General contractors operate under a great deal of pressure to provide every client with high-quality work. And, if something goes wrong, it’s not just your reputation that’s at stake – you could suffer financial losses and your business could be jeopardized. General contractor insurance can provide critical protection from some of the most common risks.
Common Insurance Requirements for General Contractors
General contractors must comply with the licensing and insurance requirements in the cities, counties and states where they do business. These requirements can vary significantly between jurisdictions. Check with the licensing board to find out the requirements where you do business.
In addition to meeting state and local insurance requirements, general contractors may have contractual requirements. Since clients may feel more comfortable working with general contractors who have a certain level or type of insurance, clients may require coverage as a prerequisite for doing business.
Contractor General Liability Insurance
Many states require general contractors to carry general liability insurance. When states require this, they also set a minimum coverage amount, such as $300,000 or $1 million.
Even if local laws don’t require general liability insurance, general contractors should strongly consider maintaining coverage. Commercial general liability (CGL) insurance provides coverage for third-party claims involving bodily injury or property damage, as well as advertising and personal injury.
Imagine the following scenarios in which general liability coverage could apply:
- While you are working in a client’s house, your equipment starts a fire, causing you to knock over an antique and destroy the hardwood floor.
- You have your equipment on the floor while working on a project. A client trips over the equipment, breaks their hip and sues you for their medical costs.
- In the course of advertising your business, you are sued by a competitor for defamation.
Lawsuits could stem from many activities just like these, and they can be extremely expensive. General liability insurance could provide protection, allowing you to focus on your work. However, general liability insurance does not cover everything.
CGL policies typically exclude certain types of third-party claims, including auto-related, pollution-related, faulty workmanship, professional negligence and worker injury claims. Additionally, general liability insurance does not provide coverage for first-party claims, such as damage to your own equipment. Because of this, to round out their insurance programs, general contractors often need additional insurance policies.
Commercial Auto Insurance
Auto insurance is typically a requirement under state law. While your business must meet your state’s minimum insurance requirements, you may want additional commercial auto insurance in case you are sued.
If you use a personal vehicle for work, make sure you have adequate coverage. Many personal auto insurance policies exclude business-related usage, so you may need to secure a commercial policy or modify your existing coverage. Plus, the liability limits on a standard personal auto policy may not be high enough to cover the types of damages plaintiffs typically seek from businesses.
Equipment Insurance
Most general contractors rely on expensive tools and equipment to carry out their work. If something happens to this equipment, you may need to pause projects until you can repair or replace the equipment.
Construction equipment insurance provides coverage for the tools you need for work. If your covered equipment is stolen, lost or damaged in a covered peril, your policy will pay for the repair or replacement (up to the coverage limit).
Umbrella Insurance
When a case involves severe injuries, jury awards are often massive. Your general liability or business auto insurance policies may be insufficient to cover the costs, which could lead to financial losses for you and your business.
Commercial umbrella insurance, also known as excess liability insurance, provides an additional layer of liability coverage in cases like these. If you exhaust the limits of your underlying policies, your commercial umbrella policy will kick in to provide extra coverage.
Workers’ Compensation
All U.S. states other than Texas require employers to carry workers’ compensation insurance for all their employees. Some states also require general contractors to carry workers’ comp coverage for their subcontractors.
If a worker suffers an injury on the job, workers’ compensation helps cover medical costs and certain other expenses, such as lost wages. This coverage takes care of workers while shielding employers from potentially costly lawsuits.
Contractor Professional Liability Insurance
When you’re working on a big project, small mistakes and oversights could result in major financial losses. Also called errors and omissions (E&O) insurance, professional liability insurance provides coverage for claims stemming from professional services. This is important for contractors because general liability insurance does not cover claims involving financial losses, faulty workmanship or negligence in professional services.
Environmental Liability Insurance
Environmental damage resulting from a spill or other pollution event could lead to major costs for your business. Environmental liability insurance can help cover the costs of property damage, injuries, containment, cleanup and legal defense. This is important because general liability insurance typically excludes pollution-related claims.
Builders’ Risk Insurance
Builders’ risk insurance provides property coverage for current construction projects. It can include coverage for many perils that may result in property damage and project delays, including fire, theft, vandalism, explosions and storms. This coverage is important for general contractors, along with property owners, subcontractors and other parties involved in construction.
Commercial Property Insurance
While builder’s risk insurance covers ongoing construction projects, commercial property insurance covers property belonging to your business, such as an office.
Bonds for General Contractors
Some states require general contractors to have surety bonds, and certain clients may require bonds of any contractors or subcontractors performing work.
A surety bond is different from traditional insurance. Insurance involves two parties: the insured and the insurer. Surety bonds involve three parties: the principal (the bonded individual or company), the obligee (the government agency or other party requiring the bond) and the surety (the company providing the bond). Furthermore, insurance protects the insured, while surety bonds protect the obligee. If there is a bond claim, the principal must repay the amount.
Are you adequately insured?
- Are your limits sufficient? If your policy limits are not high enough to cover your risks, consider raising them or purchasing umbrella insurance.
- Do you have uncovered risks? Check your policies for exclusions. Keep in mind that general liability insurance does not cover all types of liability, which means you may need additional policy types.
- Do you have subcontractors who need insurance? Your insurance may not cover subcontractors. If you have subcontractors, make sure they have coverage, either through your insurance or through their own policies.
- Do you need insurance policies not listed above? If you have additional exposures, you may need additional insurance products.
- Are you meeting all your legal and contractual obligations? Maintaining required insurance is an important part of managing your risks and protecting your business.
Need help protecting your contractor business?
General contractor insurance can be confusing, but it’s important to verify that you have the right coverage in place before you experience a claim. Higginbotham can review your coverage to help determine whether you have coverage gaps that could result in uncovered claims.
We can also help you find additional construction insurance solutions, such as wrap-up insurance and owners and contractors protective (OCP) liability coverage. Talk to one of our contractor insurance specialists today to learn more.
