Solved! What Insurance Do I Need as a Contractor?
Q: After years of working for other people, I’ve finally decided to start my own general contracting business. I’m worried, though, about how to protect myself and my employees in the event of an accident on a jobsite. What insurance do I need as a contractor?
A: Whether it’s for a construction firm or an independent handyman business, insurance is a necessary expense to protect the owner of the business as well as any employees. The type of insurance a contractor needs depends on several factors, such as the type of work the contractor does, the number of employees, and whether or not the contractor has a physical office location. However, the majority of contractors protect their businesses with liability insurance. This helps cover the cost of any damages the contractor is responsible for. Other types of insurance for contractors can help limit the financial impact of any damages they’re responsible for, whether an employee causes a car accident while in a company vehicle, or a contractor’s actions cause damage to a client’s property. Although contractors may not be able to foresee what might happen on a jobsite, having the right insurance coverage can help protect them financially and ensure their employees are protected as well.
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At a minimum, contractors will want to have general liability insurance to protect them from potential costs related to property damage or injury to a third party.
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General liability insurance is an important type of coverage for contractors. Liability insurance policies help protect contractors from the costs associated with being found liable for an accident that causes property damage or physical injury to a third party. If a contractor accidentally causes damage at a jobsite or a customer’s property, they may be responsible for fixing the damages. General liability insurance can help pay to repair property damage up to the liability limits of the policy. For example, if a construction company accidentally leaves a hose on at a jobsite and water floods the area and causes water damage to several buildings under construction, the contractor’s general liability policy may help cover the cost of repairing the damaged buildings.
A general liability insurance policy also includes bodily injury liability protection. This coverage helps pay for medical expenses to third parties if a contractor’s negligence causes physical injury. In the flooded jobsite example, it's possible the owner of the building could slip on the wet floor, break an arm, and require a trip to the emergency room. The contractor’s general liability coverage would help pay for the building owner’s medical bills and any associated legal costs if the building owner decided to pursue legal action.
Another key aspect of a general liability policy is personal injury and advertising injury coverage. Personal injury refers to harm done to a third party, excluding bodily injury. For example, if an employee makes false statements about a client, and the client sues the contractor for the employee’s actions, the contractor’s personal injury coverage could help cover court costs.
It’s also a good idea for a contractor to carry professional liability insurance, which can protect them against client lawsuits.
A general liability policy focuses on protecting contractors against the cost of damages, third-party medical bills, and any legal expenses that result from their actions or those of their employees. Many contractors choose to get additional liability protection by adding a professional liability insurance policy. Also called errors and omissions insurance (E&O), professional liability coverage helps protect contractors from claims that they failed in their professional services.
For example, say an inexperienced contractor accidentally installs wiring incorrectly and the client’s building project isn’t up to code. Although there was no intentional damage, the contractor could be liable for the business service error if the client decides to sue. This claim coverage type would be part of a professional liability insurance policy.
A contractor with employees may be required by state law to carry workers’ compensation insurance—and even if it’s not required, it’s still a good type of coverage to have.
Workers’ compensation insurance is one of the most important types of insurance coverage for contractors. Workers’ compensation helps cover the cost of work-related injuries employees may sustain on the job. The cost of claims for workers’ compensation can be high, as the worker may request payment for their medical bills as well as lost wages.
Contractors in the construction industry, in particular, may want to make sure they have sufficient coverage limits to handle workers’ compensation claims. Construction projects tend to have a lot of hazards that could injure employees, even when every precaution is taken. For example, a developer may hire a construction contractor near them to build houses. While installing siding from a ladder, an employee of the construction company could lose their balance and fall to the ground, injuring their back. The construction contractor’s workers’ comp insurance will likely help cover the medical bills for the employee. It can also help pay for temporary disability insurance and lost wages while the employee is out of work.
Contractors who have expensive tools and equipment will want to consider insurance to cover these items in the event they’re lost, stolen, or damaged.
Known as inland marine coverage or equipment insurance, this type of insurance can help contractors cover the cost of replacing lost, stolen, or damaged equipment. Many contractors use expensive equipment in their businesses, such as high-quality power tools or heavy machinery such as excavators. An equipment coverage policy or endorsement helps contractors repair or replace their mobile equipment if it’s stolen, vandalized, or damaged. Generally, equipment coverage is in place when the equipment is being moved on the way to the jobsite, at a jobsite, or in temporary storage, such as a warehouse.
Contractors considering equipment coverage or inland marine coverage may want to talk to a commercial insurance company to get a better idea of their coverage needs. Depending on how valuable their equipment is—and the cost of replacement for equipment—they may need specialized coverage with higher policy limits for their business equipment.
A contractor who has a physical business location, such as an office, will want to look into commercial property insurance.
Just as homeowners insure their dwelling with homeowners insurance, business owners can protect their physical offices with commercial property insurance. Commercial property insurance covers the office building itself and business equipment within the property. This can be essential coverage for both contractors who own their physical office as well as those who lease space. Some commercial landlords may even require their tenants to carry commercial property coverage.
For example, a flooring contractor may own their own office and warehouse space. If there’s a fire in the building that damages the office space and the flooring inventory, the contractor’s commercial property insurance could help cover the cost of replacing the inventory and office equipment, such as office furniture or computer systems.
A business owners policy, or BOP, combines general liability coverage with commercial and personal property insurance.
Individual contractors or small contracting businesses often opt for a business owners policy, or BOP, for the broadest protection at an affordable cost. The cost of handyman insurance or contractor coverage can be expensive for many small-business owners when purchased as separate policies. A BOP helps lower the overall cost of insurance by combining common coverage types.
Contractors can generally customize their BOP coverage to fit their needs through endorsements and additional protections. A basic policy will often include general liability coverage as well as some form of commercial property insurance. By combining coverage into one policy, the best handyman insurance companies can offer the coverage contractors need at more affordable prices.
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A contractor business that owns or uses vehicles will need to have a commercial auto policy to cover damages and injuries that occur while the vehicle is being used for business purposes.
In most cases, a personal auto insurance policy won’t cover a vehicle if it’s being used for business purposes. Contractors usually need a commercial car insurance policy to protect their business-use vehicles, even if the business doesn’t own the vehicle. This is typically done through non-owned vehicle coverage, where the business pays for insurance on a personal vehicle it uses but doesn’t own.
In cases where the business does own the vehicle, a commercial auto insurance policy is likely essential—and may be required by law. Commercial car insurance works in a similar way as personal auto insurance, except that coverage limits tend to be higher than those of personal auto insurance. Many contractors insure business-owned vehicles for a large amount of liability coverage to protect the business from the cost of an auto accident.
Commercial umbrella insurance can provide a contractor business with additional liability coverage that has a higher limit.
A commercial umbrella policy gives contractors another layer of protection above their usual liability limits. Umbrella policies kick in after a contractor has exhausted the initial coverage limits of other liability policies, such as general liability coverage or commercial auto coverage.
For example, if a worker sustains a serious injury while on the jobsite and sues their employer for damages, the contractor’s general liability insurance would pay for the settlement up to the policy limits, while the umbrella insurance would help cover anything over the regular policy’s limits. So if the worker is awarded a $2 million settlement and the contractor has a $1 million general liability limit, the umbrella insurance would pay up to the policy limits, potentially covering the rest of the settlement.
Surety bonds can help protect the contractor financially if they’re unable to complete a project as outlined in a contract.
A surety bond works outside of a contractor’s normal commercial insurance policies. Surety bonds are additional coverage a contractor may purchase for specific jobs or projects. Some clients may require contractors to purchase a surety bond for their project as part of the contract agreement.
Surety bonds work with three participating parties:
Client
Contractor
Surety—often a business insurance company
To purchase a surety bond, a contractor will outline the details of the project, including the amount of the contract and the time frame it will take to complete the project. The contractor then gets to work. If the contractor cannot meet their agreed-upon obligations, the surety company pays the client. The surety company then recoups its costs from the contractor.
Loss of income insurance can help financially if a contractor is unable to work due to injury or illness.
Loss of income coverage, also called income protection insurance, helps contractors keep their businesses financially stable in the event that they can’t work. This coverage usually kicks in if the contractor has fallen ill or is injured and physically unable to work. The contractor might use their claims payouts to help cover business and personal expenses, such as rent for their business office or their personal mortgage.
For example, say a self-employed contractor with no employees runs a handyman business. After an accident leaves them with a broken arm, they’re unable to work for a few months while recovering. Their loss of income insurance could help cover their ongoing business expenses and some of their personal expenses. Some policies may limit what insurance funds can be used for, so it’s recommended that contractors carefully read their policies to better understand what is and isn’t covered.
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In the event that the contractor business is unable to operate, business interruption insurance can help cover employee wages, taxes, and other expenses.
While loss of income insurance helps contractors who are unable to work due to sickness or injury, business interruption insurance helps contractors when outside factors cause them to lose revenue. Business interruption coverage helps take care of ongoing business expenses, from employee wages to equipment rental fees, when the business is unable to operate.
For example, if a construction company has to pause work for a few weeks while a hurricane causes extreme rains at the jobsite, the contractor will likely still have expenses, including:
Employee wages,
Business insurance premiums,
Rental equipment charges, and
General taxes and fees.
Business interruption insurance could provide the contractor funds to cover their recurring business expenses, even though the business was temporarily not making money.
Employee dishonesty coverage can protect a contractor if an employee commits fraud or steals from the business.
Contractor businesses that hire employees open new risks to their businesses. Even with a thorough hiring and employee-vetting process, the contractor may end up hiring a dishonest employee. If an employee steals from the business, the contractor’s employee dishonesty coverage can help them recoup the cost and replace stolen equipment.
Employee dishonesty insurance isn’t limited to employees who steal directly from the business. An employee could also cause harm to the business by ruining its reputation through things like fraud or financial forgery. Employee dishonesty insurance covers the business in these situations as well as for instances of direct theft.
Contractors who don’t need consistent insurance coverage may be able to get on-demand insurance that lasts the length of a job, whether it’s a few hours, several days, or a month.
The cost of contractor insurance depends on a number of factors, including:
Claim history,
Location,
Type of contracting work,
Number of employees,
Cost of equipment, and
Years in business.
Contractors in certain industries, such as roofing, may have to pay higher premiums to get coverage. This can put a strain on business income. In these cases, contractors may want to look into temporary insurance, which helps them insure their business for the length of each project.
For example, an independent roofing contractor may only be able to afford a small BOP policy, which doesn’t provide the necessary coverage limits for larger projects. When a large roofing project comes up, the contractor may need to talk to several insurance companies to find an on-demand insurance policy for the length of the project. This allows them to get the coverage they need for the large project—with potentially expensive liability costs—without losing the financial gain of taking on the bigger job.
