Liability Insurance for Contractors: Understanding the Basics
Liability insurance is the foundation of your contractor insurance coverage. It’s the most basic coverage, the one you simply can’t do business without, and the policy which you can build on to further reduce your business risks and strengthen your protection.
If it’s been awhile since you’ve visited the issue of liability, or are just starting off as a new contractor, here’s a return to the basics of liability insurance: what it is, what it does, and why you need it.
What is Contractor Liability Insurance?
Liability insurance protects contractors from the risks of potential lawsuits that could arise from accidents, injuries, illnesses, or damages to other people. Liability insurance is a safety net for your construction business, because no matter how much you prioritize safety on a project site, there’s no way to tell if or when someone might sue you.
Why Contractors Need Liability Insurance Coverage
Let’s face it, you work in a high-risk industry. And you often times take this risk straight to your clients. If you specialize in new construction projects, there’s a risk that your finished product could cause an injury down the line. If you specialize in renovations or repair work, you could be taking dangerous tools and construction equipment to the home of a client, putting them in harm’s way.
And you never know when a passerby might trip over an extension cord attached to your favorite hand tool, or what kind of injury someone could sustain if you happened to drop a roofing shingle from ten feet overhead.
Risks to other people (third-party persons, aka non-employees) are part of doing business for any independent contractor or small business owner. But when you are a contractor, subcontractor, or construction business owner working, the risks intensify.
General Liability for Contractors
Contractor general liability insurance, which is also known as commercial general liability insurance, offers coverage for the kinds of potential lawsuits that you could face as a contractor.
Did you know? The average cost of a trip and fall accident to a business owner or independent contractor is $20,000.
That’s one client who trips over a 2×4 that you’ve left on the ground, one passerby who gets tangled in an extension cord, or one person who slips on a plastic sheet left carelessly on a slippery laminate floor. Whether you are actually at fault or not, could you afford the costs of defending yourself in court?
When you have general liability insurance, you don’t need to have tens of thousands of dollars on standby to cover your legal defense.
What General Liability Covers
When you think of what your general liability covers, think “damage and injury to other people”. Third-party persons are those who aren’t your employees; they are your clients, the people you do business with, or even complete strangers.
What kind of damage is covered to these “other people”? General liability covers:
Property damage
You accidentally run your excavator through the neighbor’s fence, and across their (newly installed) landscaping. Oops.
Bodily Injury
Your ladder falls on a client who is walking past, leading to a broken leg, missed work, and some pretty hard feelings.
Illness
The paint that you selected for the interior of residential home is causing your client to experience dizziness and headaches which are preventing them from going to work.
Reputation Injury
You proudly put up a website to advertise your services as a renovation specialist, and blog about the other guys in town that clients should steer clear of. They find out, and lawyer up.
Copyright Infringement
The marketing flyer you are distributing is a little bit too similar to a competitor’s, and they aren’t flattered by the imitation.
In all of these situations, the “other person” (third-party) could very well bring a lawsuit to your front door.
Your liability insurance is there to pay for the costs associated with a third-party lawsuit, such as
- Lawyer’s fees
- Evidence expenses
- Settlements
- Judgements
- Miscellaneous court fees
Your liability coverage may even cover the costs of time away from work if you need to meet with lawyers or be in court.
What General Liability Doesn’t Cover
Your liability insurance isn’t a catch all. There will be situations where general liability isn’t enough. Your liability insurance may not cover:
- Injuries or illness to your employees
- Damage to your own property
- Economic damages (financial losses) to a third-party
- Data breaches or identity theft
General Liability Insurance vs Professional Liability Insurance
There are two different liability policies that you may want to consider as a contractor, general and professional. General liability doesn’t cover a financial loss or economic damages to a third-party, but that’s exactly what professional liability insurance does.
Let’s say that you completed a residential project for a client, constructing a small dwelling detached from the main house. Your clients have big plans for this tiny cottage; they want to rent it out to the vacation-crowd that swarms their town every summer and fall. Unfortunately, you and the client have had problems every step of the way with this project.
Progress slows to a crawl as you argue over change orders and costs, then stops altogether. Before you have a chance to smooth things over and get the project back on track, the client terminates your relationship, and brings in a new contractor to finish the job. Your client also phones a lawyer, because the project wasn’t completed in time for the summer tourist season, and the new contractor is going to charge him even more than you did to finish the job.
When you client thinks his economic loss is a result of your work, the lawsuit would only be covered by a professional liability policy. General liability wouldn’t protect you from the high cost of a lawsuit for your clients alleged financial losses.
Liability insurance is part of doing business as a construction professional. It offers you protection from a risk that you often can’t do anything about: the risk of a third-party lawsuit. There may be ways you can try and avoid general liability claims, but there’s no guarantee you can always prevent accidents from happening.
As a contractor, there are various insurance policies that you can put to work to protect you from losses, but your contractor insurance coverage will always start with general liability. Depending on the scope of work you do, how large your business operations are, and what other assets you have to lose, you probably want to consider adding additional policies to your liability policy. But with the strong foundational protection of liability coverage, you know your business is protected from the uncertainty of “other people”, and the strong likelihood that one day a lawsuit may find its way to you.
