(Written by Ray Gee – NMHBA President – Originally published in the September 2014 Housing Journal)

Contractors Insurance 101

Over the past two decades, I have often questioned what insurance coverage I needed and what was actually covered in the policies I was paying for. For most contractors, insurance is one of the better methods of controlling their cost of risk, and understanding it is imperative.

I have always turned to Emily Mascarenas for answers to my questions. Emily is a Vice President-Client Executive specializing in Contractors insurance for Hub International Insurance Services. I asked Emily to contribute to this article in order to address specific questions and concerns. What follows is a discussion of these issues.

Will general liability cover consequential damages at the job-site caused by error of contractor? A general liability policy is intended to cover bodily injury or property damage caused by occurrences arising out of the work that the contractor is performing. There is a separate policy available for contractors to provide coverage for errors caused by the contractor which is called errors & omissions liability. It is important to understand that the general liability policy does not provide coverage for the error, but could pay for the resultant damages caused by the error. For example, if a roof installed by a sub-contractor leaked and caused damage, the repair to the roof is not covered, but the consequential damage caused by the roof leak could be covered under the general liability. Because policies can differ, a contractor should always read their specific policy to understand the conditions, and coverage exclusions, that dictate the types of losses covered.

Can you explain the term “occurrence”? Most general liability policies are written on an “occurrence form”, meaning the coverage provided under the policy is “triggered” when the claim (bodily injury or property damage) “occurs”, not when the job was performed.

Some people believe that a builder’s risk policy will pick up damages to the house under construction. How does that work? The builder’s risk policy is intended to pay for the damages caused by a covered peril as defined in the policy. It’s very important to understand what perils are included in your policy. For instance, some builder’s risk policies only provide coverage for fire, but do not include theft of building materials. The premium for a straight fire policy is lower than a policy that provides coverage for a number of other perils, including theft. A builder’s risk policy does not provide general liability coverage for the contractor or the owner. Both the contractor and the owner should have a separate liability policy for the job site.

Why do insurance companies require the general contractor be named on a sub-contractor’s insurance policy and list them on a certificate of insurance as additional insured? If a sub-contractor causes damage or injury, most of the time a general contractor will be included in a lawsuit. In such a case, the general contractor wants the sub-contractor’s insurance to defend them for the sub-contractor’s actions.

But wouldn’t the general contractor’s insurance cover her/him? Possibly, but if the general contractor wasn’t at fault, it’s best to keep her/his insurance coverage for claims that are the result of their own actions.

Some insurance companies are also requiring that contractors use contracts with each and every sub-contractor. Is this really necessary? Some companies have limitations of coverage or exclude sub-contractors in their entirety. It is strongly recommended that contracts are used between general contractors and sub-contractors and there should be a clause about the insurance requirements of minimum limits to match whatever the general contractor carries. It should also include the additional insured requirement as well.

I realize that we’ve only touched on a few of many issues we’ve discussed over the years. However, could you give me a summary of your recommendations to contractors concerning their own liability exposures? Insurance for contractors has become a specialty item. There are so many details to ensure that contractors are adequately insured. I started in the business in 1978 and there were several insurance companies to choose from willing to provide general liability coverage. Because of all the product defects claims, many insurance companies have chosen not to insure general contractors at all.

At the very least, I recommend that all contractors take the time to discuss their specific insurance needs with their insurance agents – just like you have. You certainly don’t want to wait for a claim to occur to find out what exclusions your policies contain.

As I mentioned in my opening comments, insurance is an important component of risk mitigation. Understanding the details of insurance requires an expert, and I strongly recommend that all contractors investigate their coverage thoroughly. I rely on Emily as my agent, but I suggest you reach out to your agent and have that conversation with them if you haven’t already.