What Does Contractor Insurance Cover?

May 5, 2024
what does contractor insurance cover

“Contractor insurance” is a loose term referring to insurance coverage designed to protect contractors and their businesses from the many risks associated with their operations. Because of their line of work in the construction industry, where people and property can easily be harmed, contractors are usually expected to carry various kinds of coverage to protect themselves, their clients, and their hires from liability. 

In this blog, we’ll discuss insurance requirements for vendors, contractors, and other third-party service providers, the main types of insurance that contractors are expected to hold, and what you can do to ensure that your hires have the coverage that they say they do.

Why Do You Want a Contractor to Be Insured?

Let’s begin by discussing the importance of insurance protection for contractors. Insurance, as you know, is a system designed to protect people when expensive legal situations are likely to occur, especially due to their work. In construction, property damage and bodily injury are two unfortunately common situations where liability lingers. 

If your hired contractors and subcontractors don’t have proper protections, third-party claims against them may make their way to you, the hiring party, to be financially responsible for. Additionally, contractors must often hold insurance anyway to maintain compliance with federal, state, and industry-wide guidelines. 

It is best practice to require all hired contractors, vendors, and other third parties to hold adequate coverage to avoid the threat of looming risks.

What Are the Requirements of Insurance?

To get and keep insurance coverage, there are a few requirements that contractors, as policyholders, must follow. Here are a few:

  • Policyholders must pay regular premiums to their insurer for their coverage.
  • Policyholders and insurers should agree on a policy whose coverage limits, or the maximum amounts that an insurer will pay for covered losses, adequately protect their needs.
  • Some insurance policies include deductibles, which are financial amounts that policyholders must pay out of pocket before the coverage kicks in to cover the rest. 
  • Policyholders must comply with its terms and conditions throughout the policy’s duration.
  • To maintain coverage, policyholders must review and renew their policies promptly (typically annually). 

What Does Contractor Insurance Cover?

As we’ve mentioned, contractor insurance includes a range of insurance policies that can protect contractors from the many risks arising from their work. Let’s discuss some common contractor insurance policies and what coverage they provide:

  • General liability insurance covers third-party claims of bodily injury, property damage, and personal injury. This is the most commonly held insurance policy for contractors.
  • Workers’ compensation insurance covers expenses for employees suffering from work-related injuries or illnesses. This coverage is required in most jurisdictions.
  • Professional liability insurance covers claims related to professional negligence and errors or omissions.
  • Contractor’s pollution liability insurance covers claims stemming from pollution or environmental damage caused by their work.
  • Commercial auto insurance protects vehicles for business purposes, such as company vehicle damage.
  • Inland marine insurance protects equipment and materials in transit, which is important for contractors who frequently transport tools and other work equipment.
  • Subcontractor default insurance protects general contractors from losses from subcontractor defaults (e.g., delays or non-performance).
  • Umbrella (or excess liability) insurance gives an additional layer of coverage to protect contractors against significant claims.

What Does a Contractor’s Liability Insurance Cover?

Contractor’s liability insurance is incredibly important as it covers a wide range of risks associated with their work. 

It grants financial protection to contractors from third-party claims of bodily injury (e.g., if the construction hurt a bystander on a job site), property damage (e.g., if the client’s property or a neighboring property was unwantedly affected), and personal injury (e.g., cases of libel, slander, or false advertising). 

It will also provide some long-term protection, as most liability policies will cover claims mentioned above even after the project is finished. Contractors must ultimately customize their coverage to meet their specific needs and risks. 

Does Contractor Insurance Cover Poor Workmanship?

General liability insurance is designed to cover third-party claims related to damages and injuries due to a contractor’s job but is not related to the quality of their work. Therefore, a contractor’s main forms of insurance, general liability, and workers’ compensation will not cover poor workmanship. They may obtain protection for this through errors and omission (professional liability) insurance or offering clients some kind of warranty.

If you, as a contractor’s client, want to protect yourself from possible shoddy workmanship, you should consider requiring them to purchase a performance bond. Contractor bonds guarantee that they will complete work according to the contracted terms, and if they fail to do so, they may have to cover the costs of completing the work to the right standard. 

What Does It Mean When a Contractor Says They Are Insured?

When a contractor says they are insured, it can signify experience, professionalism, and commitment to compliance and client safety. However, you shouldn’t just take a contractor’s word for it. 

It is commonplace in the construction industry to ask for and receive contractors’ proof of insurance coverage. Insurance verification, done through certificates of insurance, or COIs, is the easiest way to certify that contractors carry insurance coverage for the correct policies, time periods, and coverage amounts that you, as their hiring party, require.

We Make Contractor Insurance Verification Easy

Are you not sure where to get started with insurance verification or looking to streamline your process with easy-to-use technology and an expert-backed team? We’re the ones for you. Reach out today to feel safe with your vendor partners. 

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