually be occupied, while a structure is not. Therefore, if your policy covers “buildings,” it may not cover the shed where you store lumber and tools for the build.
- Work with insured subcontractors: This way, you don’t need to add them to your policy, which adds to your expenses. Also, be sure which policy takes precedence when they are involved in (or cause) an accident while working on your project on your property.
Many people consider insurance a necessary financial evil. It’s true that it can take a significant bite out of your budget. However, these policies, whether required by law or offered as an option, can protect you in times of emergencies. When damages are extremely bad, insurance could be the investment that saves your business. Look over the types of insurances carefully, and examine a few policy options so you select the insurances that best protect you, your employees and your clients.
Contractor's Guide to Insurance: What You Need and What It Costs