Contractor Insurance: Liability, Programs, Costs & More
July 17, 2020
The market for contractor insurance programs is enormous. According to U.S. Census data, the construction industry has 680,000 employers who hire more than seven million people. Their work is responsible for creating $1.3 trillion worth of structures each year. Alternatively, the Associated General Contractors of America (ACG) states even higher employer numbers in its The Key Role of Construction in Each State's Economy report. It states the U.S. had 810,295 construction firms in 2016, of which 92% were small (1 to 19 employees). The ACG report provides useful data on the role of construction in the economy and employment in the United States, each state and major metro areas.
There is a nearly exhaustive variety of companies operating in the construction insurance market. They have needs for specialized coverages designed to protect their unique risk exposures, which drives demand. The demands from those needs create significant potential for agents and brokers with clients and prospects operating in the construction market. This report provides insights into the contractor insurance market and the opportunities within it.
Contractor Insurance versus Construction Insurance
Despite being used widely by the public and insurance professionals, neither "contractor insurance" nor "construction insurance" are actual forms of insurance themselves. They synonymously describe the array of insurance coverages designed for construction projects. Specific policies sold under the generic name of contractor insurance cover everything from one-person artisan contractors to giant multinational corporations.
There are substantial inherent risks associated with hiring a contractor and launching construction projects. As such, certain types of business insurance are both a necessity and legal requirement for construction and contractor-related companies and services. The legal requirements vary according to state law. It's common to find that one state may require specific types of contractors to obtain a license to operate their business within the state, while across the border, another state does not. It is incumbent on the agent writing business to be aware of each state's specific requirements for contractors within its boundaries.
Contractor Insurance Programs Businesses and Coverages
The types of policies included under contractor insurance span a wide range of liability protection for property owners, developers, contractors, and other businesses and professional services involved in the construction market. Although interrelated, the significant categories of contractor insurance are highly specialized.
The following list samples many of the major contractor insurance categories to provide a high-level summary of the market. Each of these broad categories may have a dozen or more business classifications under them, which indicates the scope and vast size of the market for general contractor insurance programs.
Contractor Insurance Markets
These representative examples of the categories of business and services found in the independent contractor insurance market are not inclusive of the market:
Architects & Engineers
Commercial/Residential General Contractors
Fire Suppression Contractors
Security & Alarm
Targeted Classifications Show the Depth of the Contractor Insurance Market
To display the diversity and variety of the business classifications found in the categories listed above, we review the business classes that fall under Artisan Contractors' insurance programs.
Artisan Contractors Insurance provides coverages for these Targeted Classes:
Carpet, Rug, Furniture Cleaning
Ceiling or Wall Installation
Furniture or Fixture Installation
Lawn Care Services
Swimming Pool Construction & Installation
The list of targeted classes above that is found under Artisan Contractor insurance comes from USG Insurance Services. Check out its storefront on the Program Business market directory. On its website, USG Insurance publishes downloadable PDF product guides indicating targeted classes for Contractor Insurance Markets. Typically, each of these sub-classes are small business insurance prospects that need contractor risk management services.
For a more exhaustive review of the classifications of contractor businesses, the California State License Board (CSLB) publishes a pdf directory of its Description of CSLB License Classifications. The CSLB issues licenses for the following classifications:
Class "A" — General Engineering Contractor
The principal business is in connection with fixed works requiring specialized engineering knowledge and skill.
Class "B" — General Building Contractor
The principal business is in connection with any structure built, being built, or to be built, requiring in its construction the use of at least two unrelated building trades or crafts.
Class "C" — Specialty Contractor
There are 42 separate "C" license classifications for contractors whose construction work requires special skill and whose principal contracting business involves the use of specialized building trades or crafts.
As with Contractor Insurance, the term Contractor's Liability is often used as a catchall phrase to describe various coverages, either standalone or as part of a contractor insurance program. For instance, a Contractors Professional Liability (CPL) policy protects professionals who provide design and building services. It also covers contractor mistakes and errors made by third parties hired by the contractor, such as engineers, architects, and other vendors.
Contractor business insurance, such as a Business Owner's Policy (BOP), does not include coverage for liabilities resulting from the specific professional services a contractor may provide. In those cases, professional liability insurance, such as a CPL, is necessary to cover against claims of errors or omissions in services a contractor offers.
Contractor Insurance Programs
Contractors insurance programs provide reliable insurance protection for general contractors and subcontractors through one entity. Typical programs offer general liability insurance, workers' compensation insurance, and commercial auto insurance to protect the insured’s work, tools, equipment, employees, and business property. Options for additional coverages to suit specialized needs are also available.
The trend today finds fewer carriers seeking to provide policies intending to cover the full range of general contractor insurance programs. More are targeting niches within the commercial and residential building marketplace. As an example, carriers will make General Liability Programs for residential contractors available depending on factors, such as these:
Number of Homes Constructed Per Year
Average Construction Cost of Home
Annual Sales from Construction
Annual Subcontracted Costs
Single or Multi-Family Construction
Demonstrating cooperation by establishing quality control and inspections, certificate of insurance management and other programs that help to minimize post-construction losses
There are certain types of policies that are either required by law or are prudent for every instance of contractor insurance. These include:
Commercial & General Liability
General liability insurance is also known as Commercial General Liability (CGL), it intends to protect a contractor's business from:
A minimum commercial auto liability coverage only pays to cover a person or persons who sustain injuries and property damage in an accident caused by the insured. Comprehensive, collision, physical damage, lease or loan gap, and electronic equipment are additional coverages available for commercial vehicles.
Inland marine insurance covers products, materials, and equipment when transported over land—e.g., via truck or train—or while temporarily warehoused by a third party. Collisions and cargo theft are the two most frequent causes of inland marine losses.
License bonds provide guarantees to a local municipality or a state that the contractor will abide by the relevant laws in this area. Depending on the location, the contractor might need license bonds for both local and state authorities. Contractors also often need surety bonds to guarantee their company will meet its legal and contractual obligations. They may also be required to have a Certificate of Liability Insurance as proof that their company follows requirements from entities that have exposures due to working with a licensed contractor. Other types of bonds include fidelity and construction bonds.
Workers' Compensation, also known as Workers' Comp insurance, is mandated by most states. A workers' comp program is designed to replace wages and provide medical benefits, disability income or rehabilitation, and to pay expenses related to the injury covered to employees who suffer an injury regardless of fault on the job. The trade-off for the mandated coverages means employees who accept it relinquish their rights to sue their employer for negligence.
Employment Practices Liability Insurance (EPLI)
Contracting businesses have risks relating to employment practices liability claims. Both current and former employees may proceed to take legal action against a contracting business. Their reasons for filing such claims include:
Other types of casualty coverages purchased under contractor insurance include:
Contractor's Pollution Liability (CPL)
Environmental Services Package (ESP)
Professional and Environmental Coverage (PEC)
Additional Professional Liability coverages for contractors include:
Contractor's Protective Professional Indemnity (CPPI)
Owner's Protective Professional Indemnity (OPPI)
Property Portfolio Protection
Commercial Excess Umbrella
Consolidated Insurance Program (CIP)
Contractor Insurance Costs
Numerous factors affect insurance costs for contractors, which makes them vary greatly. The price is determinant on the insurance provider, the level of coverage needed, the size of the business, where it is located, and the type of work the contractor performs, among other things.
Insureon provides examples of costs for general contractor insurance on its website with this article, How much does insurance cost for general contractors? It gives examples with dollar amounts for costs of general liability, Workers' Compensation, commercial auto, contractor's tools and equipment, and professional liability insurance for general contractors.
Best Contractor Insurance Programs
Agents seeking the best insurance programs should consider USG Insurance Services, Inc. It is a national wholesale broker, and managing general agent (MGA) with 21 offices across the U.S. USG specializes in providing innovative solutions for hard to place commercial insurance, including contractor insurance programs. It represents a variety of A-rated carriers, both admitted and non-admitted. Writing business in all states, it operates as an MGA for 18 carriers and works with more than 260 different brokerage markets.