If a fire destroys your office building or your tools or equipment are stolen from your warehouse—these are all cases where property insurance would cover you for the value of the property that is damaged or destroyed.
What types of property insurance are important for contractors?
There are three types of property insurance that are particularly important for contractors. These coverages are:
If you own the building or a business condo that houses your business, commercial property insurance can pay for the cost to repair or replace the building if it is damaged or destroyed by a covered cause of loss.
Consider this example: an overloaded electrical outlet in your office overheats and catches fire overnight, causing the fire sprinkler system to activate. There is substantial fire and water damage to your building due to the fire. In this scenario, the building coverage of commercial property insurance would cover the cost to repair the building.
Business personal property
Any property that your business owns that is stored at your office or building is also covered under commercial property insurance. If your property is destroyed by a covered cause of loss, the insurance company will reimburse you for the value of the property.
For property that is kept at a client site or in a vehicle, commercial property insurance provides limited coverage. To more fully cover this equipment, you’ll need mobile equipment coverage.
Commercial vehicles made for public roads are also excluded from property insurance policies. To cover commercial vehicles, you’ll need commercial auto insurance.
Consider this example: You have a storage area at your office where you store wood mouldings that you sell to clients for floor and ceiling work. Over the weekend, a pipe in the bathroom bursts and floods the storage area. Your wood moulding products are damaged by the water. The business personal property coverage of commercial property insurance would reimburse you for the damaged products.
Mobile equipment coverage, sometimes called Inland Marine Insurance – Mobile Equipment, provides protection for business property and equipment that is mobile, stored at a job site, or in a vehicle. Unlike commercial property insurance, which generally protects property on your business premises, mobile equipment insurance is intended to protect your property no matter where it is located. For contractors, this type of coverage is particularly important, as much of your property may be machinery or equipment that is moved from job site to job site. A few examples of mobile equipment include cranes, compressors, pumps, tools, and mixers.
Consider this example: your roofing company owns a cherry picker, also known as an articulated lift. You move the cherry picker to a client site to work on the roof. While the cherry picker is stored on the client site, a violent windstorm hits, knocking the cherry picker over and severely damaging it. In this scenario, mobile equipment insurance would cover the cost to repair or replace the cherry picker.
For equipment that you are leasing or renting, mobile equipment insurance can also provide coverage. While some insurance policies may include mobile equipment you rent, lease, or borrow from others, often times this is excluded and needs to be added in through an endorsement.
An installation floater, sometimes known as Inland Marine Insurance – Installation Floater, provides coverage for personal property that is in storage, in transit, awaiting installation on a job site, or being installed. For contractors, this is especially relevant, as you may be responsible for the transportation and installation of high value materials or fixtures.
Consider this example: you are hired to install a custom marble bathtub. As you are transporting the bathtub to your client’s home, your truck runs over a deep pothole. As you unload the bathtub, you notice a large crack in the marble, meaning the entire tub will need to be replaced. In this scenario, an installation floater would provide coverage for the damaged bathtub.
What risks are covered by property insurance for contractors?
Property insurance covers some, but not all, causes of loss. Depending on the contract you have with your insurance company, coverage may vary. It’s important to review the details of coverage carefully to ensure your contracting business will be covered in relevant situations.
An important distinction in property insurance loss coverage is the concept of named perils versus open perils. When property insurance is purchased on a named perils basis, this means that only the specific risks listed within the insurance contract will be covered. If a risk isn’t listed, it isn’t covered. With open perils, all loss types will be covered, except those that are specifically listed in the contract as excluded. Open perils premiums are generally higher than named perils premiums because open perils coverage is more comprehensive.
Both flood and earthquakes are commonly excluded from property insurance policies including open perils policies. Also, dishonesty and theft by employees are usually excluded as well.
The most commonly covered named perils include:
- Fire or lightning
- Theft or vandalism
- Damage from vehicles or airplanes (excluding those owned by the business)
- Water damage, sprinkler leakage, or burst pipes (but water damage from flood is excluded)
- Windstorm or hail
- Smoke from accidental fire
- Riots or civil commotion
- Sinkhole collapse or building collapse
Every insurance contract covers different perils, so it is important to read your contract and discuss with your agent or insurance company.
Common exclusions from named perils policies include:
- Employee theft or dishonesty
- Nuclear reaction or war
- Wear and tear
- Power failure or computer failure
- Robbery & burglary
- Changes in humidity and temperature
- Inventory shortages when there is no physical evidence to show what happened to the property
- Losses from intentional acts
Under open perils coverage, your property will be covered if it is damaged or lost for any reason, unless the reason is specifically excluded in the insurance contract. Open perils policies have the same exclusions listed in the named perils section above. In addition, other common exclusions to open perils policies include:
- Animal or insect infestations
- Fungus and mold
- Losses due to governmental actions
- Rust or corrosion
- Sewer backups
- Mechanical breakdowns
Replacement cost vs actual cash value
When insuring your property, you have a choice between Replacement Cost (RC) or Actual Cash Value (ACV).
Replacement Cost coverage covers the cost to repair or replace your property with a new item of a similar kind and quality, without any deduction for depreciation.
Actual Cash Value covers the value of the property at the time of loss in an “as-is” condition which considers depreciation and obsolescence of the property.
Consider this example: you have a concrete mixer that you buy new for $5,000. You insure the equipment for $5000 and store it at your office. 2 years later, a fire burns down your office, destroying the mixer. The market value of the 2 year old equipment is $2,000, while a new model still costs $5,000. If you have RC coverage, the insurance company would pay you $5,000. If you have ACV coverage, the insurance company would only pay you $2,000.
The premiums on RC coverage are higher than the premiums on ACV coverage, due to the higher potential payouts.
A deductible applies to most property insurance policies. The deductible is the amount of the loss that your business is responsible for before the insurance company’s coverage begins.
For example, if you have a loss of $1,200, and a deductible of $250, the insurance company will only pay your company $950, which is the amount of the loss minus the deductible. Having a deductible gives your company a financial incentive to take care of the property that is insured, rather than transferring the full amount of risk to the insurance company. The deductible usually applies to each loss separately, meaning the insurer will subtract the deductible from each loss that you experience.
Having a higher deductible lowers your insurance premium as it reduces the amount that the insurance company would potentially pay out if there is a loss.