How Much Insurance Do Contractors Need?
License Requirements
When a contractor begins shopping for insurance, the very first step is to find out the insurance requirements for the city or county in which the license is obtained.
As an example, in our home state of Indiana, every municipality has different requirements. For example, the Consolidated City of Indianpolis requires that contractors get licensed, carry insurance for $500,000/occurrence and also obtain a bond for $10,000. In Indiana, the Cities of Lafayette, West Lafayette, and Tippecanoe County all have different requirements. That"s three different requirements in one county. However, for many cities and counties there aren"t any requirements for licensing. The contractor may just need to get a building permit, if applicable. The contractor licensing and the insurance requirements can vary greatly by municipality and county.
The organized contractor will know their requirements ahead of time, prior to discussing a project with a business or homeowner. However, if the contractor gets their work from a company such as Lowes hardware, they have their own set of insurance requirements.
A dollar amount of liability you want to be covered must also be decided. This is determined by type of contractor work. More risk = higher coverage.
Liability
The two types are: occurrence and claims-made. Most states allow for both, but there is a huge difference. Knowing the laws in your state is vitally important. For the most part, an occurrence form policy is best for contractors.
For an occurrence liability policy, a contractor is covered by something that happened during the time the policy was in force, regardless of when the claim is made. A claims-made policy, on the other hand, covers only the claims made while the policy is in force.
In some cases there can be a large time lapse between when the work was done and when the problem manifests to prompt a claim. However, problems that may occur but not be reported for a long time can cause problems in occurrence policies, such as inadequate limits from an older policy, in which inflation would not allow for sufficient coverage.
A claims-made policy offers a solution to this problem due to coverage taking effect during the policy period for an injury or damage that occurred after the policy"s retroactive date. A contractor"s current insurance company would not be responsible for any losses occurring prior to the retroactive date. It is helpful to know that the retroactive date should never be changed when switching insurance companies. Sometimes the new carrier may advance the retroactive date to the inception date of its policy. But if the carrier does this, there is no coverage for any losses that occur between the date of the first claims-made policy and the date the new policy takes place, creating a gap in coverage. An exception is if the new policy is written with "full prior acts" coverage in which a retroactive date would not apply.
An important thing to remember when carrying a claims-made policy is that if a contractor is made aware of a problem that may require a claim, the insurance company must be notified immediately before the policy expires.
Before choosing your policy type, please consult an agent that knows contractor regulations in your state laws as well as an attorney in the state/states where you"re doing your jobs.
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