Many investors worry that contractors will cost dramatically more if they’re required to obtain all the recommended insurance coverage. But hiring contractors who aren’t insured can ultimately hurt your business worse than if you had simply paid more for labor. So, unless you are enthusiastic about losing sleep and money, anyone you hire to do work on your property needs to be appropriately licensed and insured.
Where are you at risk?
When it comes to hiring contractors, some investors assume their property coverage and premises liability coverage will protect them if a contractor gets hurt while working on their project.
Don’t be fooled— anyone you hire to do work on your property is excluded from any standard ISO policy.
The reason for this exclusion is to avoid an overlap of coverages. Any property damage, injuries to a contractor’s employees, or negligence in their workmanship is covered under policies that the contractor procures for himself. (Subcontractors should get their own liability coverage, too.)
Injuries don’t happen on every job, but when you work with saws, ladders, and nail guns, the risk of injury and even death increases. Paying a couple hundred or even a couple thousand dollars more for the appropriate coverage is a bargain compared to the tens or hundreds of thousands in costs you could face after an accident.
What kinds of coverage are available?
General Liability: Covers property damage the contractor is responsible for, as well as any negligence in workmanship once the job is completed.
Worker’s Comp: Covers injuries to a general contractor’s or subcontractor’s employees if they are hurt while working on the job. The legal requirement to carry this coverage varies from state to state. In some states, it’s required with as few as one employee.
Surety Bond: If the contractor cannot finish your job—due to illness or bankruptcy, for example—this type of bond will cover some of the financial losses you as the owner incur in getting the job finished.
Professional Liability: Protects the contractor against liability incurred as a result of errors and omissions in the course of business.
Inland Marine: Insures property in transit, such as materials and tools on their way to your property.
Pollution Liability: Coverage for bodily injury or property damage arising from pollutants.
Equipment Floater: Covers the contractor’s equipment, such as bulldozers, excavators, and tools.
Commercial Auto: Covers the contractor’s vehicles while used in the course of business. (Hauling materials or traveling between jobsites, for example.)
Contractual Liability/Hold Harmless Agreement: General contractors should sign this agreement with their subcontractors so they are not held liable for any damage or injuries for which the sub is responsible.
Builder’s Risk: Covers your property in the course of construction. Can cover property at off-site storage locations and in transit as well, including building materials waiting to be installed.
Premises Liability: Covers property damage and injuries caused to third parties ( the mailman, for example) on the premises only. The owner procures this coverage, and it does not protect hired workers.
Excess Liability: Increases (but does not broaden) the limit of liability coverage and will pay out only if the primary policy pays.
What else does your contractor need?
Licensing: A license isn’t a 100 percent guarantee that all work is being done according to current building codes, but if your hiring contractors that are fully licensed, it’s a good sign of their seriousness. Licensing exams last several hours, and a license can cost hundreds of dollars per year.
If you are near a state border, your contractor may need licenses for multiple states.
Permits: Each city’s ordinances vary, but permits can cover exterior painting, roof repairs, and much more. If your contractor doesn’t obtain the appropriate permits, any fines could come back on you as the owner. If structural elements fail because they haven’t been reviewed by an engineer, there could be even worse consequences.
Certificate(s) of Liability Coverage: Obtain a copy of all liability policies in force. At the bare minimum, this means a general liability policy and, if a contractor has employees, a worker’s comp policy, too. If you aren’t sure of the coverages being presented to you, consult your insurance agent.
Require your contractor to add you or your business as an additional insured/certificate holder during your project. This can give you some protection if you are named in a lawsuit, and it generally doesn’t cost extra. Being listed on the policy should also ensure that you are notified if coverage lapses or is canceled.
Non-Negotiable Coverages: Products and completed operations coverage should be included in your contractor’s liability policy. This covers damage that occurs after the work is completed. If an improperly soldered pipe fails three weeks after you pay your contractor, this coverage can take care of the cost of the repairs.
You will also want the contractor to guarantee his or her work for a reasonable period of time after the job is done—12 months is a good rule of thumb.
Health Insurance: You might ask your contractors for proof of health insurance, too. Most independent contractors have policies that cover their workmanship, damage to your properties, and injuries they may cause to others—but not injuries they suffer.
Hiring contractors who have health insurance provides a safety net if they get hurt. They’ll be less likely to sue you to pay their medical bills.
Insurance is an area where you don’t want to skimp. Don’t be tempted to make your killer deal even sweeter by cutting corners in insurance. It may, in fact, end up being the deal that kills your business instead.
