E&O Insights: Insuring Contractors

Risks to Consider When Working With Contractors

If you are running an agency, there is a pretty good chance you insure a contractor or two – whether they are your traditional artisan contractors or a class of contractors that falls outside the artisan definition. While the economy has probably taken its toll on the number of contractors, suffice it to say, there is a still a significant number of contractors doing business.

Whether you currently write a few of these accounts or are faced with insuring your first one, using one of the industry exposure analysis checklists is a great tool. Effective use of this tool will provide your staff with a solid handle on this class of business, along with the pertinent questions that should be asked of the account. This could prove difficult, though, as many of these contractors – more so the smaller ones – work many hours and may be tough to sit down with a face-to-face. Bottom line: you must understand the risk completely.

Dealing with carriers that understand the contracting business is important. Fortunately, many companies have custom-designed, quality insurance programs for you to offer smaller contractors. Some of the typical coverages you want to consider, with their corresponding errors and omissions (E&O) issues, include the following.

Property – Other Than Tools and Equipment

Some of these accounts may have a warehouse or storage for supplies, etc. Identify whether this exposure exists and check the quality of the premises to avoid writing a risk that the carrier, after inspecting, asks to get off of. Determining the proper value, taking into consideration co-insurance issues, should be handled carefully.

General Liability

Does the contractor subcontract any work? Is there a need for owners and contractors protective liability coverage? What about products and completed operations? These are just some of the issues you will need to uncover. This class of business generates a significant number of requests for certificates of insurance, with one of the more common issues involving additional insureds. Not all carriers handle such requests the same, so check this area carefully. Plus, if you are using the excess and surplus lines market to insure your contractors, carefully review the forms as there will definitely be differences. In fact, with some of their exclusions, you have to wonder what coverage they are really providing.

Inland Marine – Tools and Equipment

This will be a significant issue with most risks. Discuss this with the contractor to see if they desire coverage. If they do not want this coverage, confirm it in writing.

Issues to consider are: 1) What perils are covered? With the recent flood activity, many contractors probably found out that flood was excluded. 2) Is coverage on a per-item or blanket basis? 3) Is there coverage for newly acquired tools and equipment? What is the limit?

Installation Floater

Is the contractor liable for loss to materials after they have installed or is the customer liable?

Auto

Get a list of all the vehicles and all the drivers. Plus, get the auto coverage listed on the umbrella policy.

Umbrella

Offer various limits of umbrella coverage and let the customer decide what is best for them. Don’t make this decision for them!

Workers’ Compensation

Based on the type of contractor, this may or may not be easy to secure. Some sole proprietors may choose not to carry it – if they don’t, confirm this with them in writing. A common issue that has significant E&O potential involves knowing where your contractor is doing business and making sure you handle the coverage accordingly. As you will note by the following claim, a mistake can be costly.

An agency’s client was an employee-leasing company that leased workers to construction contractors. Although the client conducted most of its business in one state, the client contracted for a job in another state, and needed workers’ compensation coverage for the employees working for a sub-contractor in the second state. The workers’ comp coverage was to be placed through an assigned risk pool in that second state. The carrier that wrote the workers’ comp in the original state for the client was through the voluntary market, and it was intended for that same carrier to pick up coverage in the second state under the assigned risk workers’ comp pool.

The agent spoke to the carrier’s underwriter and was told to submit certain forms to put the workers’ comp coverage in place for the second state. The agency said it completed and sent the forms to the carrier via fax. The carrier denied receiving the fax. The agency kept no record of sent faxes that would indicate the fax had, in fact, been sent and received. In addition, the carrier stated the forms the agency intended to send were the wrong forms.

A workers’ comp loss occurred and the carrier denied coverage, forcing the general contractor who hired the client’s customer to pick up the workers’ comp costs. The agency’s client’s customer was then fired by the general contractor for not having workers’ comp coverage in place. The customer stopped using the client’s services. Suit ensued against both the agent and the carrier. The carrier was dismissed based on the fact that a policy was never issued. The agency’s client claimed a huge loss of profits resulting from the lack of workers’ comp on that particular job, as their customer stopped using them. The claim against the agency was eventually settled for $350,000.

Insuring contractors is not as easy as you may think. There are a significant number of exposures and each account is unique. Take the time to understand the account and request that the client takes the time to understand their insurance. As with any customer interaction, document the discussions and final resolution. It takes time, but the time you spend now could save you later if you are hit with an E&O claim.

Topics Carriers Workers' Compensation Contractors Professional Liability