Insurance Requirements for Contractor Start-Ups
| 14 September 2010
Over the last 25 years the Porter-Brandenburg Agency has written insurance for numerous contractor start-up companies and has advised new ventures on the proper amounts and types of insurance. It is our aim to continue to serve contractor start-ups including air conditioning and heating contractors, street and road contractors, concrete contractors, carpenters, painters, electricians, flooring, plumbers, roofers, tile and other trade, artisan and general contractors.
The financial “melt-down” in the economy has halted new construction for both commercial and residential projects. New home builders have been devastated and only recently have there been any signs of recovery. The USA economy has experienced recessions before and while some areas of the country are not seeing a lot of new construction due to the oversupply of new homes, parts of Texas have begun to see what Federal Reserve Chairman Ben Bernanke refers to as “green shoots”.
Due to lay-offs at larger construction companies, many entrepreneurial former employees are starting their own construction companies. Those start-ups will need insurance so the purpose of this article is to list and discuss the types of insurance that a contractor will need. The most common insurance requirements are General Liability (also known as Commercial General Liability) , Workers Compensation and Business Auto insurance.
The contractor should ascertain the required insurance in advance of taking the job and prior to signing the contract. This can be done by asking his commercial clients for a copy of the insurance requirements or proposed wording on the certificate of insurance. Owners or hiring General Contractors generally have a contract which spells out the insurance requirements or hold harmless agreements. A contractor or subcontractor should obtain a copy of this contract prior to purchasing the insurance and prior to signing the agreement. There is wisdom in many counselors so it would be a good idea to seek legal counsel and advice from your attorney, insurance agent as well as other contractor friends.
Once you know for sure the types and amount of insurance you will be required to furnish, you should know the cost prior to signing the contract or starting the job. You should obtain bids from at least two insurance agents.
General Liability: General Liability (GL) insurance is designed to pay all sums that the policyholder is legally liable to pay due to bodily injury and property damage up to the limits in the policy arising out of premises, operations, products and completed operations. The policy also includes medical payments, advertising injury, and personal injury. The General Liability policy excludes injuries to your employees, automobile liability, professional liability, damage to your work and equipment. Certain exclusions contained in the policy are designed to be covered by other insurance and certain exclusions are not the scope of the GL policy as it not designed to be a warranty or guarantee of your work.
The most common limit is $1,000,000 each occurrence with an aggregate (total) limit of $2,000,000. Commercial construction work will require at least limits of $1,000,000 and often even higher limits. Contractors who do only residential work can get by with lower limits, but the savings is not proportionate to the reduction in limits. For example, $500,000 limits of liability will not yield a 50% cost savings, but the savings is approximately 10%.
Doubling the aggregate to $2,000,000 is a good value for the money. Aggregate means total and represents the total limit available to pay claims. If there are multiple losses in a year, the policy would pay the aggregate amount before the liability limits are exhausted. For example, the policy would pay four losses of $500,000 or two losses of $1,000,000.
General Liability costs for contractors are determined by the payroll of workers in the field. The payroll of employees who exclusively work in the office or in sales are not included. The owners or officers are included at a fixed payroll of $31,900 (ISO rule) or some other arbitrary amount determined by the insurance company.
Workers Compensation : Workers Compensation (WC) insurance is designed to compensate for employee injuries including medical bills, disability or death benefits as set by statute. A Workers Compensation policy is often known as the “exclusive remedy” which means that except in cases of gross negligence, the employer is immune from lawsuits from employees or heirs. If an employee or heir alleges gross negligence, part II of the policy, which is known as employer’s liability, defends the employer and pays any sum up to employer limits for which the employer is liable. Minimum limits are:
Bodily Injury by Accident $100,000 each accident
Bodily Injury by Disease $100,000 each employee
Bodily injury by Disease $500,000 policy limit
Employers liability limits can be increased to $1,000,000 each accident, 1,000,000, each employee and 1,000,000 policy limits for only 2% of the WC premium and is a good value.
Workers Compensation is rated based upon payroll with a variety of rates depending upon the duties of the employee. Clerical rates are the lowest and the cost for a roofer is among the highest rates.
Non Subscription Insurance/ Occupational Accident- This type of insurance is available only in Texas and covers medical, death, disability and lost wage benefits for employees injured on the job. The policy can be purchased with or without Employers Liability. However, the Employers Liability coverage is highly recommended along with medical benefits which extend at least three years. Minimum limits should be $1,000,000 and a viable plan should include an ERISA document along with instructions and forms on how to become a nonsubscriber with the Texas Department of Insurance.
Auto Insurance : A Business Auto Policy includes Bodily Injury and Property Damage Liability, Uninsured Motorist Liability. Uninsured/Underinsured Motorist, Medical Payments, Personal Injury Protection and coverage for damage to your auto including Collision, Comprehensive, Specified Causes of Loss, Towing, Rental Reimbursement, Hired and Non Owned auto coverage as well as Drive Other Car Coverage and Hired Car Physical Damage.
Rather than defining each of the above terms you can click on the following link for an insurance glossary published on the internet by IRMI, International Risk Management Institute Inc, (www.irmi.com ). You should also ask your insurance agent about the pros and cons of each coverage as needs vary from one company to another.
Contractors always ask, “What limit of liability should I purchase?” You should know that the sky is the limit to your liability, but also check your client’s contract to see what limit is required. Most contracts specify at least Bodily Injury and Property Damage limits of at least $1,000,000 combined single limits. Often limits are expressed separately for Bodily Injury (BI) and Property Damage (PD). For example, you may purchase BI/PD limits of 500,000/ 1,000,000/500,000 which would provide you with Bodily Injury limits of $500,000 per person, $1,000,000 occurrence with $500,000 for Property Damage Liability.
Umbrella Liability: An umbrella policy provides excess liability over General Liability, Employers Liability, and Business Auto Liability. Umbrella limits are purchased in $1,000,000 increments from $1,000,000 to as much as $50,000,000. The most common umbrella limit is $1,000,000. An umbrella provides additional coverage when your underlying policy limits are exceeded. For example, if you were in a serious auto accident, your Business Auto policy would pay up to the policy limits of $1,000,000 and then the Umbrella policy would be triggered and the limit of your umbrella would be available to pay the damages.
Professional Liability: Unless a building contractor is involved in design, architecture, or inspection, there is not a professional liability exposure. Professional Liability is often referred to as Errors and Omissions insurance.
Pollution Liability: Contractors involved in asbestos abatement, mold remediation and lead paint removal are generally required to have pollution liability. Your General Liability policy excludes pollution liability so you will be required to purchase a separate pollution liability policy if you involved in asbestos, mold or lead paint clean-up.
Employment Practices Liability: Larger contractors who have a number of employees have an Employment Practices Liability Insurance (EPLI) exposure. EPL insurance defends the employer and pays for claims arising from the employment process including but not limited to discrimination of all types, wrongful termination or sexual harassment etc.
Property Insurance: Provides coverage for buildings, business personal property, fences, signs and other property at premises for perils selected. Coverage forms are generally, basis, broad or special although some carriers are now writing Business Owner package or portfolio policies for contractors which have a lot of extra coverage built into the policy such as Accounts Receivable, Valuable Papers, Money and Securities and Employee Fidelity.
Builders Risk/Installation Floater: Covers replacement of building materials and labor which has been damaged by a covered peril including fire, windstorm, vandalism, theft etc. This insurance is available for new construction as well as remodeling jobs. The installation floater is often an overlooked exposure for contractors who are installing expensive equipment including air conditioners, heaters, electronics, plumbing, electrical etc.
Contractors Equipment/ Tool Floater: This type of insurance covers the contractor’s tools and equipment used in performance of work. Insurance may be purchased on a “blanket” or scheduled basis. A schedule would describe your equipment including year, make, model, serial number and amount of insurance of each item for which coverage is desired. Most policies are written on an actual cash value basis which means that the company will not pay the replacement cost of the equipment, but the depreciated value.
Group Medical: Provides healthcare coverage including doctors, hospitals, drugs, medical tests etc for employees.
Surety Bonds: Surety Bonds which are also known as Performance and Payment Bonds are required of a contractor by an owner or general contractor to finish a project. If the contractor cannot finish the job, the bond company is obligated to hire someone to finish the building, road or project as required by contract. Bonds are more of a financial or credit instrument than insurance. Therefore, to qualify for a bond a contractor must have a strong balance sheet as well as the work background to do the job.
Business Services bond: A business services bond is a type of employee fidelity bond to indemnity a client for the dishonest acts of an employee. These types of bonds typically do not pay off unless there is an arrest and conviction of the employee who committed the crime. Some contractors who advertise they are “insured “ and “bonded” often purchase a Business Services Bond as a form of marketing and to lend credibility to their company. Bond amounts which are generally written in an amount of $25,000 or less are not very expensive. For example, contractors with 1 to 5 employees selecting a coverage amount of $25,000 would pay around $170 per year.
James H (Jim) Porter CPCU, CLU
Porter-Brandenbrug Agency, 12160 Abrams Rd, Suite #107, Dallas, Texas 75243
Email; This e-mail address is being protected from spambots. You need JavaScript enabled to view it phone 972-234-5588, fax 972-234-5311
www.porterbrandenburg.com Specializing in insurance for small business
