Insurance Basics For Contractors
Insurance can be one of the largest expense items a contractor has, next to materials and payroll, depending on their operations. Furthermore, the litigious nature of the construction industry makes having the correct coverage extremely important, if you should ever have a claim. One uninsured claim can wipe out years of hard work.
This short guide is not intended to replace the advice, or counsel that you may receive from your insurance agent or lawyer. It is intended to serve as a brief, short primer on a few basic points for a new contractor operating primarily in The State of Florida.
This guide is also not intended to be a sales pitch for the insurance industry of Florida. Contractors are a unique animal in the insurance industry. Many times a contractor will pick an agent based upon the simple fact they purchased their homeowners policy from the same guy. If you will be working in the construction arena MAKE SURE your agent has some degree of expertise in this area, before you sign on the dotted line.
If you have any questions on any item in this pamphlet, or your situation is not specifically addressed here, contact our office or any other licensed agent in the state for clarification.
First, a VERY important fact:
Your insurance policy is a contract. Just like a construction contract, it has obligations and expectations that must be fulfilled in order to trigger the specific provisions within the policy. The contract you sign for any of your work is COMPLETELY separate from your insurance contract. Both contracts talk about each other, but they are in fact separate contracts.
The important fact here is this: Never agree in writing with the job contract to do something that may not be covered in your insurance contract, unless that is your specific intent. Although you may be anxious to land “the big job”, don’t do so in a way that may cost you your company.
As you get started in construction, seek input from your project owners, your lawyer, and your insurance agent on what exactly you are agreeing to “indemnify” and “hold harmless” with owners or GC’s that may not have your best interest in mind.
So what are the basics?
In short, as a licensed contractor in Florida, you are required at the bare minimum to have a General Liability policy with $300,000 in coverage in General Liability and $50,000 coverage for property damage. Although there are other policies you may want to consider, this is what you need to get started. Many insurance carriers will sell you a policy with a $1,000,000 minimum limit. Believe it or not, that does not affect the premium much, so don’t panic. We will get to workers compensation later in this document. Are you simply a one-man handyman service? We get to you too, so read on!
If this is just the basic policy, what is not covered?
The first question you need to ask yourself is this: “When something goes really REALLY wrong, who do I want to get the check?” This will answer about 80% of your insurance questions. For example, the General Liability policy that you just purchased above will cover you many times when you need to write a check to OTHER PEOPLE. It would almost never write a check to you. If your tools are stolen, or your office (job-site trailer) burns down, you probably do not have coverage with a General Liability Policy.
Policies are generally either 1st party or 3rd party coverage’s. 1st party is an insurance nerd way of saying YOU get the check. 3rd party means the OTHER GUY gets the check. Here are some examples of the two types:
|1st Party Coverages||3rd Party Coverages|
|Property (your building)||General Liability|
|Inland Marine (your tools/equip.)||Umbrella|
|Boiler and Machinery (testing)||Employment Practices Liability|
|Electronic Data Protection||Director and Officers Coverage|
|Auto*||Special Policies (Demo, EFIS, Explosives, Etc.)|
|*both 1st and 3rd party||Workers Compensation|
Here are some good to know quick facts about what each one of these cover, and should you look into obtaining one. Keep in mind that many times, the coverage may be included automatically (like an accessory) in your existing policies. When in doubt, ask lots of questions.
General is a very accurate term in that this policy “may” cover a lot of your general exposures. This policy will write a check to someone else (3rd party). It will also have lots of exclusions. Make sure you read the exclusion parts of your policy very carefully. Most contractors will automatically have work like EIFS, Demolition, Underground Excavation, and work with explosives automatically excluded. If you have an operation that is doing this kind of work PLEASE MAKE SURE it is not excluded. We have personally seen silly things like a demolition contractor who had a “demolition exclusion” on his policy. We suspect the price was really cheap!
Most General Liability policies exclude Pollution. This too is designed to pay a 3rd party. You may think that since you are not carrying toxic sludge or nuclear weapons that this should not be an issue, right? Wrong! Insurance companies define a pollutant as follows:
“Any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemical, liquids, gases and waste. Waste includes materials to be recycled, reconditioned or reclaimed.”
In short, this means just about anything can be a pollutant. Things such as milk, concrete dust, orange juice, polyurethane overspray, and many other seemingly innocent items are a pollutant.
So do you need this coverage? We personally recommend ALL of our larger contracting clients purchase this coverage because #1) it’s usually cheap and #2) their General Liability policy, even if it covers some pollutants, is rarely adequate. If you are a polluting type company, it can get expensive, but if you are just a roofer, framer, etc, then we would strongly consider getting this coverage.
For the guys out there performing renovations, that “maybe” show $100-200K in work a year, you should carefully go over your work with your agent before you decide what to do. The minimum premium tends to be around $4,000 so that may make your decision right there.
If you are performing any sort of engineering or design work and especially if you are stamping documents as the architect or engineer, then you will want to make sure this 3rd party coverage is obtained. Your work as a “professional engineer” or “architect” is almost always excluded under the General Liability policy.
Employment Practices Liability
This is a policy designed to cover the employer from “harassment” claims. It too is a 3rd party coverage. An example would be where a former employee sues you alleging you fired him because of his race (hair color, sexual orientation). You get the idea.
Unless you have had claims for this issue in the past, it is fairly inexpensive. It may cover more or less than you think because each carrier typically uses their own unique policy form. Go over your concerns with your agent and determine if you want this coverage or not.
Auto is unique in that it can sometimes pay both you (1st party) and/or someone else (3rd party). Of all the policies you purchase, this one will probably be where you have most of your claims. We recommend to all of our clients to purchase high limits. If you purchase the state minimum of $10,000/$20,000 you are asking for trouble, unless you are convinced the most expensive car you could hit is a Yugo.
The fact is this: Attorneys make their living suing contractors just like you for idiotic auto claims. Once the guy who was tapped lightly calls “1 800 ASK IDIOT” and finds out that the truck who hit him had your business’s name on the side, you can plan on the first demand from his attorney being well over $100,000. If you drive a triple axel dump truck filled with asphalt or something else big and heavy, then you should start with setting your limits at $1,000,000 minimum. This is just our advice.
This is an additional policy that goes “above” your existing policy limits that would pay a 3rd party. Typically this is purchased in multiples of $1,000,000 and is almost always required for larger commercial projects by the owner or GC. The amounts vary wildly based upon your trade and exposure. Cabinet makers for example can purchase millions in coverage for only a few thousand dollars. Roofers, painters and anyone who works on the “skin” of a building can expect to pay far more. The logic being that if there is ever a claim, it will probably be a very large one.
From experience, Umbrella coverage becomes very important when you have an auto accident with a death and/or heavy vehicle is involved. Go over your exposures with you agent to determine adequate limits. Many times your contracts will require you to have specific limits. Many trade contractors can negotiate lower limits with the project owner if you feel the request is unreasonable. A cabinet maker or tile guy being asked to provide a $15,000,000 Umbrella is just stupid.
Director and Officers Coverage
This is special 3rd party coverage for litigation against corporate officers. This is good coverage to purchase if you have multiple shareholders. Typically your larger companies purchase this coverage, BUT smaller family owned shops (think dad and multiple sons who all own a share) may want to consider this. Ask your agent if you should consider this coverage.
Boiler and Machinery (aka Equipment Breakdown)
If you install equipment such as “Pressure and Refrigeration Objects”, steam generators, mechanical objects such as gears or pumps, or electrical objects like transformers, rectifiers, induction units, and ESPECIALLY if you must be test this equipment prior to you finishing on a job site, you may want to consider this coverage. Commercial, and Industrial guys should definitely check into this because of the dollar amounts involved. It can be very specific to your products or operations so be sure to go over this information carefully with your agent. Some basic coverage may already be included elsewhere.
This policy pays you for your loss of property (1st party). Property typically means your stuff that doesn’t move. This can include your building, chairs and sometimes even specialty “permanently installed equipment” like a massive press break or something similar. This policy can be used to cover your inventory or even special costs should your facility burn down or be blown away in a hurricane.
An extremely important item called “coinsurance” is usually listed as a percentage such as 80 – 90%. This is usually not a good thing for you, but don’t try to argue it away. Almost all carriers have them. Coinsurance essentially means that if you UNDERINSURE your building or other property, you may not get all that you want if there is a claim! Ask your agent to explain this one VERY CAREFULLY, especially if you have a lot of “property”.
Inland Marine (your tools/equip.)
Yes, the name makes you think of boats. That is because centuries ago (and still today) Inland Marine “forms” were used to cover cargo being shipped between cities via ship. This same “form” is used to cover items like your tools, and equipment that may move from job site to job site. If you have a trailer that you store your tools or equipment in, MAKE SURE you look into obtaining this coverage. Contractors have told me multiple times that the insurance company paid for the trailer, but not for the $20,000 in Porter Cable power tools in it! This is generally easy and inexpensive to insure. You can have “scheduled” and “unscheduled” tools. Scheduled means you have a detailed list or inventory. Unscheduled does not require a detailed list but is slightly more expensive. Most contractors will schedule their heavy tools like scissor-lifts and compressors and put their hammers and wrenches as unscheduled. Keep in mind that a trailer filed with $20,000 in tools, could be insured for approximately $500 -$1000. Maybe less.
Builders Risk and Installation Floaters
These two are related in that many contractors confuse which one is which. The installation floater is purchased by the contractor (you) and is generally designed to cover equipment, supplies, materials, etc. that have been purchased, sent to the job site, but have not been installed or accepted by the GC or project owner. Think of a large boiler or HVAC compressor that you are going to install that is sitting on the job site. Should something happen to any of these materials, such as a large crane was to fall on them, you may be able to file a claim and receive a check to replace the damaged items. Sometimes this coverage may be automatically included in your property policy but with much lower policy limits then you may actually need.
Builders Risk is purchased by the project owner that will cover the building and equipment that has already been installed and accepted. This policy usually pays the property owner. Many times the owner will ask the contractor or GC to be a “nice guy” and to purchase the policy directly. This works great until there is a claim. If a claim occurs, the owner may not like the coverage that was purchased or suddenly feels the amount was too low resulting in you, the contractor having a very bad day. Kindly point out this detail to the owner and ask them to call an agent (yours for example) to obtain the Builders Risk coverage. This way the owner signs off on the policy, not you.
Also note there is a HUGE difference between new construction and renovations when obtaining a builders risk policy. Make sure if you are performing renovations, that the agent is aware. Historic buildings create wonderful insurance headaches too. We once had to insure a historic lighthouse. At the end of the day, we all simply had to guess what the value of a 200 year old lighthouse was. Renovation from hell…
If you are concerned about theft, burglary, forgery, or any number of crime related scenarios, go over this exposure with your agent. A common policy in construction covers Employee Dishonesty. This can be purchased in any limit and covers situations like when the bookkeeper decides to give himself a raise without consulting you the owner.
You must prosecute the culprit in order to collect from the insurance company. Experience has shown that many times the perpetrator is a relative. This could lead to a very uneasy Thanksgiving Dinner should you go ahead and agree to prosecute your brother-in-law. Again, please consult with an agent as coverage’s vary wildly.
Electronic Data Protection
Most standard property policies exclude electronics and data beyond $2500. This means that your computers, copiers and large electronic plotters may not be covered. Some (not all) carriers are happy to include these items for no charge under the Property limit, but make sure you ask, and verify that they are. Remember, a wide format printer is not very cheap to replace!
We could write an entire 10 page document just on the basics of Workers Compensation. Since you are in construction, and in a hurry, consider this the A.D.D. version. Work Comp will become critical if your operation grows. Just because the state sets the rate for your class of business, does not mean you do not have ways to control your cost. If cost control is important, read on.
Although you may “exempt” yourself from Workers Compensation insurance, you need to consider a few critical facts: Under Florida Law, Workers Compensation is the “sole remedy” provided to your employees should they be injured on the job, AND you have a policy. This is why you never hear of a construction employee suing their employer for “pain and suffering”. If you do not have a policy, then you are liable under civil law. This means your employee can call “1 800 ASK IDIOT” to get an attorney to sue you personally.
Even though your employee may still hire an attorney when you have Workers Compensation, the award amounts are determined by the actual injury and not what a jury of 12 unemployed construction workers thinks you should pay.
Another good reason to have workers compensation is subcontractors. Although you may ask your subs to show proof of insurance, what happens if their policy is canceled on Monday and they have a claim on Tuesday? Under Florida law, you are now the statutory employer. This may not be such a major issue if you have your own Workers Compensation Policy…but if you don’t, then you may have a huge issue on your hands. You can also verify a subcontractor’s policy is in force on the “Florida Department of Financial Services website. Look for the Workers Compensation proof of coverage database and search away. Best of all, this service is free!
You also have a Modifier or “Mod Rate” that is essentially your credit rating based upon your experience or losses. Guard this like you would your regular credit rating. Work with your agent to develop strategies on how to respond to certain types of claims such as Med Pay, Frequency, or Severity claims. A bad “Mod” rate can cause you to pay twice the premium that your competitors do.
Many contractors elect to use a PEO or Leasing Company to obtain work comp. Although this has many advantages, such as payroll, and employee benefits in some cases, be aware that the Workers Compensation policy is the PEO’s and not yours. Although this may seem like a silly distinction, you may not have coverage for claims should a subcontractor not have valid insurance. Even if you do not have “subcontractors” you may have friends or relatives that help out with an occasional job. Usually PEO’s and leasing companies do not cover these claims. Also note that most “Health Insurance” policies specifically exclude workplace injuries. An occasional ER room visit may go unnoticed, but if you show up with a piece of rebar through your leg, they may ask questions. “Mr. Smith, was this injury work related?”
Discounts are available to contractors that have a Drug Free workplace or a Safety Program. Also if you pay an exceptionally high hourly wage because you have special “skilled” labor, then you may be eligible for further discounts. Ask for them! If you are told you are not eligible, ask why. If the agent can’t tell you, find a new agent.
Special Policies (Demo, EFIS, Explosives, Etc.)
If you perform specialized operations such as any of the above, you may need to purchase a special additional GL type policy just to cover that aspect of you operation. It does not mean your insurance will be more expensive. It does mean you will need to make sure your insurance understands the special risks your type of work represents. Please contact your agent to make sure you are covered.
Note: The following items are not specific coverage’s but they may apply to some or all of the above policies.
Certificates of Insurance
As a contractor, you may either ask for, or be asked to provide this document to show proof that you have insurance. The most important fact to know here is that the certificate is not proof of anything. Even if your sub has provided you a certificate, it has disclaimers all over it that say it is not to be used as “proof”. If you truly want to verify coverage, call your subcontractors insurance agent listed on the certificate.
Also be aware that your General Liability and Workers Compensation Insurance premiums will be based upon either your payroll or gross receipts. If you hire lots of subcontractors, you must be able to show your insurance company certificates of insurance for each of your subcontractors you hire. Otherwise your insurance company will assume you are using uninsured subcontractors. Then the insurance company will get nasty and charge you additional premium to cover each of your subcontractors “assumed” to lack of coverage. Therefore please collect and keep good records of your subcontractor’s certificates of insurance.
Additional Insured Status
Many GC’s and owners ask the subs to list them as an Additional Insured. This essentially means that the GC or homeowner wants you to add them to your policy so that your policy would respond as if the claim was sent directly to you. Many insurance companies and their agents will be happy to comply. Sometimes there may be a small fee. If you are requesting certificates to be sent to you by your subcontractors, one of the best ways to protect yourself is to ask for a copy of the actual Additional Insured endorsement. This document should be 1-3 pages long (usually just 1). READ THIS PAGE! A majority of the Additional Insured documents in existence exclude “Products and Completed Operations” (see below). Make sure the endorsement either includes products and completed operations, or that it specifically does not exclude it. If you have tons of subcontractors, request that your insurance agent develop a Certificate of Insurance management strategy for you.
Products and Completed Operations
This is an insurance term used to differentiate between ongoing construction work and completed work. Since many claims can result from work completed years ago, make sure your policy covers Completed Operations. Although the first page of the policy may show a dollar limit under “Completed Operations” make sure the agent indicates where this coverage is for the contractor and that no unique exclusions exist. A common exclusion excludes all work completed away from your premises. This would mean any of your work performed on a job site is not covered!
The “Your Work” Exclusion
Almost every insurance policy excludes “your work”. This means that your insurance is not a warranty. If you install an HVAC condenser and it causes damage to the ceiling in a building, the damage is covered under insurance, but the cost for you to replace the unit, including labor would be excluded. This is true of almost every insurance policy issued in construction. Sometimes your policy will exclude “work performed on your behalf by subcontractors” too. Make sure to check for this especially if you act as a General Contractor and hire many subs.
Hey I’m just a “Handyman” so why worry about all of this?
The good news is that 90% of the above will probably never affect you. The bad news is that should something bad happen on a job site repairing Mr. Dumbledore’s kitchen cabinets – say you flood his kitchen with water by drilling through a water pipe, all of the above rules and limitations still apply.
In this economy, we have lots of clients that knowingly are uninsured in ways that would personally make me a little nervous. The important thing to know here is WHERE you are exposed. We doubt anyone reading this wants to become a full time insurance expert, but it is a good idea to at least be AWARE of any special risks you may be exposed to.
At the bare minimum, make sure you have your General Liability that covers Products and Completed Operations, a good Auto policy with the highest limits you can afford (this is where you WILL have claims), and some sort of plan to cover yourself if you get injured and can’t work for a few weeks or months. On this last item, do you really want to trust that Social Security will be there to help you?
What else should you keep in mind?
ALL INSURANCE POLICIES HAVE EXCLUSIONS!!! Some are harmless, and some can wreck your company if you have a claim. Although we ask all of our clients to read their policies, in our experience most don’t – although we am sure YOU will now! One of the first 1-5 pages of most policies will have a page that lists all of the exclusions that are included. Look for this page. If you can’t find it, ask your agent to help you. Read it over and look for any scary terms like these:
- “Exclusion – Residential Operations”
- “Specific Project Exclusion”
- “Exclusion – Completed Operations”
- “Exclusion – Subcontracted Operations”
Any of these exclusions, or similar wording should give you pause, or at least a mild case of heartburn. Call your agent. Get an explanation. If he can’t or is unavailable, get a new agent!
What are some other good “tips” that will help me?
Make sure the named insured has your real business name on it. Many times an insured will have XYZ corp. listed on the policy, when in fact the name was changed to XYZ, LLC. That means the insurance check sent to you after a claim would say XYZ corp. and not the actual business name. It happens more often than you can imagine…