7 Contractors Insurance Facts You Need To Know

snake-oil-contractor-salesmanChances are you have been swindled in the past by a smooth talking salesman, heck I know I have. When we are talking to someone about there products or services they usually always have nothing but great things to say. They’re sales reps, right? Sometimes reps tell us things that are not necessarily true, contractors insurance is not any different. Just last week I was talking to a new customer who had been duped by his previous insurance provider. He had a some exclusions on his policy that made the policy arbitrarily pointless. His wife, also the company bookkeeper, was going through documents and found the issues. In this situation it kind of worked out, since he didn’t have a claim to file. Situations like this happen all the time, most of the time these issues come up when a contractor tries to file a claim.

Here are 7 facts that you need to know about contractors insurance:

  1. Deposits are non-refundable

    When purchasing contractors insurance, a deposit of 30-40% of the total annual policy premium is due on signing. Sometimes contractors think that the deposit is refundable, as long as they cancel the policy prematurely. If you were to cancel your policy the following month after signing up, you would not be entitled to a deposit refund, even partial.

  2. General liability does not cover poor workmanship

    Liability insurance is third party coverage. We had one client who installed a bamboo floor in a home, and the contractor didn’t leave any space in-between the walls and the flooring. When the room heated up, naturally due to weather, the flooring buckled in the middle due to this no breathing room for the flooring. The customer called the contractor to get the flooring redone at no charge, and the contractor called us to file a claim with the insurance provider. The claim was not cheap, $80,000 to be exact, and the contractor was not covered because he should have known the flooring would need breathing room. The lesson in this is to know your trade, and don’t assume that an insurance company will cover poor workmanship. You’re general liability should cover you on what is not listed on your exclusions list. Anything that is not excluded and within the scope of operations should be covered.

  3. Be honest with numbers because audits and inspections DO happen

    Audits usually happen at the end of the year. If you were not truthful in your gross receipts, and payroll when you obtained your contractors insurance, you will end up paying the difference when the audit happens. Typically, 2 weeks after the policy is written an inspector calls to verify the information you provided for your policy, then 2 weeks after the policy expires an inspection will be due.

  4. Protect yourself by requiring all subcontractors to be insured because their work is NOT covered

    On the majority of general liability policies subcontractors are not covered on the primarily insurance holder (you). If you are working with a sub, make sure that they have their own policy, and make sure the policy they carry doesn’t contain any exclusions that are out of the norm.

  5. Policies are on an annual basis

    Typical workers compensation, and general liability policies are on an annual basis. There are exceptions with your builders risk/course of construction (COC), and excess/umbrella policies that may be written. A policy that has an exception would be a wrap/owner controlled insurance policy (OCIP)

  6. Short term coverage or project specific policies are NOT available

    Standard policies are not available on short term basis because insurance companies don’t want to expose themselves to that much risk. This is also why insurance companies ask for 30-40% of the total annual policy premium up front.

  7. Any and all contractors license bonds, bid bonds, performance and payment bonds, and completion bonds are based on credit

    It’s better to understand what these types of bonds are:
    Contractors License Bonds: In place in case a contractor doesn’t fulfill contract. The better the credit score of the contractor, the less he will have to pay for a contractors license bond.
    Bid bonds – Help you bid on jobs. Based on not only credit, but current assets and prior work history.
    Performance and payment bonds – Once the job is awarded, the performance and payment bond will already be approved. This is caused because all of fact checking is done prior during the bid bond application process.
    Completion bonds – Process is the same as performance and payment bonds. Once the job has been awarded, the completion bond is provided, requiring usually a simple review.

Hopefully this information helps you when you are renewing a policy or are currently in the market for a new one. As always, we offer free quotes.