ContractorsLiability.com shares tips for avoiding common contractors insurance pitfalls.
Insurance cannot be overlooked—otherwise, you may end up owing much more than expected. ContractorsLiability. com is a full-service brokerage, meaning they represent multiple insurance companies and shop for clients for their customers.
They also work with insurance companies that give management credits for using green techniques. “It shows you’re trying to do things right,” says John Brown, president of ContractorsLiability.com.
But as a contractor, how do you tackle insurance policies overall? “The thing with heating and air conditioning is that we have insurance companies that will take contractors without prior insurance because it is a lower risk type of business, whereas they would not take roofing or heavy construction,” Brown says. HVACR contractors can usually easily get in with a preferred insurance company, for instance. But even with this head start, there are many things to consider when you’re getting insured.
1. Collect certificates of insurance.
No matter how busy your day-to-day business gets, it’s important to remember to ask subcontractors for their certificates of workers’ compensation insurance to ensure you don’t end up owing extra money. “Good businesses are militant about collecting certificates of insurance for the people they hire,” Brown says. He suggests creating a rule where no one gets paid until you receive a certificate of insurance from all subcontractors.
Insurance companies audit contractors to make sure their subcontractors have workers’ compensation insurance since it’s illegal to not have it in most states. If the people on your payroll don’t have workers’ comp, technically you would have to pay any claims made.
When you’re audited, the insurance company will ask for the certificates of insurance naming you as an additional insured. If you forgot to get the certificates and your subcontractors weren’t insured, you would be responsible for covering the costs for their insurance—even if no one got hurt on the job.
And the insurance company will make you pay the premium rate since they were at risk when you hired an uninsured worker. “Another bad thing about that is sometimes the amount you paid your subcontractors included the cost of parts, but the insurance company will still make you pay the total, even though the only real risk was the labor,” Brown says.
Planning ahead goes a long way. If your subcontractors don’t have workers’ comp insurance, Brown says one option is taking a cut out of their pay to cover the cost of insuring them. “You can say, ‘Hey, I need to take 20% out of what I pay you because I’m going to have to be covering your insurance,’” he says. “If you price for it, you can pass that extra cost down to your customer. If you don’t price for it, it comes out of your pocket.
2. Focus on risk management.
Insurance loss control consists of risk management techniques that help reduce the likelihood of claims being made against your insurance policies. Both contractors and insurance companies benefit from loss control—insurance companies cut back on the odds of having to pay out claims and dip into their profits, and policyholders can lower their premiums
Insurance companies may even offer incentives to manage risks or provide customized loss control plans. Loss control consultants can help examine and understand what leads to workplace injuries. Setting up rules and guidelines can help prevent claims from happening.
“Most claims can be avoided in workers’ compensation,” Brown says. “It’s important to really think about workplace safety.” Brown points out that large companies often have rules where if you ever feel uncomfortable or unsafe at a job site, you’re allowed to walk off. Companies also set rules to avoid injury, like the two-person lifting rule for objects more than 50 pounds or requiring workers to take preventative measures like wearing back braces or protective eyewear. Incentivizing your employees to be safe on the job can help you manage risk, too. “Employees can share in the profit of avoiding workers’ compensation claims,” Brown says. “For example, you can make an incentive plan if your team has a clean record, every member may get $500 at the end of the year.”
3. Choose an agent who is experienced in bonds.
When it comes to bonds, there’s a widespread misconception that bonds are difficult to get. But the truth is, when you’re working with someone who specializes in bonds, the process goes much more smoothly, says Tom Hester, bonding specialist at ContractorsLiability.com. “When you’re dealing with your local agent, the guys who don’t do a lot of work in bonds, it’s kind of like hiring somebody that isn’t very familiar with HVAC work to do HVAC work,” Hester says.
Many people think the bond process moves at a snail’s pace and requires excessive paperwork, but that doesn’t have to be the case. “There are some horror stories where your local agent will get your application and you need it for a job right away, but they sit on it. They don’t realize the urgency,” Hester says. “But if you’re working with ContractorsLiability.com, we have our own underwriters here that we have direct access to. We can turn around bonds in less than a day in most situations.”
When you work with an agent who is inexperienced in bonds, you may miss out on jobs because of the wait. On top of that, inexperienced agents may fill out your application incorrectly, requiring you to jump through a lot more hoops. “It’s like the medical insurance board—once they have that wrong information in their system, there’s no real way to counteract it, and that can cause your bond to be declined,” Hester says.
For bonds more than $500,000, insurance agents usually require financial statements from the past few years and good credit. However, if you have a bond under $500,000, a credit score of above 700, and no bankruptcies, ContractorsLiability.com can get you a bond pretty much the same day. “All we need is your social security number and your signature. We don’t require any financial statements or anything like that,” Hester says.
4. Personal credit scores matter.
Your personal credit can affect your insurance rate by as much as 50%, Brown says. If you have excellent credit, you end up getting a better rate, and vice versa. “I think a lot of people may be shocked by that. It’s been that way in home and auto insurance for 10 or 15 years, but it’s relatively new to the contractor market.”
Better credit scores show your insurance company you are a trust- worthy client. If insurance companies know the owner has good credit, they know the owner is going to generally meet the claims.
But don’t worry too much if your credit score isn’t very high—not all companies change rates based on credit scores. “If you have bad credit, we have companies that don’t check credit,” Brown says. “However, if you have good credit, we have companies that do check for credit, and you can be rewarded for that.”
5. Consider getting professional liability insurance.
Professional liability insurance is becoming more common among contractors—in fact, many architects require contractors to obtain it. It’s not terribly expensive and it can save you a lot of money in the long run.
Also known as errors and omissions coverage, professional liability insurance protects contractors from common risks they face, such as claims, damages, and defense costs. For instance, if you tell someone they should buy a certain HVAC unit and it doesn’t fit in the space, you could be potentially sued for that, Brown says. But with professional liability insurance, you don’t have to pay for your own defense out of pocket.
ContractorsLiability.com offers professional liability insurance in all 50 states. “We’re a brokerage and can shop for you, making sure you’re getting the best price you can get, and the best discounts,” Brown says.