Insurances and Legal Aids: Are You Covered?
Protecting Your Business
S.S. Saucerman / November 2023
Wall and ceiling contractors play a pivotal role in shaping our nation’s building environment, from plastering walls in mid-level homes to sculpting ornate molded ceilings in historical buildings. However, within these opportunities for personal satisfaction and professional success, there also lies a multitude of risks and legal exposure that can threaten these livelihoods. Unforeseen accidents, property damage and legal disputes can disrupt projects and even threaten the financial foundations of the contracting business itself. This is where insurance and legal coverage come into play as essential—even mandatory—tools for safeguarding contractors and their companies.
Risk: A Primer
Construction sites are inherently hazardous environments where a variety of risks are present on an almost perpetual basis. Accidents may result from falling (off of ladders or scaffolding/staging), equipment malfunctions (or misuse) and even from natural disasters, which can sometimes result in severe injuries—or death—to your workers or innocent bystanders. This same sort of accident can also damage property, whether it be on your own building site or next door. And what about the contracting work itself? The complex nature of construction projects alone can lead to disputes regarding project specifications, schedule delays and a team member’s contractual obligations. And what do all these risks have in common? They all underscore the crucial importance of maintaining comprehensive insurance and legal coverage for your business.
But what insurance packages do you choose? Well, of course (and what will remain a theme throughout this article) is that the only real way to know if a particular insurance policy is right for your circumstance is to sit down with your local insurance agency to discuss your needs and how those needs mesh with the various (and oft times confusing, hence the meeting) attributes of the particular policies. That being said, there are common categories of insurance that tend to suit many contractors. So, let’s take a moment to examine some of these more popular insurance packages. First, there is:
General Liability Insurance. Contractor general liability insurance protects contractors from having to pay out damages or medical payments due to bodily injury, property damage or personal/advertising injury to third parties relating to the contractor’s work. It is strongly recommended that contractors maintain this coverage for their own protection. It’s also common for contractors to be required to provide proof of such coverage in order to be accepted for a project being bid.
The cost for GL insurance is often based upon the contractor’s classification, payroll, subcontractor costs, gross receipts and location. For instance (and as pure example), a contractor with an annual payroll of $30k may pay in the range of $1,500 for GL insurance while a contractor carrying $100k in payroll might pay in the neighborhood of $3,000 per year. Again, for you your actual cost is best to sit down with your local insurance carrier for a quote.
You should also know that that not all insurance carriers utilize the same underwriting criteria to determine the premium of a policy. Additional underwriting criteria that may or may not be utilized include credit score, policy age, experience and number of years the insured has not made any claims. There are many additional coverages, deductibles, fees, taxes and exclusions that can be added to a policy which can also affect the premium rate.
The policy coverage limits can also affect the price. A common misconception held by contractors is there is a large difference in price between a policy with a $1 million versus a $2 million aggregate limit. Typically the variance is only around $15 or $20. Most third parties that require a contractor to have a general liability policy are looking for a $2 million aggregate coverage limit to get on the job. For this reason, it’s often advised that all contractors carry
$2 million in aggregate coverage.
Every day more and more contractor clients are requiring proof of a contractor’s general liability insurance coverage. Most insurance services provide the contractor with a Certificate of Insurance upon purchase of the policy that can be used as proof of insurance. In addition, some contractor’s clientele want to be named on the policy as an “additional Insured” to lessen their exposure to loss. Your insurance can also provide necessary additional Insured documents upon request, often for an additional charge.
What does a contractor general liability policy cover? It commonly covers third party claims from damages that may arise from operations of the insured contractor’s business including bodily injury and property damage (again, check your local providers for actual coverage). Keep in mind that GLI coverage may not include faulty workmanship or damage to the insured’s work.
As mentioned earlier, GL policies can cover personal/advertising injury. As you may not be familiar with this type of coverage, this is injury arising out of false arrest, malicious prosecution, wrongful eviction, use of another’s idea in an advertisement, copyright infringement or publication of material that slanders, libels or violates a person’s right to privacy. These are not common with contractor general liability claims, but they do pop up from time to time so be sure to discuss it with your insurance agent.
Workers’ Compensation Insurance. In an industry where physical labor remains a key component, injuries to workers can occur. Workers’ compensation insurance provides coverage for medical expenses and lost wages for employees injured on the job. It also helps maintain goodwill with employees while ensuring compliance with labor laws. Workers’ compensation is insurance that provides cash benefits and/or medical care for workers who are injured or become ill as a direct result of their job.
Employers pay for this insurance and commonly do not require the employee to contribute to the cost of compensation. Weekly cash benefits and medical care are paid by the employer’s insurance carrier, as directed by the Workers’ Compensation Board. The Workers’ Compensation Board is a state agency that processes the claims. If Board intervention is necessary, it will determine whether that insurer will reimburse for cash benefits and/or medical care and the amounts payable.
In a typical workers’ compensation case, no one party is determined to be at fault. The amount that a claimant receives does not decrease according to the claimant’s carelessness, nor increased by an employer’s fault. Commonly, a worker will lose the right to workers’ compensation if the injury results solely from their intoxication from drugs or alcohol, or from the intent to injure themself or someone else, although it’s important to not always assume this will be the case. Over my career, I have seen cases of drunken/high employees receiving worker’s comp due to extenuating circumstances.
Basically, with workers; comp, a claim is paid if the employer or insurance carrier agrees that the injury/illness is work-related. If the employer or insurance carrier disputes the this claim, no cash benefits are paid until the workers’ compensation law judge decides who is right. If a worker is not receiving benefits because the employer or insurance carrier is arguing that the injury is not job-related, that worker may be eligible for disability benefits in the meantime. Any payments made under the disability program, however, will be subtracted from future workers’ compensation awards.
If you can return to work but your injury prevents you from earning the same wages you once did, you may also be entitled to a benefit that will make up two-thirds of the difference. You may also return to work in light or alternate duty before you are fully healed.
Builder’s Risk Insurance. During the construction process, your property is often exposed to a range of risks, including theft, vandalism, fire and extreme weather. Builder’s risk insurance covers structure and material damages during construction, shielding contractors from financial losses due to unexpected perils and “acts of God.” BRI, often known as construction insurance, is a more specialized type of property insurance that can be complex and often misunderstood, but even so, there are certainly times it is needed and indeed it may from the backbone of a successful risk management program.
Builder’s risk insurance helps protect construction projects from property damage due to fire, lightning, hail, explosions, theft, vandalism, hurricanes/tornadoes and more. Any person or company with a financial interest in a particular construction project should seriously consider builder’s risk insurance and you may want to have it even include the property owner, general contractor, subcontractors, lenders, architects or major engineers. The type of property included with BRI includes materials, supplies and equipment on site or in transit to/from the site location.
Also, depending on the policy, BRI can even help cover additional “soft” costs (costs not directly related to the construction of the project) such as lost sales, rental income, additional interest on loans, real estate taxes, scaffolding, formwork, temporary structures, debris removal and even hazardous material cleanup. Again, check with your insurance carrier for exactly what you are covered for under your policy. BRI often excludes items in earthquake/flood/wind zones. It also generally doesn’t cover things like wear and tear (or corrosion), acts of terrorism/war, employee theft, mechanical breakdowns, workmanship/materials, engineering/architectural errors.
Every BRI policy is different, so costs can vary depending on what you need. Your policy may need more coverage, or you may need to add extensions to help protect your construction project. It all often depends on the type of construction materials, type of project and policy details, like coverage amounts and limits. A good rule of thumb is to choose coverage limits that are equal to the anticipated cost of construction. So, if your construction project has a high cost, it could result in a higher insurance rate.
Professional Liability Insurance. Also known as errors and omissions insurance, this coverage can be necessary for contractors who provide design or consulting services in their daily operations. It protects the business against claims alleging negligence, mistakes, or omissions in design or advice, which can lead to project delays or failures. Often referred to as E&O, professional liability insurance focuses on claims related to professional errors, such as design flaws, faulty construction plans, or inaccurate project specifications.
Even the most experienced professionals can make mistakes. PLI provides contractors with peace of mind, knowing that they have financial protection in case a client alleges that their work did not meet the agreed-upon standards or caused financial harm. This insurance can cover legal fees, settlements and judgments, which can be substantial in construction-related disputes. Without E&O insurance, contractors may be forced to bear these costs out of their own pockets, which can be financially devastating, not to mention quite damaging to a contractor’s reputation.
Commercial Auto Insurance. Contractors can use many different vehicles for transporting equipment, materials and personnel. Commercial auto insurance covers vehicles used for business purposes, protecting against accidents, injuries and property damage. Commercial automobile insurance is a specialized insurance policy tailored to meet the unique needs of businesses that rely on vehicles as part of their daily operations. Whether a company operates a fleet of delivery trucks, service vehicles, or employee cars for business purposes, CAI is essential. This type of insurance provides coverage for a wide range of potential risks, including accidents, property damage, bodily injury and theft involving company-owned vehicles.
Equipment Breakdown Insurance. Contractors also use a vast array of machinery and equipment that are susceptible to mechanical breakdowns, resulting in costly repairs and lost time. EBI coverage helps cover repair or replacement costs of equipment, protecting contractors from the financial losses associated with the sudden and unexpected breakdown of essential equipment. It covers not only the cost of repairing or replacing damaged machinery but also any business interruption expenses incurred during the downtime, such as lost income and temporary rentals. EBI is a more specialized form of insurance so it’s likely something you’ll have to ask for when you sit down with your local insurance provider.
Bonding. Unlike conventional insurance, bonding is more associated with individual projects or bids. Bonding provides assurance to clients and project owners that the contractor will fulfill their contractual obligations. There are different types of bonds in the construction industry, including bid bonds, performance bonds and payment bonds. Bid bonds are submitted with a contractor’s proposal and ensure that the contractor will enter into the contract if awarded the project. Performance bonds guarantee that the contractor will complete the project according to the terms of the contract, while payment bonds ensure that subcontractors and suppliers are paid for their work and materials. These bonds offer a level of financial protection to clients, assuring them that the contractor is financially stable and capable of completing the project as agreed upon. For contractors, bonding is not only a requirement for many government and public projects but also a valuable tool to build trust and credibility in the competitive construction industry. It helps contractors secure new projects, expand their client base and demonstrate their commitment to delivering quality work.
Of course, insurance packages aren’t the only way to protect your business. Attorneys experienced in construction law can review and draft contracts to ensure they are clear, comprehensive and protective of a contractor’s interests, lessening the chance of ambiguous contract terms causing disputes down the line. There are also legal experts that specialize in dispute resolution that can help contractors navigate conflicts that arise during construction projects—whether through negotiation, mediation or litigation. Legal experts can even help you develop risk management strategies for your business to help prevent potential legal issues down the line. This includes ensuring compliance with regulations, industry standards and governing codes.
But regardless of the type, insurance and legal coverage are not just optional expenses for building contractors—they are critical investments that provide a safety net against the uncertainties inherent in the construction industry. These coverages ensure that contractors can focus on their projects without constantly fearing the financial and legal consequences of unexpected events. By partnering with insurance providers and legal experts specializing in construction, contractors can build a solid foundation for their businesses to thrive and withstand the challenges of their dynamic and often complicated field of endeavor.
S.S. Saucerman is a retired commercial construction estimator and project manager who worked for a large upper-Midwest general contractor. He is also an established freelance writer and author whose work spans 20 years.