Contractors Insurance: Types, Costs, & More

Contractors insurance refers to multiple types of general and contractor-specific insurance that when bundled together create a business owner policy (BOP) for contractors. Contractor BOPs typically include general liability, commercial vehicle insurance, workers compensation, and more. This combined insurance policy covers property and liability risks for contractors who work on projects of different types and sizes.

Applying for bundled contractors insurance can be cumbersome and it often takes weeks. Next Insurance offers an online application that cuts down on the time it takes for you to get covered. You can fill out an online application within 10 minutes and receive up to $1M of general liability coverage within 1 day.

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Types of Contractors Insurance in a BOP

There are many types of insurance that can be bundled together in a contractor’s Business Owner’s Policy (BOP). Some are required by law or by your clients before you bid or start a new job. Others are simply recommended to have because they can protect you and reduce liability for your business.

Most local and national insurance companies offer these required and recommended insurance types to contractors. However, due to increased liability, premiums are typically higher and it’s best to find an insurance company like Next Insurance that specializes in a contractor’s business owner policy (BOP).

Required Contractors Insurance

The required insurance typically varies based on the assets your business owns and the type of projects you bid on. In general, there are 4 types of insurance that most contractors will be required to have:

1. Commercial General Liability Insurance

General liability coverage is the most common type of commercial insurance and is considered the “base” of all the coverage a contractor needs. While it’s not contractor-specific, it’s typically required prior to making any bids on projects. For contractors, you may pay more than other industries will pay for similar coverage due to the high nature of risk you see on a daily basis.

Commercial General Liability insurance can cover different types of risks, including:

• Damage to your physical work location, or other property damage
• Work completed by subcontractors
• Medical payments from accidents
• Bodily injury
• Personal injury
• Advertising injury

2. Worker’s Compensation Insurance

Worker’s compensation insurance covers medical costs if your employees suffer injuries while on the job. This type of insurance is also not contractor-specific, but is often required by law due to the fact that construction can be a dangerous and high-risk profession. Worker’s comp laws vary by state, which may change how much coverage you need as well as the overall cost.

3. Commercial Auto Insurance

Commercial auto insurance is a necessity if you use vehicles to perform work or transport supplies. It’s required to carry if the business owns any trucks or other vehicles used during projects. This coverage is for damage to the vehicles or damages caused by an employee driver while on the job. It is not contractor-specific.

4. Surety Bond

A surety bond isn’t exactly insurance but is like insurance for your clients. It protects your clients against liability and malpractice and guarantees that the project that you bid on will be completed within the stated terms. For example, if you’re awarded a contract and then back out, the surety bond policy will cover the costs to find a new contractor.

These contractor-specific surety bonds are typically required by potential clients. For more information about surety bonds, you can read our ultimate guides on what a surety bond is as well as the different types of surety bonds.

Recommended Contractors Insurance

There are plenty of other insurance types that contractors can get to eliminate or severely reduce their liability on projects. While we don’t list all possibilities, we do cover each of the 4 most common types of insurance that aren’t typically required but are recommended for many contractors.

Below are the 4 common types of recommended contractors insurance:

1. Professional Liability

This optional coverage is often called Errors and Omissions (E&O) insurance. This covers mistakes on the actual work product made by your employees or subcontractors and covers any potential lawsuits from those actions. Many contractors will consider this insurance to be in the “need” category, but it depends on whether or not your general liability policy provides this coverage, which it might.

2. Umbrella Insurance

Umbrella coverage is optional, and its coverage is pretty much just like it sounds. It extends the total amount of coverage per claim of existing policies you have with the same insurer. Some contractors will get smaller coverage amounts on other policies if they can extend them with an umbrella policy, which can result in a lower overall premium.

3. Excess Liability

Excess liability coverage is an optional policy that is similar to umbrella insurance, providing extra coverage amounts per claim for your general liability or similar liability coverages. The difference is that excess liability can only extend one policy, while the umbrella can extend all coverage.

4. Builder’s Risk

Builder’s risk coverage is property insurance for contractors that isn’t mandatory but can be helpful. It covers damage or loss to your own property, tools, or any of your work materials. This insurance is taken out as short-term coverage for each individual project or job. While this is recommended, certain local authorities or local building codes sometimes require the contractor to have it for that individual job.

While there are other types of insurance you might want to look into for your business, these 8 are the most relevant to contractors. If you’re unsure which policies you could get, we suggest working with an insurance agent that is familiar with both contractors and the industries you serve. This will help you to maximize your protection while limiting your overall costs.

Contractors Insurance Costs

The main cost of contractors insurance is the combined annual premium of your various insurance types in your BOP. Average annual premiums can range from $350 – $10,000+ per insurance type. Premiums typically result in coverage up to $1 million per claim. However, you’ll also have to pay out of pocket on claims until you meet your deductible.

The table below represents the median costs of the most relevant types of contractors insurance, but your costs could vary greatly depending on your specific industry. Your exact premium will depend on what your insurer can offer you for your unique situation.

Contractor Insurance Cost by Type

Your deductible is the annual amount you must pay towards any claims you have throughout the year before coverage kicks in. This amount varies by insurer and perceived risk. The total amount of coverage per claim for most of these policies is $1M, with the exception of Worker’s Comp and a Surety Bond, which vary widely by policy.

Where to Find Contractors Insurance

There are typically two different ways you can get contractors insurance. One way is to go through a traditional broker who typically helps you shop multiple traditional nationwide insurers that offer more general types of commercial insurance. The other option is to use an online service like Next Insurance that specializes in contractors insurance.

Nationwide insurers are a good option but they may not be the most affordable due to the risk involved with the construction industry. On the other hand, providers experienced in taking on contractor risk can help you get coverage within 10 minutes and for a lower annual premium. Their costs are less because their proprietary application system is automated to assess your risk and get you covered quickly and seamlessly.

The amounts in the costs section above are a good thumb in the air for what your potential insurance costs are going to be, but it’s best if you get a personalized quote. Next Insurance specializes in offering policies tailored to contractors. You can apply online and get a quote within 10 minutes, with annual premium costs as low as $40 per month.

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How to Apply for Contractors Insurance

Applying for contractors insurance is similar regardless of the insurance types you choose to include in your business owner’s policy (BOP). Typically, an insurance broker will help you find insurers that offer the types of insurance you need and help you apply. This makes the hardest part of the process choosing which insurer is the right fit for your business.

The 3 steps when applying for contractors insurance are:

1. Gather the Right Information

Unlike applying for financing, you won’t be asked to submit a bunch of documentation when you apply for insurance. However, you’ll be asked to provide some basic information to verify your business and to determine how much of a risk you might be to the insurer. Before applying you should gather the following information:

• Business address
• Full legal business name
• Number of employees
• Estimated business revenue for the next year
• Number of years you’ve personally worked in the industry
• Number of years your business has been in the industry
• Details of any other insurance you currently have
• Details of your business operations (what you do daily and what risks are involved)
• Types and amounts of coverage you’re interested in

2. Find a Broker & Apply

You can use a broker to go out and find the best insurance deal. This makes it much easier for you during the application process, but it also could add some additional costs to your premiums. Whether you use a broker or not, you’ll need to provide all of the above information to potential insurers and see who can offer you the most coverage at the most affordable rates.

If you’re looking for a broker, you should aim to find someone who has plenty of experience with many different insurance companies. They’ll need this experience in order to give you confidence that they’ll find you the best cost with the best coverage. A broker that works exclusively with one insurance company isn’t likely to do either of those things and it’s better to find an independent broker.

There are many different insurance brokers and directories that can help you bundle the best insurance with the best insurance company. For example, online brokers like insuranceguys.com can help you find all the insurance types you need bundled together through reputable insurers like The Hartford and Allstate.

However, the costs might be higher and the coverage less with these brokers and insurers. Instead, you could engage an online provider like Next Insurance that offers liability insurance at a lower annual premium. It can take as little as 10 minutes to apply and you can get coverage within 1 business day.

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3. Sign Paperwork and Pay First Premium

Once you find the right broker and/or insurer for your business, you’ll need to agree to all of the contracts and sign the provided paperwork. When you submit these contracts, the insurer will typically require you to pay your first premium for the coverage to begin. Some will ask you to pay the full premium up front, while others will agree to quarterly, semi-annual, or even monthly payments.

Tips When Applying for Contractors Insurance

Applying for insurance can seem daunting because there’s a lot of paperwork and legal terminology involved and it can be confusing. Plus, you don’t want to get anything wrong that you’ll pay for later when you need coverage. We’ve put together some tips that can help you avoid small business insurance mistakes when you’re going through the insurance process.

Use these 5 tips when applying for contractors insurance:

1. Choose a Reputable Insurer

You don’t want to choose an insurer based solely on price, no matter how tempting it might be. They should be reputable, with at least a B+ ranking in the Lloyd’s of London syndicate.

According to Andy Wood, Head of Sales at Insureon,

“Make sure the company is financially stable. They need to be a reputable company, rated by AM Best or via a Lloyd’s of London syndicate at ‘B+’ or better. This is a solid indicator of their ability to pay any claims you might have. Also, make sure that the certificate of insurance is current (i.e. the policy effective dates cover the period of work) and that the certificate has been recently produced (which is an indicator that the policy is in-force)”

2. Monitor Your Insurance Per Project

You may need to change your coverages based on new projects you take on. If you start to take on riskier projects – or even projects in a new industry – then you may be required to change your policy. You also may want additional coverages based on the new type of contract work you’ll be performing.

Some insurers will let you add coverages that only cover specific projects, which will be short-term policies that won’t cost as much as others. This can be extremely beneficial if you decide to take on a one-off project of unique size and scope to your usual work. Make sure your insurer can offer you these ad-hoc insurance policies.

3. Shop Around

Just like small business financing, you might need to shop around and see what multiple insurers can offer you before you decide to move forward with a partner. This is especially true if you don’t have an insurer that has an extensive history covering businesses in your industry. When shopping around, look at the cost, coverage, as well as the reputability of each insurer.

4. Pay Attention to the Fine Print

Make sure you understand all the major provisions of your policy. It should be easy to find the information on your claims or when your premium payments are due. However, less known parts of your policy can have an impact on you as well.

For example, some plumbers won’t be covered for liability related to water damage. That seems like the exact coverage they’ll need to protect their business. These fine points of the policy may seem insignificant when you get the insurance due to the legal jargon that’s involved, but it can make all the difference later when you need it.

5. Evaluate Your Needs Regularly

As a business owner that takes on new projects constantly, your needs are likely to change from time to time. It’s best if you’re aware of these changes, and if you keep an eye on what insurance coverages are best for you at any given time. Reevaluate your needs whenever you have a big change in your business so that you don’t miss an opportunity to better your coverage.

Occurrence Policies and Claims Made Policies

Contractors insurance policies typically come in two forms, either occurrence or claims made policies. The difference between these two depends on how coverage is triggered and how claims are made. Occurrence policies are most common and are the best option while claims made policies are less common.

1. Occurrence Policy

Occurrence based policies are the traditional types of policies. Essentially, a claim will be paid out any time it is filed, as long as the occurrence was during the policy period. This is true even if the claim isn’t filed until years later. Many insurers will charge more for these policies than claims made policies because the risk is more unpredictable and the coverage better.

An occurrence policy is always easier to manage and safer for the insured than a claims made policy and is therefore the best option. As a small business owner, you have a lot of paperwork to deal with and unexpected things happen all the time. It’s nice having an insurance policy that you know you have coverage for during a set period of time, even if you don’t make a claim until much later.

2. Claims Made Policy

A claims made insurance policy carries a much different claims trigger. Coverage for any claims only occurs if and when the claim is actually made and not when the incident itself occurs. This means that you typically have to make a claim during the policy period itself. Specifically, under a claims made policy, you’re required to make a claim during one of the three allowed timeframes below:

While the Policy is Still in Force

This is pretty straightforward. If your policy hasn’t expired and has continued without interruption since the day of occurrence, then your claim is covered.

During the 60 Day Extended Reporting Period

This is the first 60 days after the policy has expired. For example, if your policy expires on March 1st, then you can file a claim until April 30th.

During the Supplemental Extended Reporting Period or Tail

A tail is an extension of your policy that you can purchase within the 60-day extended reporting period. The endorsement essentially says that the insurer will defend and pay any claims that occurred during the policy’s effective dates. In exchange for this, you’ll have to pay an additional premium. It essentially transfers your policy to an occurrence based policy

Claims made policies have become increasingly more popular with insurers over the last several years because it limits their exposure if you don’t stay on top of your claims. It’s important to know what your policy is before you agree to it and implement a system afterward that helps you file any potential claims quickly.

If your insurance provider offers an occurrence policy option then you should take it. The one exception might be if there are additional costs associated with it. If that’s the case, then you’ll need to weigh the extra expense against the risk involved with potentially missing your claim window.

Benefits of Contractors Insurance

Contractors insurance is, to some degree, required by both the state you live in and the customers you work for. Some require it as part of your contract agreement. However, it has many benefits for both you and your customers and is always something you should consider, even if it’s not required.

Contractors insurance has 4 main benefits:

1. Protects Your Business From Employee Injuries

The right contractors insurance protects your business from any costs associated with employee injuries on the job. Covering the expenses of injured employees can be a huge long-term cost if you don’t take proper precautions before the injury occurs.

Without the right worker’s compensation insurance, you could be on the hook for hospital or medical bills for years to come, depending on the nature of your business and the extent of the injury. Some general liability coverages will include protection for employees and other workers who are working on your project.

2. Protects Your Business From Performance-Related Lawsuits

The right general or professional liability insurance can also include coverage for your own work as a contractor. You don’t want to be held liable for a mistake and have to sell your own assets to pay for it. Instead, insurance can cover ongoing lawsuit costs while you continue to take on additional projects.

3. Protects Your Business From Mistakes of Subcontractors

Most contractors, at some point, have to bring in subcontractors to complete a portion of the project. In construction, it’s not uncommon to work with many different subcontractors on a single project. You typically can’t oversee their work 100% of the time, and you need insurance to protect you from any mistakes that they may make.

It could take awhile for a subcontractor to pay for damages once a mistake occurs. You’ll want to make sure you can take care of the mistake with your customer without worrying about when the subcontractor is going to pay for it. This is where your own general liability insurance can come into play – paying these costs pending any potential damages you sue your subcontractor for.

4. Helps You Qualify For Larger Projects

Most large construction projects won’t even look at your bid if you don’t have the necessary insurance. These customers want their own peace of mind to know that they can file a claim and collect damages from your insurance provider if you damage their property. Without proof of that insurance coverage, your bid will probably just be thrown out.

Limitations of Contractors Insurance

Before you agree to terms on any insurance coverage, you should know what the limitations are or what the insurer won’t cover. For example, the limitations on your general liability coverage will generally help you know what other types of coverage you may need. Most general liability insurance won’t cover medical expenses for injured workers, flood damage, or fire damage, meaning that you should get workers comp (among other insurance types) to cover the limitations.

Even the things that are covered will have limitations. Your insurer will limit you to a certain dollar amount for each occurrence or individual claim on your policy. This is why it’s important to shop around and find the best coverage for the lowest cost.

Bottom Line

Getting the right types of contractors insurance is important to the creation, growth, and sustainability of your business. You can protect your business from anything that may go wrong during a project so that one mistake doesn’t put you out of business. The key is to make sure you maximize your coverage while limiting your yearly insurance costs.

Next Insurance can give you a quote within 10 minutes that is catered towards your specific industry, providing only the coverage you need. Their costs start at $40 per month for up to $1M of General Liability coverage with a deductible between $0-$500. You can apply online and get proof of insurance within 1 business day.

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