Contractors insurance explained: a beginner's guide

A contractor does not buy one policy. A contractor assembles a file: general liability for the damage the work does to other people and their property, workers' compensation for the crew, commercial auto for the trucks, an inland marine policy for the tools that ride in them, a builders risk policy for the structure while it is going up, and a bond or two for the licensing board and the owner. Each answers a different question, and a general contractor's insurance requirements page will ask about all of them before the first pour.

This guide walks through the file in the order a new contractor in Arizona, Nevada, Utah or Idaho usually needs it, explains the endorsements that subcontracts demand and why, works through what happens when the work itself fails, and lists the mistakes that show up at audit. It applies to a one-truck handyman and to a framing outfit with twenty employees; the policies are the same and the numbers differ.

General liability: the policy every job asks for

General liability pays when the work injures someone who is not an employee or damages property that is not yours. A homeowner trips over a cord, a ladder goes through a window, a torch sets a fascia alight, a subcontractor's trench floods the neighbour's basement. It also pays after the job is over, under the products-completed operations part, when the deck sags or the water heater installed in March floods a hallway in September. The defence is paid on top of the limit on most standard forms.

For contractors the exclusions matter as much as the grant. The your-work exclusion means the policy pays for damage the defective work causes to other things but not to redo the work itself: a bad roof flashing that ruins drywall is covered as to the drywall and not as to the flashing. Some forms carry a broader exclusion for residential or condominium work, or for work done by subcontractors without a certificate on file, and in the four states' tract-housing markets those exclusions decide whether a construction defect claim is covered at all. Read for them before signing.

The endorsements a subcontract demands

A general contractor's insurance exhibit will ask for most of the following on the general liability policy, and the certificate of insurance has to reflect each one. They are not formalities; each moves risk from the GC to your carrier.

• Additional insured for ongoing and completed operations: the GC and the owner are covered under your policy for claims arising from your work, both while you are on site and after.
• Primary and non-contributory: your policy pays first, without asking the GC's carrier to share.
• Waiver of subrogation: your carrier agrees not to pursue the GC to recover what it paid on your claim.
• Per-project aggregate: your annual aggregate limit applies separately to each job rather than once across all of them, so a large loss on one site does not strip the limit from another.
• No exclusion for the type of work the contract covers, which is where residential, roofing, EIFS and subsidence exclusions have to be checked.
• Notice of cancellation to the certificate holder, so the GC hears if your policy lapses.

Workers' compensation, and the subcontractor trap

Once a contractor has employees, workers' compensation is required in all four states, and the threshold and any exemptions for owners are set by each state's statute rather than by a carrier. It pays an injured worker's medical costs and a portion of lost wages regardless of fault, and in exchange the worker cannot sue the employer. Construction class codes carry some of the highest rates per dollar of payroll, and roofing, framing and steel erection sit at the top.

The trap is subcontractors. If you hire a sub who has no workers' compensation of their own and one of their workers is hurt on your job, the statute in each state generally treats you as the employer for the purpose of benefits, and your carrier will pick up the claim and then charge their payroll to you at audit. The fix is a certificate from every sub, current on the day they start, and a file that proves it. A contractor who skips this typically discovers it as a large audit bill, not as a claim.

Tools, equipment and materials: the inland marine policy

A property policy covers things at your address. A contractor's tools are never at the address; they are in the truck, on the site or in a trailer, and a standard property form gives little or nothing for property away from the premises. Contractors equipment coverage, written on an inland marine form, follows the tools wherever they go. Small tools are usually covered on a blanket basis up to a stated amount per item; larger equipment such as a skid steer, a trencher or a compressor is scheduled individually with its own value. Materials in transit and at the jobsite, until they are installed, can be added under an installation floater.

Suppose a plumbing contractor keeps $40,000 of hand and power tools across three vans and one $60,000 mini excavator on a trailer. A van is broken into overnight in Henderson and $8,000 of tools are taken; a month later the excavator is stolen from a site. Under a blanket tools limit of $50,000 and a scheduled $60,000 for the excavator, both losses are paid less the deductible, provided the tools were listed by category and the excavator by serial number. Without the schedule, the excavator would be limited to whatever the blanket allowed for any one item. Figures invented; the lesson is that the schedule is the coverage.

Builders risk: the structure before it is finished

A building under construction is not covered by anyone's homeowner or commercial property policy until it is complete and occupied. Builders risk covers the structure, the materials on site and often the materials in transit, from groundbreaking to completion, against fire, wind, theft, vandalism and, where added, flood and earthquake. It is bought by whichever party the contract assigns it to, owner or contractor, and it should name the other party and the lender. The policy has a term, and a project that overruns needs an extension before the term ends, because a policy that expired in month twelve pays nothing for the fire in month thirteen.

Commercial auto, bonds and the rest of the file

Trucks and vans titled to the business need a commercial auto policy; a personal auto policy will exclude a vehicle used for the trade once the carrier learns of it, often at the claim. Hired and non-owned coverage extends liability to employees driving their own vehicles to the supply house. A licence bond is required by each state's contractor licensing board as a condition of holding a licence, and it is a guarantee to the public rather than insurance for you; a performance and payment bond is required by owners on larger public and private jobs and is underwritten on your financial statements. Both are surety products, and they are described in their own guide. Pollution liability, for a contractor who disturbs soil, removes asbestos or handles fuel, and professional liability, for a design-build firm, complete the file where the work calls for them.

Regional notes

All four states license contractors through a state board or division, and each board requires a bond and proof of insurance before issuing a licence, with the amounts set by the board rather than the carrier. Arizona's tract-housing volume makes construction defect litigation a live exposure, and the general liability market there prices residential work accordingly; a contractor should look for a form without a residential exclusion rather than accept one and hope. Nevada's licensing board sets monetary limits on the size of contract a licensee may take, tied to the bond and the financial statement, and a growing company has to raise the limit before bidding above it. Utah and Idaho both see heavy seasonal swings in construction, and a builders risk policy on a mountain project needs to carry through a winter shutdown rather than lapse when work stops. Monsoon wind in Arizona and spring snowmelt along the Wasatch Front and the Boise foothills are the two weather events most likely to hit an open structure.

How to use this

Bring the insurance exhibit from a recent subcontract or bid package, the licensing board's requirements for your classification, a vehicle list, a rough equipment list with values, and last year's payroll by trade. From those we can lay out the file, say which endorsements the general liability policy already carries and which are missing, and set the tool and equipment schedule to what is actually in the trucks. Many contractors have the policies right and the endorsements wrong, and the fix is an endorsement rather than a new policy; when that is the case we say so and the change costs little. We place contractors coverage across the carriers we represent in Arizona, Nevada, Utah and Idaho.