Real World Advice For Contractors To Avoid Financial Ruin
Contractors like you, put food on my family's table and, in short, you sign my paycheck.
Other insurance agents may not publicly acknowledge this, but it is in fact true.
This truism led to this report. Contractors like you work hard daily - you get up early,
work late - work in the heat and the cold, and for many contractors the work is dangerous,
you have to far too often chase your receivables, and in short the contractor's life is
not an easy one. Compiling that problem is the very nature of your work leads to complex
insurance issues - issues which if not handled correctly will cause your contracting business
to suffer financially or worse yet be ruined.
I have compiled a list of Contracting Liability Black Holes that you as an informed contractor
must avoid at all costs. Initially, I thought that I would call these items, something akin
to 'Keeping out of the Deep Weeds' ...but it is really more than that.
Simply put, if your contractor's liability package is handled incorrectly, and doesn't adequately
address your unique insurance exposures than chances are - your contracting business will cease
to exist. If done correctly your contracting business can succeed and prosper all the while
allowing you to sleep at night. After more than 20 years in the insurance industry I have come
to realize that for both of our sake's - there is nothing that compares to knowing that the cold
wind is not going to blow your house down.
Contractor's Liability Black Hole #1
Not Choosing A Contractors Insurance Expert as Your Agent
Insurance is simply too broad for anybody to be an expert in all things. 'Jack of all trades and
master of none' is completely accurate when it comes to insuring contractors. As a matter of
practice I hire our contractors to do all the work around my house and office - I believe in what
goes around, comes around - but that is not the point I was trying to make. A skilled carpentry
contractor told me - 'Just cause you can swing a hammer - that doesn't make you a carpenter'. The
same holds true for you when you choose an insurance agent.
A contractor who is now an insurance agent explained it better than I ever could. He said basically
when he was a contractor he looked at his insurance policies as simply a black hole that he kept
throwing money into without any return. Now, as an insurance agent he shook his head and said every
form, every box on the application you either check or don't check, every endorsement you add or
don't add, every exclusion you don't address -- could mean the difference between coverage and
no coverage. Peace of mind and financial ruin.
When researching an insurance agent for your business please keep in mind that you have entrusted
that person to protect your entire financial empire while realizing that the very nature of the
contracting is vastly different than insuring other niches of business.
An example makes the point clearer, as why you must have a contractor insurance specialist. Say
you call an agent that is a generalist - he insures some personal auto, some houses, maybe some
retail exposures and contractors that he comes across.
A generalist would suggest to you that 'insurance is insurance' as that is the only explanation
they can offer.
That suggests for example that insuring a retail shoe store is the same thing as insuring a contractor.
This is not dissimilar to the thinking that you should have a doctor, just any doctor, perform heart
or brain surgery for you.
I can tell you without question or hesitation that insuring a contractor and insuring a retail shoe
store are like comparing a house cat to a mountain lion. In more than 20 years, I have never had a
conversation with an underwriter about a shoe store that started off - this risk scares me or from
a claim rep that called to inform me that the gas main that the contractor hit caused a house to be
blown in the air blew into enough pieces that nobody was injured when it came crashing down. I have
had a sub contractor fall off a roof on his head with a workers comp case that continues today; I
have yet to have any heart to heart conversations with the retail shoe store client I insured when
I first started about power tools or height requirements or uninsured subs… it's just a different animal.
As such, you as a prudent consumer must at all costs - know that your insurance agent is a contractors
expert.
Ask the agent - How many contractors do you insure? How many insurance companies do you represent
that have specialty contractor products? What other types of business do you personally insure?
If the answer isn't a high percentage of contractors - keep searching!
Contractors Liability Black Hole #2
An Occurrence vs. Claims Made Policy
Contractor's General Liability policies are written on 2 forms for determining when coverage applies
or is triggered. The two forms are 1) Occurrence Form 2) Claims Made - and while both provide coverage
for a covered loss - the 2 policies respond vastly different.
An occurrence policy pays when the claim occurred, while a claims made policy pays when the claim
occurred. In my opinion, the occurrence form is almost always the better way to go. The lure of
the claims made policy is at times there can be a cost savings, but it opens up gaps which are
difficult or impossible to address.
The problem - claims made policies allow you to only present a claim during the policy period they
are in force for. If you want to leave that particular insurance company - you must purchase
additional coverage to cover you for possible claims as they present - the additional coverage is
called a tail and must be purchased for a pre-determined length of time at the termination of the
policy period.
That is not the problem - however. Most contractor general liability claims do not present at the
time the work was done; instead these claims come in years down the road once you have left the
job site . The law allows consumers to file lawsuits from construction problems for up to 10 years
after the project was completed. This means that if you decide to buy a claims made policy you would
need to purchase a 10 year tail if it is even available - without it you are running bare.
As I said, most contractor claims fall into the part of your general liability known as 'products/completed
operations' - these are essentially 'done deal' type claims - you have completed the work and are on
to another project.
An Example :
You build and renovate a residential bathroom - simple enough - everything goes well - the clients
are happy, you get paid in full, and head onto your next project, and the next, and the next.
6 years later you receive notice from the customer that the bathroom is leaking into the downstairs
family room destroying the family room and its contents. The clients inspector says that the
damage is a result of the work you performed 6 years earlier.
If you have an occurrence policy - the policy that was in place when the claim occurred will pay
without a question of coverage. On a coverage made policy - if you didn't purchase a long enough
tail - you will not have coverage.
In an attempt to save money, you have now limited your ability to shop on a go forward basis, you
must pay for a long enough tail to cover up to 10 years and have opened yourself up to huge potential
gaps in coverage.
Claims made policies work well for professional liability policies - like medical malpractice, but
they are a nightmare waiting to happen for contractors - Just Say No.
Many companies will allow you to take a deductible on property damage which has the effect of reducing
your premiums. This is a far better idea as you can control this exposure than trying to save some
money by going to a claims made policy.
Contractors Liability Black Hole #3
The Rating and Financial Strength of the Insurance Company
Insurance companies are rated based on a number of factors - their financial strength, their ability to
meet their claim's obligations, etc. Insurance companies are given a grade much like we all did when we
were in school. A.M. Best each year analyzes and reports on the financial health of every insurance
carrier.
You should look at two things when it comes to insurance company - 1) What is the company's A.M. Best
rating and 2) Is the rating rising, falling or holding steady.
An insurance company with a less than an 'A' rating from A.M. Best can be a potential problem for a
couple of reasons 1) There is a risk of the company not being able to meet all of their claim obligations
and going out of business and 2) Many General Contractors (GC's) will not accept any insurance company
rating of less than an 'A' for its subs. This means that as a sub - you may not get paid. To further
compound the issue, most state and municipalities will not accept anything less than 'A' paper - so you
have taken yourself out of bidding process for lucrative work.
Contractors Liability Black Hole #4
Exclusions & Endorsements
In a contractor's general liability policy all the exclusions are shown on the front page of policy -
the Dec Page. As an industry, we then list the exclusions not by name, but instead by number. Not to
beat a dead horse, but if a generalist is looking at the policy, he or she probably isn't totally
versed in the exclusionary and amendment forms that the insurance company underwriter will put on a
policy. More importantly, what forms can be taken out, or amended to provide the coverage the
contractor needs.
To illustrate, these are common general liability exclusions:
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Expected or Intended Injury
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Contractual Liability
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Liquor Liability
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Workers Compensation & Similar Laws
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Employer's Liability
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Pollution
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Aircraft, Auto or Watercraft
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Mobile Equipment
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War
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Damage to Property
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Damage to Your Product
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Damage to Your Work
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Damage to Impaired Property or Property Not Physically Injured
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Recall of Products, Work or Impaired Property
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Personal and Advertising Injury
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Electronic Data
While the list seems much like any other list when you read it - take a look at how it works in
real life. Take a look at an example of exclusion #12 - Damage to Your Work and what not having
an expert explain your coverage can mean to you in real dollars.
An Example:
ABC Construction Company contracts to build a warehouse for JeffCo. ABC does 25% of the work
itself, and subs out 75% to various subcontractors.
3 years after completion, the warehouse is destroyed by fire - the fire is the result of faulty
wiring installed by ABC. The entire loss of the building is estimated at $1 million. How much
if anything is covered?
Answer - $750,000 ($1m loss minus the $250,000 (25% of $1m - ABC's own work) - so everything
but the contractors own work is covered.
This is by no means an all encompassing list of exclusions or amendments. Each
exclusion by its very nature takes away coverage and amendments modify coverage. You
as a contractor are only looking at insurance form numbers. You better have an expert
to explain them, lest you wind up in the black hole searching for coverage that your
insurance company doesn't think you have.
Contractors Liability Black Hole #5
Beware of the Subs
As a kid, I played Battleship with my dad. He told me then that the subs were silent
killers. Turns out he was a man ahead of his time when it comes to subcontractors.
When you hire a sub to do work for you, you must make sure that they carry the same
limits of liability that you have. So if your company carries $1 million General
Liability, your subs have to carry the same limits and be able to document it.
As a contractor you must be able to document that your subs have their own General
Liability and Workers Compensation Coverage - current Certificates of Insurance are
needed. Why?
You will be audited on both your Contractor's General Liability and your Workers
Compensation. Without documentation to the contrary, your subs will be treated by the
insurance company as your employee for both the cost of the general liability and your
workers compensation. Once that audit hits, the respective companies will add that
exposure base to your current policy period. It is the gift that keeps giving.
Time after time contractors say this isn't fair and, whether or not you or I agree, it is
the way life in insureland is for contractors. The reality of the situation is that from
the claimant's standpoint they are simply going to sue everyone, and if the sub is
uninsured, you are going to take the whole hit. That is reality.
I suggest that you take the same outlook for dealing with uninsured subs as I have on
my teenage daughter's boyfriend sleeping over in the same room. Not yesterday, not
today, and tomorrow doesn't look any different…
Teenagers, uninsured subs - UGH!!
Every insurance company writing General Liability coverage for contractors asks what
percentage of subs do you use. Let's say you are building an addition. They will want
you to sub out the electrical as you are not licensed for that, but they get real antsy
when the percentage of subs rises above a level they are comfortable.
Pulling exclusions and Subs together - we see this exclusion for Independent Contractors.
It takes away coverage for 'Claims arising out of: the acts or omissions of independent
contractors while working on behalf of any insured, or the negligent hiring or contracting,
investigating, supervision, training, retention of any independent contractor for whom any
insured is or ever was legally responsible and whose acts or omissions would be excluded.
If you are using subs, this exclusion is a hangman's noose.
Contractors Liability Black Hole #6
Let's call this one - the creative writing exercise
There are a couple of facts that can't be disputed and become a part of real world contractors insurance
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Insurance company underwriters don't like surprises
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Insurance company underwriters have been burned on a contracting claim and are wary
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Contractor claims can quickly and severely impact an insurance companies
financial outlook - negatively
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Contractors don't like paying for insurance and want to reduce premiums
wherever possible - this is logical but keep it safe.
One old-school underwriter explained it to me that she believed contractors were
lying to get a lower rate if they were 1) Awake and 2) Their mouth was moving.
While I don't totally agree with this, I can tell you that a lot of 1 man band
contractors are carrying a lot of two person lift items while being in more than
1 place at any given time.
You will see a lot of exclusions now for 'Designated Work' - that says there is no
coverage for 'Claims arising from any classification or class code not listed on the
declarations page'. For example you are a roofing contractor and you tell the agent
that you are a painter and carpenter. The policy shows you as a painter and a carpenter
and just to make sure the underwriter slaps on a Roofing Exclusion.
Now the policy that you thought was such a great deal - you can fold it up and make
paper airplanes out of it - because it's not providing a lick of coverage for anything
other than what you signed the application for.
In your zeal to save premium dollars, make sure you haven't taken away all coverage and
left you with your pants around your ankles getting ready to be spanked.
Contractors Contractors Liability Black Hole #7
Admitted vs. Non - Admitted Insurance Companies
Admitted companies are insurance companies that are licensed in the State of Pennsylvania.
The following list is taken directly from the PA Department of Insurance website.
In many instances you must as a practical matter use non-admitted carriers. As a matter
of practice, it is best to use admitted carriers wherever and whenever possible.
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