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A complete guide to buying contractors insurance

save money on contractors insurance

If you’re like most contractors, insurance is one of the last things you want to think about – but it’s an essential part of your business and ignoring it could come at a great cost.

Whether you’re buying insurance for the first time, or you’re getting ready to renew, here’s what you should know.

What does contractors insurance cover?

Insurance experts say a contractor should purchase a commercial insurance policy consisting of:

  • Property insurance.
  • Inland marine insurance (tools and equipment.)
  • General liability insurance.
  • Excess liability insurance (also known as umbrella insurance.)
  • Auto/equipment insurance.
  • Workers compensation.
  • Surety bonds (this ensures contract completion in the event of contractor default.)

3 common insurance mistakes contractors make.

Mistake #1: Being underinsured and not understanding exclusions.

Review your total business assets and make sure you have enough to cover everything if you were to suffer a total loss. It’s best to think about these things before they happen.

For example, it’s important to note that regular personal property coverage won’t cover your equipment off-premises. Therefore, as a contractor, you need inland marine coverage (also known as an “equipment floater”) to cover your equipment in transit.

Mistake #2: Classifying employees as subcontractors.

Some contractors try to save money on their insurance by incorrectly classifying employees as subcontractors (subs).

However, this is risky because your insurance company will typically audit your operation, records and payroll annually. If they discover you have employees rated as subs, they’ll backdate your premium and require the additional premium be paid within 30 days.

To avoid this, make sure your subs are true subs. “A true sub is paid on a 1099, has his owns tools and equipment, and is able to work for whatever company he wants,” says Andrew Cohn, an insurance broker at Regency Insurance Brokerage Services.

Mistake #3: Failing to get your additional insured endorsement up front.

An additional insured endorsement allows you to name the owner of the property you’re working on as an additional insured. “If you’re sued for negligence and they also name the property owner you have listed as additionally insured, your insurance will defend them as well,” Cohn says.

However, if the property owner isn’t listed as an additional insured and he doesn’t have insurance of his own, they may end up suing you to pay for damages.

Make sure your sub-contractors list you as an additional insured and you have a copy of their certificate for audit purposes.

This coverage may be included in your policy or it can be an additional cost from $250 to over $1,000.

How to determine how much insurance you need.

Contractors insurance policies are complex, so it’s best to work with an independent agent who specializes in contractors insurance.

Here are some questions to determine how much coverage you need.

1. How much insurance coverage does your contract require you to have?

The amount of insurance coverage you’ll need will largely be determined by the type of contracts you sign for the work you engage in. 

According to Jonathan Farrow, vice president of Agent Relations at Ox Bonding, a Florida-based company that provides surety bonds to contractors, says “an agent should be able to review the insurance section of potential contracts and make sure the contractor is in compliance with contractual insurance requirements.”

Farrow adds that if you do bonded work, then it’s important to have a qualified accountant monitor your financial status and prepare annual reports.

2. What’s the bond amount required by your state?

Check with your state license board to find out the bond amount you need to carry. For example, the California Contractors State License Board requires general contractors to carry a $12,500 contractor license bond.

This amount varies by state. For example, in Oregon it’s $20,000 and in Arizona it’s only $5,000. Also, these amounts can vary according to your projected gross income as well as your personal credit score.

3. What’s the value of all your business property?

Your agent will rely on you to tell him the value of your tools and equipment. It’s a good idea to create an inventory before you talk to your agent.

3 tips on how contractors can save money on insurance.

Here’s how you may be able to save money on your contractors insurance policy without skimping on coverage.

1. Consider a higher deductible.

Ask your insurance agent how much you would save by increasing your deductibles in certain areas, such as your property and inland marine insurance. However, be aware that if you file a claim, you’ll need the cash on hand to cover the deductible.

If you opt for a higher deductible, put the money you’re saving into an emergency fund. That way you’re paying yourself every year, instead of the insurance company and you may be able to cover the deductible if you have to make a claim.

2. Take advantage of state discounts

Make sure to ask your insurance agency or state license board to see if there are any special state discounts that you may qualify for as a contractor.

3. Start a safety program and let your insurance agent know about it

“Insurance companies will always look favorably on contractors that have risk management safety programs in place,” Farrow says.

A risk management program is a set of guidelines, rules and practices that help identify and minimize risks on the job. It could simply consist of having weekly safety meetings where everyone is trained on how to be more proactive about risks and how to respond if an accident happens.  

Remember, the lower your risk, the more appealing you become to insurance companies.

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