Contractors and construction businesses face a variety of risks and liabilities, from workplace injuries to property damage. At any given moment, your business could be hit by a lawsuit or accident that has the potential to put you out of business. With the right insurance coverage, you can help mitigate risk and protect your business from unexpected disasters.
Types of Contractors Insurance
Business insurance for contractors and construction companies generally falls into one of two main categories: liability insurance and property insurance.
Although your business likely pays great attention to work safety, accidents do happen. If your business causes harm or damage to another person or their property, you could be sued for damages. With liability insurance, you pay an insurance company to take on the risk of accidents. In exchange for your payment, the insurance company will pay for damages or settlements against your business if an accident occurs.
As a contractor, you’ve likely made a significant investment in tools, equipment, and other property for your business. Unexpected disasters like fires, windstorms, and theft can destroy your business property in a heartbeat. When you purchase property insurance, you pay an insurance company to take on the risk of these disasters. If your property is destroyed by a covered cause, the insurance company will reimburse you for the value of your destroyed or damaged property.
Get a quote on Contractors Insurance
The four most common types of business insurance for contractors are:
General liability insurance protects your business if you are sued by a third party for causing injury to someone else or for damaging someone else’s property.
- Example: You leave a toolbox out at a client site, and a client trips and hits their head. The client sues you for medical expenses and lost wages. General liability insurance will cover your legal and defense costs.
Workers’ compensation insurance is a form of liability insurance that pays for medical expenses and lost wages when one of your employees is injured while working.
- Example: Your employee is working at a job site and falls off a ladder, injuring his back. He is unable to work for six weeks. Workers’ comp will provide coverage for his medical bills and a portion of his lost wages while he is recovering.
Commercial property insurance protects your business against financial loss if your business property is damaged or destroyed.
- Example: A fire destroys the tools and machinery you store at your business office. Commercial property insurance will pay to replace the damaged property.
Commercial auto insurance protects your business financially if you or one of your employees injures someone else with a business vehicle. This coverage also protects the investment you have in business vehicles from crashes and theft.
- Example: Your employee is driving your company van and crashes into another vehicle. The other driver sues your business. Commercia auto insurance would cover the resulting legal fees and any judgements or settlement costs.
Additional Insurance Coverage for Contractors
In addition to the common types of contractors insurance listed above, there are several other types of insurance that may be useful for your contracting business:
- Contractors errors & omissions insurance: Liability insurance that covers the cost of repairing or replacing the work done by your business if that work is unintentionally defective
- Builder’s risk insurance: A form of property insurance that covers the value of the labor and materials in a partially completed project
- Surety bonds: A financial instrument where an insurance company helps guarantee a contractor’s performance to a client
- Professional liability insurance: Provides liability protection if your contracting business provides design services to your clients
- Umbrella insurance: A form of liability insurance that provides extra protection against large judgments from severe accidents caused by your company
Who needs contractors insurance?
Whether your business is a one-man operation, or you’re a contractor with hundreds of employees, contractor insurance can protect your business from the unexpected and help you win new clients. If your business meets any of the following criteria, purchasing contractors insurance is a good idea:
- Your clients require liability insurance
- You serve as a subcontractor to a general contractor
- You hire employees
- You have valuable assets to protect, such as heavy equipment or construction materials
- Your business owns automobiles or work vehicles
- You or your employees drive personal vehicles between your office and worksites or between different worksites
Contractors insurance can cover contractors in a wide variety of building trades. Some common trades that need contractors insurance include:
Why is contractors insurance important?
Clients may require contractors to have liability insurance.
- Benefits: Contractors who have the proper insurance coverage are in a better position to win new jobs. If a client sees that your business is properly licensed and has appropriate insurance coverage, your company will be taken more seriously, and the chances of a successful bid increase.
- Risks: Without the proper insurance, contractors are at risk of losing business. If a client hires a contractor without liability insurance and an accident happens, the client may be on the hook to pay for damages. Many clients will not hire contractors who do not have liability insurance.
General contractors may require subcontractors to have liability insurance.
- Benefits: If your business does work as a subcontractor for a general contractor, having liability insurance protects the work that your company does on the job site. This can help you qualify for subcontractor jobs where the general contractor requires liability insurance.
- Risks: In many states, the law allows general contractors to be held responsible for financial damages if their subcontractors are not insured. As a subcontractor, if you do not have liability insurance, you may not be able to be hired for jobs that a general contractor contracts out.
The law may require contractors to have certain types of insurance, especially workers’ compensation insurance.
- Benefits: Purchasing workers’ compensation is not only required by law, but is also a smart business decision. Although you may do your best to work safely, accidents do happen. When an accident occurs, you can rest assured knowing that your workers and your business will be covered financially, and that you’re complying with the law.
- Risks: If your employee is injured on the job, without workers’ compensation insurance, your company will be responsible for paying for the employee’s medical costs and lost wages. Additionally, your business may be fined by the government for failing to carry the required workers’ compensation insurance. In some states, failure to carry workers’ compensation insurance is a felony crime as well.
Accidents or unexpected disasters can happen in the course of doing business.
- Benefits: Insurance provides financial protection for your business. Having insurance coverage can protect the investment of hard work, time, and money that you’ve made in your business when certain kinds of disasters happen. Liability insurance can protect your business financially if it is sued for injuring someone or damaging another party’s property. Property insurance protects the property your business owns if your property is damaged or destroyed.
- Risks: Without insurance, a single accident or injury could put your entire business at risk. If your business is unable to come up with the funds to pay for damages or pay the legal fees necessary to defend your business, you may need to sell your business assets or declare bankruptcy.
Contractors, subcontractors, and independent tradesmen face a number of risks in their work. From injuries at job sites to lawsuits from unhappy clients, the liabilities are vast, and every contractor should consider securing at least some minimum level of insurance coverage. While you may consider it to be just another expense for your business, you’ll be glad you invested in comprehensive insurance protection in the event that your business is hit with any unexpected lawsuits or disasters in the future.
AdvisorSmith spoke with the following experts to provide critical insight on insurance for contractors and construction businesses.
- Professor, Manufacturing & Construction Management
- Central Connecticut State University
Q. What are the most important risks for contractors and construction businesses to insure against?
Jacob: Insurance is just one of the methods contractors use to reduce risks. The risks that insurance most effectively covers are general liability and worker health and safety. These two risk areas can produce high value claims that cannot be compensated for with construction techniques. General liability insurance is often a contractual requirement. Worker health and safety is typically state mandated through worker compensation laws. There are other areas that risk can be managed through the use of insurance, but these are the two biggest.
Q. Should smaller businesses be concerned about liability and risk?
Jacob: Everyone needs to be concerned about risk management. However, single high value events are more likely to damage a smaller company than a larger one. Companies with substantial financial backing can absorb, and recover from, a significant loss whereas smaller companies may not. Additionally, larger companies can typically afford more insurance coverage than smaller ones.
Q. What actions can a contractor or construction business take in order to reduce risk and liability?
Jacob: Risk management is a complicated issue. We offer a full semester course, on that specific topic, in our graduate program in construction management. It is also included in our undergraduate program, distributed through related subjects. Perhaps the most import thing a contractor can do is to develop a risk management planning tool to use on every job. This will force the contractor to be more aware of potential risks and lead to steps that will help mitigate them.