Contractor Insurance Plus Risk Management: A Perfect Pair

Contractor insurance and risk management are two sides of the same coin. Relying on just one won’t fully protect your business from financial losses; they work together to keep your assets safe from the unexpected events, accidents, and injuries that threaten your business.

Let’s take a look at the way you can combine these two into an impenetrable fortress of protection for your construction business, whether you’re a single handyman, an artisan tradesman, a general contractor, or the owner of a construction company.

A Risk Management Recap

Risk management is not something best left to huge corporations with entire divisions of employees dedicated to crunching numbers and risk calculations. It is a practice that can benefit every business and business owner, even if you are a sole proprietor operating your business out of the living room of your own home.

Risk management is the process of identifying potential financial risks to your business, along with procedures to avoid or minimize their impact.

Chances are, you probably have your own risk management strategies in place already, even if you don’t label them as such. Insisting that your employee wear a hard hat on the project site? That’s risk management. Driving safely to avoid accidents? You guessed it. Risk management.

Here’s how you can put risk management to work protecting your business.

Identify Construction Risks

When you work in the construction industry, there are unique risks you face as you do business, such as:

  • Employee safety and hazards
  • Liability from construction defects
  • Project changes
  • Budget Overruns
  • Site Conditions
  • Contractual risk

If you run into project delays, cost overruns, claims, litigation and legal fees, you can often kiss your profit margin goodbye on even the biggest projects. Legal fees and judgements don’t just affect your business assets, either. If your small business is set up as a sole proprietorship or partnership, your personal assets could be at risk, too.

Measure and Control Construction Risks

What would it cost you if an employee were injured on the job? What would happen if your work truck was smashed in an auto accident and needed to be in the shop for a long time for repairs? Could you afford to stop midway through a project, and re-do all of the work you’ve just completed? Determining the impact of risks to your business is known as measuring the risks.

Controlling the risks you face means putting processes and procedures in place to reduce the likelihood of them happening. Like adhering to safety regulations, and insisting your employees make workplace safety a priority. Or putting your phone away while you drive, to reduce the risk of an auto accident.

But even though you can try to minimize some risks from happening, you can’t avoid all of them altogether.

That’s where the other side of the coin comes into play.

Transferring Risk with Contractor Insurance

When you can’t eliminate a risk completely, you can transfer the financial impact of that risk away with insurance. For example, you can do your best to be the safest driver on the road. You can obey the speed limit, pay attention, slow down when it rains, and not follow other drivers too closely. But no matter how much you play it safe, you can’t control the other drivers.

What you can do, however, is transfer the risk of an auto accident to your auto insurance. Your insurance company agrees to take on the financial risk of a potential auto accident, in exchange for a price (your premium and deductible amounts).

How do you know when a risk is worth transferring? With a simple calculation. If something unexpected happened, and you had to pay a judgement on a lawsuit; medical expenses and recovery time for an accident; or to repair and replace the damage on a project due to a natural disaster, could your business afford it? Compare the cost of your insurance premiums to the cost of paying out of pocket for an accident or injury. In most scenarios, it makes financial sense to transfer that risk away from your business.

Did you know?

  • The average cost of a slip and fall accident for a business owner is $20,000.
  • The average cost of a fall for carpenter is almost $100,000.
  • The average cost to repair property damage in an auto accident is $7,500.
  • The average cost of an injury from an auto accident is $21,000 (non-disabling injury), up to $65,000 (disabling injury).

You can use the following contractor insurance policies to transfer financial risk away from your business:

  • General liability: covers the risk of claims and lawsuits from bodily injury or property damage to other people (third-parties)
  • Commercial auto: covers the risk of bodily injury and property damage if you’re at fault in an auto accident, and even damage to your auto that’s not your fault
  • Tools and equipment: covers the risk of replacing tools and equipment that is stolen, damaged, or destroyed on the way to the jobsite.
  • Builders risk: covers the risk of damage to a project from fire, vandalism, or other events, as well as your materials, supplies, tools, and equipment on (and off) the project site.
  • Umbrella: covers the risk of a high claim exceeding your policy limits and costing you big.

Some Things Work Better Together

There’s some things in life that are great on their own, but are even better together. Like cold beer and hot wings. Or peanut butter and chocolate. And that’s how you should think about risk management and contractor insurance.

On its own, risk management is an essential part of any successful business. After all, you can’t turn a blind eye to the potential risks that could cost you everything you’ve worked so hard to build. Risk management allows you to see the threats on the horizon, and to prepare for the impending storm. Sometimes you can do enough to get through with minimal damage, and sometimes that storm may completely pass you by. But other times, watch out. No amount of preparing can help you when it hits. Which is why transferring risk to your insurance policies makes your risk management practices even more effective.

The same could be said for your business insurance policies. On their own, they're an effective solution to unexpected events, accidents, and other risks that you face while doing your job. But if you never implement risk management practices, you run the risk of letting your insurance take the brunt impact of every single accident and event that comes your way. And if you are constantly filing claims for avoidable incidents, your premiums will rise and you may even lose coverage. If you incorporate risk management practices, however, you can avoid some of these events altogether. By avoiding claims in the first place, you can keep your policies affordable and your safety net (insurance) strong and intact.

Having insurance for your contractor business is not a good reason to ignore risk management, even if your business is small. And practicing risk management alone won’t fully protect you from the risks that could lead to a financial loss. But put together, insurance and risk management can work together to protect your business the best possible way. In other words, they’re a perfect pair.

Smiling Female Contractor

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