How to Decide How Much Contractor Insurance You Should Have

You know you need insurance. But how much is enough? One one hand, you realize the value of protecting your investment into the construction business you are building, but on the other hand, you don’t want to tie up too much cash in an intangible asset like insurance, either.

When you have employees to pay, new equipment to purchase, and a work truck that is on it’s last leg, freeing up operating capital is essential. The best way to do that is to pick the right insurance coverage for your contractor business, at the most affordable rates possible. And to walk away from policies that you may not need right now at all.

Here are 10 questions to ask yourself to determine how much contractor insurance you should have to fully protect your business.


#1. Are you a Sole Proprietor?


Why does your business structure matter? When you are a sole proprietor, you may be putting your personal assets at risk when you do business. According to the IRS, a sole proprietor is “personally liable for all financial obligations and debts of the business.” Which means if someone gets hurt while you are doing your work, and brings a lawsuit against you, you are personally responsible for the resulting cost of your defense, settlement, or judgements against you.

A general liability policy is a must-have policy for many business structures, such as LLCs and corporations, but this basic insurance policy is even more crucial for sole proprietors whose personal assets are on the line, such as contractors.


#2. Could You Afford a Lawsuit?


Then again, maybe you don’t need general liability insurance after all. If you have enough cash reserves to afford a lawsuit, or multiple lawsuits, you wouldn’t need the protection of a general liability policy.

Generally, general liability will cover the expensive costs associated with a lawsuit, which can include court fees, lawyer’s fees, defense costs, settlements, and judgements. The average cost of a slip and fall accident, for example, is about $20,000 for a business owner. As a contractor doing business in a high-hazard industry, you could even face multiple lawsuits in a single year. The expense of defending yourself is often high, whether you are at fault or not.

Some people have the cash on hand to deal with emergencies, accidents, injuries, or lawsuits. For these people, paying tens of thousands of dollars for a legal defense is no big deal. But if you don’t have that kind of cash on hand, it is probably a good idea to keep your general liability policy current and up-to-date.


#3: Do You Have a Website or use Social Media?


The process of marketing your services as a contractor has changed drastically in the last few years. Today, the most successful construction professionals are advertising their services on websites, their own blogs, and social media accounts.

If you are taking advantage of the amazing benefits of the internet to market your services, however, you are putting yourself at risk. Unless you have a team of lawyers approving every post, tweet, or pic that you send out, you may accidentally be responsible for an advertising injury. If someone feels that you have violated their copyright, or used your marketing platforms for slander or libel against them, they could sue.

Once again, a general liability policy is the perfect tool to transfer the risk of an advertising injury away from your business. If someone sues you as a result of a tweet or blog post, your general liability policy may cover the legal costs of your defense.


#4. Who Works for You?


Do you have employees on your team, or are you a one-person-constructing-machine? If there are workers helping you get the job done, they are putting their health and safety at risk for your business to be profitable. In a high risk industry in construction, that could even mean loss of limbs, or worse… loss of life.

If you have employees, a workers’ comp insurance policy will provide them with benefits if they should happen to become injured or ill as a result of doing their job. Not only is this the right thing to provide for the men and women who work hard for you, in many states it is also required by law.


#5. Do You Drive a Vehicle for Work?


How do you get yourself, and your tools, equipment, materials, and supplies, from project to project? For most contractors, a work truck or other vehicle is the asset they rely on most. If your personal vehicle doubles as your work vehicle, you may not even realize that it needs more protection than your personal auto insurance may provide.

When you use a vehicle as part of your business to get the job done, you need commercial auto insurance to protect you from the distracted drivers, teen drivers, and other hazards out on the road.


#6. Do You Provide a Vehicle for Your Workers?


When you ask your employee to take your truck and pick up a quick lunch for the crew, drop off some materials at a project site, or run to the hardware store for supplies, you are putting your vehicle and your worker at risk from the hazards of the roads.

Since your personal auto policy most likely won’t cover accidents when your employees are using your vehicle for work purposes, you may want to consider using commercial auto coverage to transfer this potentially high cost risk away from your business.


#7. Do You Own, Rent, or Lease Your Equipment?


You may be surprised to hear that the tools and equipment that you use on the job can be protected with contractor insurance, whether you rent, lease, borrow, or own them outright. Sure, some of your tools could be replaced without worry, such as low-cost hand tools like screwdrivers or hammers. But your high-value equipment, such as compressors, generators, welders, or bobcats could be more costly to replace if something went wrong.

Because the tools and equipment you use is constantly on the move from project site to project site, it needs a special type of insurance to protect it. That’s where inland marine insurance comes in. Unless you are comfortable paying out of pocket to replace your highest value tools and equipment if they were damaged or stolen, you may want to consider adding inland marine to your existing insurance policies.


#8. Do You Leave Materials and Supplies on a Project Site?


Insurance is there for the worst-case scenarios, and to protect you from the truly unexpected events. Events like an electrical fire that burns down most of a project that you are working on, destroying your progress, as well as the material and supplies you left on site. And you most likely leave the materials you need to complete the project on the site more often than not. Not only could the cost of replacing materials put you over budget fast, but the cost of clearing the damage and rebuilding the ruined parts of the project are almost alway guaranteed to eat away any opportunity for profit.

When an unexpected event such as a fire, extreme weather, or even vandalism destroys the material and supplies you’ve left on a job site, a builders risk insurance policy may protect you from paying the high price yourself.


#9. How Much Cash Do You Have Available?


Cash is king, and for contractors who want to reinvest their hard earned cash in better equipment, more employees, and more marketing, cash is essential for growth. While you are determining how much insurance you need, your available cash flow should be a consideration. It’s always a good rule of thumb to have enough cash on hand to pay for your insurance deductibles in the event that something goes wrong. But what if something went really, really wrong? What if a claim exceeded your insurance policy limits and you were responsible for the additional amount?

For contractors who don’t want to worry about paying for claims that exceed their policy limits, an umbrella insurance policy is an easy way to increase the limits on all of your contractor policies with one affordable monthly premium.


#10: Have You Recently Met with Your Insurance Broker?


The easiest way to decide how much insurance you should have is to meet with your contractor insurance specialist to discuss your current business situation. The number of employees you have, the type of work that you do, the projects that you work with, and the equipment you use are all important factors in determining the best insurance to best protect your business. And nobody knows how to get you the best coverage at the most affordable rates better than your agent.

Bonus, by keeping your policies up-to-date or adding missing coverage, you could make your contractor insurance even more affordable with discounts on premiums. Your broker can give you even more ideas on how to save money on the insurance coverage you need.

Can you afford to pay for a lawsuit, car accident, worker injury, to replace tools or materials, or clean up after a disaster? For most contractors, the answer is no. And the lucky few who could afford to pay out of pocket for these kinds of risks would almost alway prefer to reinvest that cash back into their business instead. The best way to protect your assets and keep your cash in play is to protect your contractor business with the right insurance policies at the most affordable price.