Contractors General Liability Insurance: 4 Tips to Avoid Coverage Surprises
General liability insurance is one of the first types of policies you’ll need if you’re starting a new business. At Clinard Insurance we are seeing a lot of new small businesses. Starting your own company is popular these days with the layoffs we are seeing in our economy. Often the best option is to pursue something you love to do, which is why we’re seeing a lot of people starting new businesses around their construction skills. But just because you love to build things doesn’t mean you know the best way to protect yourself and your business from lawsuits.
Here are some tips on pitfalls to avoid when buying general liability insurance.
Choosing the right agent. The first place people usually go to get their business insurance is the insurance agency that handles their home and auto insurance. In some cases this will work fine. But the risk is that your current agent may be licensed to sell you general liability insurance on your new business, while actually having very little experience evaluating the perils and risks of your specific type of business. I suggest you go and find an agent who specializes in insuring other small businesses like yours. Ask your competitors who they used. At Clinard Insurance we have a niche specialty in small contractors and we speak your language and understand your needs. If your agent doesn’t specialize in your business, I suggest looking for one that does.
Type of Policy of Claims Made or Incidents: Construction claims policies became popular in the mid-1980s and have been around ever since. The promise of these policies was lower rates, but to what harm in the long run? In some cases there is no cost savings. Claims policies made for a contractor are the worst possible policy he can buy. Let me explain: Made claims policies allow you to claim your policy only during the year in which they are in effect. Contractors have claims in the future, not always just in the same year the project is built! Also, if you want to leave that company and go to another, you will have to take out additional insurance that covers you for the next 10 years… that’s right, 10 years! Because? Because the law allows clients to file a claim for construction problems up to 10 years after the project was completed.
An example:
You build a new addition to the room, everything goes smoothly and you and your client are very happy with the end result… 4 years later, your client calls you and says that the roof is leaking and water has entered the house and ruined his new $25,000 grand piano. He expects you to repair the ceiling, drywall, wallpaper, carpets, and of course replace the grand piano…
A made claims policy will not allow you to file a claim 4 years later unless you have stayed with the same company the entire time. If you intend to change companies after having a casualty policy, you must make a decision. If you want protection for any claims that have not yet occurred, but will occur in the future, you will need to purchase “tail” coverage. This coverage will extend the time in which you can file a claim. And tail coverage isn’t cheap.
If you decide not to buy the “tail” you will not be able to report a claim against the made claims policy. And to top it off, some companies do not offer the 10-year extension.
So… When your made claims policy is submitted for renewal, you must decide:
- Do I leave the company and pay for the additional insurance coverage for the next 10 years, or am I left without protection?
- Do I stay with the same company? Your prices in the new year may stay the same or go up considerably.
- Should I switch to another company that has better rates and coverage?
This limits the market available to you and makes it more difficult to accept a better offer from another insurance company. Made claims policies may work in other industries, but for contractors they are a disaster. Take some time after reading this report to see if your current policy is an incident form or a claim form…
Insurance company ratingIt is up to you to do your due diligence and ask your agent about the financial health of the company from which you are purchasing your general liability insurance. As the advice above implied, sometimes claims can be long overdue and you need to know that your company can pay a claim for you 10 years from now. Use only A-rated or higher insurance companies to protect your business.
Exclusions, understand them clearlyBe sure to take the time to ask your agent about the policy’s exclusions and what they may mean to you. Here are some exclusions contractors should consider when purchasing a general liability insurance policy:
Pesticide, Herbicide and Fungicide Exclusion, Labor Practices Liability Exclusion, XCU Exclusion, Contractors Warranty Exclusion, Professional Liability Exclusion, Asbestos, Independent Contractors. If you don’t know exactly what this means for you in your policy, contact your agent and get the help you need to understand it clearly. This can change the way you run your business.
subcontractorsMake sure you understand how your policy treats subcontractors. Are you covered if you do not have insurance or it is not enough for the loss? How much coverage should you require from your subcontractors? How often should you obtain certificates of insurance? How can you be sure that the secure certificate is legitimate? (I’ve seen fraudulent certificates for sale on eBay before.) If you’re unclear on the answers to these questions regarding your business and general liability policy, you should call your agent right away and get the answers you need to get a good night’s sleep.
As you can see, buying general liability insurance isn’t as simple as calling your agent and asking for a quote. You need an experienced professional who understands policy forms and your business. At Clinard Insurance we specialize in helping small contractors navigate the dangerous waters of the insurance world. If we can help you further, or if you would like more information about Clinard Insurance Group, please visit our website.