Contractors & Insurance: A Simple Guide to Managing Complicated Risk

"Understanding your business from the perspective of how to minimize your Exposure to Risk is key to the longevity of any business. For Contractors, this is no exception. Whether you are a General Contractor or Subcontractor of any type, understanding the Liability you assume by performing your operations is key when bidding on any job." So we asked our friend Christopher from Reveal Insurance Group to help break down some of the insurance myths surrounding Exposure to Risk for Contractors like yourself. 

The first step to developing this understanding is aligning your business with a quality Insurance Agent. So what makes an agent quality? These four characteristics of an Insurance Agent are vital to consider when going through the selection process:

1. Knowledge - Often times Insurance Agents are brought to your attention by referral. Just because the Agent being is referred to you by another individual or firm, does not always mean that they will best handle your particular needs.

• Begin interviewing the prospective Agent by asking him specific questions regarding your particular operations, and the insurance needs relative to your operations.

• If the Agent is not one step ahead of you during your conversation about your operations and what the structure of your insurance coverage should resemble, it is time to move on.

2. Responsiveness – Ask the prospective Agent what type of computer systems they use to run their Agency. If the agent is not processing the insurance documents on your behalf electronically, this will undoubtedly slow your business down. 

• An example of this would be needing to increase coverage limits relative to the contract you are required to meet. If you are unable to meet this requirement prior to starting work, or are unable to provide proof of the necessary insurance limits, this may prevent you from collecting the funds for the work performed.

3. Insurance Carrier Relationships – Always ask what Insurance Carriers the Agent/Agency is appointed with relative to your business before placing your Insurance Coverage with them. Often times, the Agent works with a multitude of Insurance Carriers that insure General & Subcontractors. Be sure the agent can name at least three off the top of their head.

4. Understanding Your Business – In most instances, the Agent you buy your insurance from is more important that the Carrier actually insuring your business.

• Making sure the agent has the same basic characteristics you have as a consumer will determine the quality of the Agent you are working with.

• For example, consider the thought process you use when buying a car. Is the agent able to mimic or replicate the same scrutiny you use when making a large significant purchase? Because the Agent is obtaining coverage on your behalf, be sure the agent is doing so in a manner that directly reflects how you would buy the coverage if you were buying it yourself.

Secondly, understanding what Liability you are assuming by acting as a General Contractor & Subcontractor is vital to the longevity of your business.

In the case of a subcontractor, often times the contract you enter exposes your limits of insurance before that of the General Contractor. This situation is often referred to as “being held primary.” This contractual relationship gives the General Contractors great power over who is held responsible first in the event of a claim.

Another point of consideration when bidding on a contract is the additional liability you assume by performing work for a certain General Contractor or company.

The contractual environment for Subcontractors today is heavily in favor of the entity accepting bids for a particular job being shopped. Many times, depending on the type of work you perform and who you perform it for, some General Contractors or other direct entities may require you agree to the following contractual language:

1. Sole Negligence – Often times entities accepting bids for jobs will write language into their work contracts that requires you as the Subcontractor to assume the Sole Negligence of the entity employing your services. In this instance, by agreeing to pick up the Sole Negligence of the employing entity, you are assuming fault for their actions regardless of your own involvement.

2. Primary Non-Contributory – This type of language is in reference to the example above of the Subcontractors insurance limits “being held primary” before that of the General Contractor. Understanding the entity you are allowing to make your limits primary before their coverage triggers can be the greatest indicator as to how vulnerable the limits you purchase are to the employing entity.

3. Waiver of Subrogation – Waiving your right to subrogate against the employing entity is often required when accepting a job. In essence, you are forgoing your right to pursue legal action against the employing entity should there ever be a claim where their involvement may or may not have led to a claim. Always be conscience of who you are accepting a job for and their operations. You want to keep the work you perform separate from the employing entities operations as much as possible. However, given the contractual environment of today, this is often required and difficult to remove this contractual language.

4. Blanket Additional Insured – This coverage requirement enables anyone and everyone requesting to be named as an Additional Insured by written contract the right to this coverage status on a blanket basis. Often times when a Contractor is accepting a job, this is another requirement that is pretty standard when accepting work orders from entities much larger than your own. In this instance, you are opening up your Limits of Coverage to those being named as Additional Insured.

Contractual language is often times a moving target, and can sometimes be negotiated. Anytime you are considering a job, be sure to have your Agent review the Insurance Requirements and Liability you are assuming by accepting this particular job. Having this conversation with your Agent will enable you to be prepared and furnish the proper insurance limits and documents needed to accept a job. The Agent will also be able to give you an idea as to what the cost is associated with the additional coverages needed. This estimate will immediately reveal to the General or Subcontractor whether or not this bid is worth the associated insurance costs.

Sole Negligence, Primary Non-Contributory, Waiver of Subrogation, and Blanket Additional Insured are merely a  few types of liability a contractor can assume by accepting any given job. When confronted with these types of Contractual Liability, having a quality Agent who can manage these requirements effectively for you is paramount. Your job as the Contractor is to perform the work you accept to the best of your abilities. It is your Agent’s job to manage the risk you take on by accepting work, and explaining to you what liability you assume by performing your operations for any given entity. Hold your Agent to the standard of your business. 

The quality of your Agent will reflect the quality of the coverage they obtain for you. Insurance today is very much a commodity.  Finding the right Agent who can service your Risk Management needs is everything when purchasing insurance.

For more information or any questions you may have, please contact the blog author - Christopher Bufkin, President, Reveal Insurance Group, LP - www.revealinsurancegroup.com / questions@reavealins.com