General liability insurance for contractors – 4 tips to avoid coverage surprises

General liability insurance is one of the first types of policies you will need if you are starting a new business. At Clinard Insurance, we see many new small businesses start up. Starting your own business is popular these days with the layoffs we are seeing in our economy. The best choice is often to pursue something you enjoy doing and so we see a lot of people building new businesses around their building skills. But just because you love building things doesn’t mean you know the best way to protect yourself and your business from lawsuits.

Here are some tips on the pitfalls to avoid when purchasing general liability insurance.
Choose the right agent. The first place people typically go for their business insurance is the insurance agency that handles their home and auto insurance. In some cases, this will work fine. But the risk is that your current agent may be authorized to sell you general liability insurance on your new business while having very little experience in assessing the hazards and risks of your specific type of business. I suggest you seek out an agent who specializes in insuring other small businesses like yours. Ask your competitors who they used. At Clinard Insurance, we have a niche specialty in small entrepreneurs and we speak their language and understand their needs. If your agent doesn’t specialize in your business, I suggest you find one that does.
Claims made or occurrence policy type: Building claims policies became popular in the mid-1980s and have been around ever since. The promise of these policies was lower rates, but what harm in the long run? In some cases, there are no cost savings. Claims made for a contractor are the worst policies you can buy. Let me explain: claims made policies allow you to make a claim on your policy only during the year they are in effect. Contractors have claims coming, not always the same year as the construction of the project! Also, if you want to leave this company and go to another company, you will need to purchase additional insurance to cover you for the next 10 years…that’s right, 10 years! Why? Because the law allows customers to file a complaint for construction issues up to 10 years after project completion.
An example:
You build a new room, everything goes well and you and your client are very happy with the end result… 4 years later your client calls you and says the roof is leaking and water has entered the house and ruined his new $25,000 grand piano. He expects you to fix the roof, the drywall, the wallpaper, the carpets and, of course, to replace the grand piano…
A claims policy will not allow you to file a claim 4 years later unless you have stayed with that same company the whole time. If you intend to change companies after being covered by an insurance policy, you must make a decision. If you want protection for any claims that have not yet occurred, but will occur in the future, you will need to purchase “tail” coverage. This coverage will extend the time in which you can file a claim. And the tail cover is not cheap.
If you decide not to purchase the “tail”, you will not be able to file a claim against the claims made policy. And to make matters worse, some companies don’t offer the 10-year extension.
So… When your claims made policy comes up for renewal, you need to decide:

  • Should I leave the company and pay for the supplemental insurance for the next 10 years of coverage, or leave without protection.
  • Do I stay with the same company? Their prices in the New Year can remain the same or increase sharply.
  • Should I switch to another company that offers better rates and coverage?

This limits the market available to you and makes it more difficult to accept a better offer from another insurance company. Claim policies may work in other industries, but for entrepreneurs they are a disaster. After reading this report, take the time to see if your current policy is either an event form or a claim form…..
Insurance company assessmentIt’s up to you to do your due diligence and find out from your agent about the financial health of the company you’re buying your general liability insurance from. As the previous tip indicates, claims can sometimes be very delayed and you should be aware that your company may pay a claim for you in 10 years. Only use insurance companies rated A or better to protect your business.
Exclusions, understand them clearlyBe sure to take the time to ask your agent what the policy exclusions are and what they may mean to you. Here are some exclusions contractors should consider when purchasing a general liability insurance policy:
Pesticides, Herbicides and Fungicides Exclusion, Use Practices Exclusion, XCU Exclusion, Contractor Warranty Exclusion, Professional Liability Exclusion, Asbestos, Independent Contractors. If you’re not sure what this means for you on your policy, contact your agent and get the help you need to understand it clearly. It can change the way you run your business.
SubcontractorsMake sure you understand how your policy deals with contractors. Are you covered if they have no or insufficient insurance for the loss? What coverage should you require from your subcontractors? How often should insurance certificates be obtained? How can you be sure that the certificate of insurance is legitimate. (I’ve seen fraudulent certificates for sale on eBay before). If you are unclear about the answers to these questions vis-à-vis your company and general liability policy, you should call your agent immediately and get the answers you need to sleep well at night.
As you can see, buying general liability insurance isn’t as simple as calling your agent and asking for a quote. You need an experienced professional who understands policy forms and your business. At Clinard Insurance, our specialty is helping small entrepreneurs navigate the dangerous waters of the insurance world. If we can help you further, or if you would like more information about Clinard Insurance Group, please visit our website.

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