The most important insurance coverages for contractors are Commercial General Liability, Workers’ Compensation, and Commercial Property Insurance. Additionally, contractors who own vehicles, or use personal vehicles for business purposes should also have Commercial Auto Insurance coverage.
In this article, we explain other types of contractors insurance that may be applicable to certain types of contractor businesses. These coverages may not apply to every business, so we’ll try to shed light on which kinds of contractor businesses need each insurance type.
The coverages in this article include:
- Contractors errors & omissions
- Builder’s risk
- Surety bonds
- Professional liability
- Umbrella insurance
Contractors errors and omissions insurance (Contractors E&O) is a type of liability insurance for trade contractors such as a plumbers, electricians, HVAC contractors, painters, carpenters, and others. Contractors E&O protects the value of the work that you do if it is damaged due to unintentional faulty workmanship. Your commercial general liability policy will protect you from damages that your work causes to other property, but your company’s work is excluded from commercial general liability coverage.
Contractors E&O protects the value of the work that you do if it is damaged due to unintentional faulty workmanship.
Consider this example: Your electrician business completes an electrical wiring job for a large building. The cost of the job, including materials, is $20,000. Several months after you complete the job, a mistake in wiring causes a fire in the electrical box that severely damages the building and destroys your electrical work. The damage to the building would be covered by your commercial general liability policy, but the damage to your electrical work is excluded. If your company had Contractors E&O coverage, the additional $20,000 loss to your company’s work would also be covered.
Contractors E&O only covers damage that occurs after the job is complete and that results from your negligence, errors, or omissions. In the event that your company is held liable, E&O would cover the cost to repair or redo faulty work, as well as any legal defense against those claims. Work done by subcontractors is not covered, so only work that your company does is covered. Importantly, Contractors E&O is distinct from professional liability insurance, which covers errors in design or advising.
Builder’s risk insurance is a form of property insurance that protects a building while it is under construction or being renovated. Besides insuring the building itself, builder’s risk can also include protection for construction materials, labor costs, and temporary structures such as fencing and scaffolding. Builder’s risk insurance is especially important for general contractors who are doing new build construction or renovations. The coverage term begins when construction begins and typically terminates when the project is complete and turned over to the owner.
Builder’s risk insurance is especially important for general contractors who are doing new build construction or renovations.
An example of when builder’s risk insurance would be important: Your general contracting business is building a single-family home. The foundation has been poured, and construction is 40% complete when a severe windstorm passes through the area and destroys the partially-built house. Your builder’s risk insurance would compensate you for the cost of the materials used so far, and the labor costs you’ve expended in completing 40% of the house.
Builder’s risk can protect against risks such as fire, windstorms, theft and vandalism, vehicles, lightning, hail, and explosion. However, any damages that result from faulty design, work, or materials are excluded from builder’s risk coverage. For example, if you are constructing a new house, and it burns down from a wildfire, your business would be covered. On the other hand, if the building collapses due to a mistake in the structural building plan, builder’s risk would not offer any coverage.
Surety bonds are a guarantee that an insurance company makes to a client that a contractor will successfully complete their contractual obligations to the client. As a contractor, you only need to purchase a surety bond if it is required by your client or a governmental body.
You may be required to purchase a surety bond in the following situations:
- When bidding on government construction jobs, some federal, state, and local governments may require your company to purchase surety bonds.
- Some private owners, banks, and general contractors may require surety bonds.
- Some states require a surety bond in order to receive a business license as a contractor.
Surety bonds have three parties: the Surety (an insurance company), the Principal (your business, the contractor), and the Obligee (the client). Your company makes a payment to the insurance company. In return for this payment, the insurance company guarantees to the client that the work will be performed according to the contract. If your company is unable to complete the job as required by the contract, the insurance company will step in and take responsibility for the completion of the job. Before issuing the surety bond, the insurance company will perform research on your business to ensure that you’ll be able to fulfill the requirements of the project.
Contractors only need to purchase surety bonds if they are required to by their client as a condition of bidding on a job, or in order to secure their business or contracting license.
Professional liability insurance is important for contractors who perform any kind of design or construction management work. Additionally, if any of your subcontractors perform design work, you’ll also want to have professional liability insurance. This type of insurance provides financial protection for your business if you are sued by a dissatisfied client for work errors, undelivered work, misrepresentation, or negligence.
While your commercial general liability insurance protects your business if your work causes property damage or bodily injury, it does not provide protection for any economic losses your clients may experience due to your work. Your clients could still sue you for their economic or financial losses. If your contract with your client includes promises to deliver a project to certain specifications or within a certain time frame or budget, your business may be sued if you do not meet the specified parameters.
For example, your business is hired to design and build a loading dock for trucks to unload at a warehouse. After the project is complete, the client discovers the height of the loading dock is too low for trucks to load efficiently. Due to a design flaw, the loading dock that was built does not meet the specifications in the contract. Your business would be responsible for the cost to rebuild the loading dock to the contract specification. Since no bodily injury or property damage occurred, this would not be covered by general liability insurance. However, professional liability insurance would cover your business.
To read about this subject in more detail, please see this article: Professional Liability Insurance
Umbrella insurance is a type of insurance that covers your business in the event your business causes a very serious accident or major property damage. If your business causes damages that exceed the limits of your commercial general liability policy or your commercial auto policy, having an umbrella policy can provide additional insurance coverage.
There are several reasons why your contracting business might want to have umbrella insurance, such as:
- It is common for a commercial general liability policy to offer $1 million in liability coverage as a standard coverage. On certain large contracting projects, however, your clients may require a higher limit of liability. You can raise the limits of your general liability insurance, or leveraging umbrella insurance may be a more affordable way to meet this requirement.
- If your business has substantial assets, such as financial assets, machinery, equipment, land, or buildings, umbrella insurance is a great way to protect the value of your investment in your business.
- Contractors who have heavy trucks or machinery that travel on public roads may want to have umbrella insurance as large vehicles can easily cause death or injury in a crash. Vehicle crashes are a common source of liability insurance claims.
To read about this insurance coverage in further detail, please see: Commercial Umbrella Insurance