Contractor Insurance Buyers Guide

May 21, 2011
Thumb_small_avatar25_1
Chicago

So you're in the market for insurance for your contracting business? It's very easy to make a mistake that will cost you thousands of dollars.  You may have learned what I am about to tell you if you've bought insurance before, or maybe not. However if you've never bought business insurance this should be a must read before you sign any dotted lines.

I have purchased at least 4 insurance policies in the last 7 years so I have learned many of the tricks some insurance brokers play to tempt you with a low price. The thing about insurance is you either have it or you don't.  If something happens, you've got to make sure you're covered. Don't guess, know!

 

When it comes to pricing business insurance, with General Liability (GL) or Workers Compensation (WC), there are some things you need to know. Your rate, or your premium, is not always based on your coverage amount. Though, coverage amounts seems to be where most contractors get hung up.  While that is a factor there are some other more important variables such as your classifications. Your exclusions are also important to your premium, but more importantly what you're actually covered to do. Also knowing what your premium is based upon, either sales or payroll, is also important for determining your premium and ensuring you are charging your customers enough.

 

Roofing contractors by far have about the highest insurance rates, except maybe steel workers.  At least this is true inIllinois.  A roofing contractor will have the Workers Compensation rate of 42%. Why do I bring this up? To explain what the rate is and how it differs by trade. Some roofers I know will claim to be carpenters so they can get a rate of 25%.  They may be saving money but let's pray nobody falls off the roof. It is likely they may not be covered for roofing operations.

So there is 42% and 25%, but what does that mean? Well simple, 42% of your payroll is owed to your insurance company for the coverage.  If you pay an employee $30,000 in a year you will pay your insurance company $12,600 for coverage on that employee.  Workers comp is almost always based on payroll, though it is important you ask your broker how they came up with their coverage numbers. 

General Liability can sometimes be based on your payroll and sometimes on your sales volume. It's important to know that when they determine your rate upfront. My last insurance policy was based on my revenue. When I was shopping around for my newest policy the numbers were  Just like workers comp there are also classifications.

So why does this matter? Your estimated premium is just that, an estimate. If things go according to plan then you pay what you were estimated. If your business grew you may owe and should know about how much you owe.  It's also important to know what the rates are based upon, because as you can imagine if you use employees and it's based on wages the increased premium won't be that much. However if your premium is based on wages and you use employees and you go over your estimated amount, you will end up owing quite a bit.

Some other important questions is knowing if you can multi-classify. This isn't always the case with GL, but I wouldn't be with a WC carrier that didn't allow multi tasking. So we base our estimated earnings on the highest, roofing, rate but come audit time some wages are not always spent in the roofing classification. Therefore we expect a refund for hours spent on carpentry, gutters, siding etc...  If you do multi-task you have to keep exceptionally detailed time sheets detailing what type of work was being done on each job. You can not simply guesstimate.

Audit? Yes I said Audit. I am audited at least once yearly where the insurance company sends out an independent analyst to review my books and see if my forecasts were met or exceeded. This independent analyst is really the person who determines what you REALLY pay. It's very easy for us we invite him in and my book keeper will generate what ever reports he wishes. 

Did you know if you use sub contractors, even if they are insured themselves, you are still likely to pay insurance on their invoices to you? Yes I pay something like 3%. This is why I ask my subs to always invoice me for labor and materials separately. I technically don't have to pay the 3% on any materials they provide.  3% may not seem like alot, but let's say a sub does $300,000 for you in a year, you're going to pay $900. I don't know about you but $900 isn't anything worth throwing away in my book.

So let me tell you some about some games insurance brokers will pay. There are unscrupulous salesmen in every industry, not just construction and remodeling.  For example, in roofing open flame is common on flat roofs, however as you can imagine it carries alot of risk.  Some brokers won't even ask you if you perform this kind of work. Your premium will be lower but coverage will be excluded from your policy. If there is ever any fire damage or injury as a result from fire operations you won't be covered! The same is true for buildings over 3 stories, condominiums over 10 units and on and on goes the list of exclusions. Everyone loves a low price, but that price is ALWAYS based on something.

My first time buying insurance was awesome. I got a great deal; “Wow all those other suckers were paying 10x what I was paying!”, I thought. Come audit time my broker didn't tell me about an audit. He didn't tell me what my premium was really based on. He didn't ask me about any estimates or forecasts, he literally gave me the bare MINIMUM. I did nearly a million revenue that first full year and I paid for it HARD. I had to take an equity loan to cover the overage.  Don't let this happen to you.

Now I understand how the premiums are calculated. I always ask up front so I know how to determine my pricing, and I won't be any insurance broker's sucker ever again.

 


Comments (10)

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  • Thumb_mil%20gun
    kubieabout 9 years ago

    dont forget claims based or occurrence based insurance either.

    if you have claims based insurance, u better hope you have a claim during your current policy period.

    occurrence based, you can pay for how many years you want coverage for. 3 maybe 4? 6? im not sure how far you can go back.

  • Thumb_avatar25_1Author
    Grumpyabout 9 years ago

    Three years back seems to be the average of what I have been asked on applications. Some brokers have asked, have you ever had a claim, some have asked if I have had a claim within the last 3 years. This does affect your coverage.

  • No-avatar-62
    22 Constitutionabout 9 years ago

    Excellent advice. I've seen a few contractors burned at the audits.

  • Thumb_avatar69271_1
    dibs16about 9 years ago

    So this is my first year in business. Just started a few months ago. I've been keeping books of everything, but I am the only employee. Do I still get audited for just general liability coverage? I opted not to cover myself under WC. Great info thanks for the post

  • Thumb_avatar25_1Author
    Grumpyabout 9 years ago

    Ahh so your broker didn't tell you either huh? Yeah the premium you pay is just a guesstimate based on numbers you may have given him or numbers he may have made up. My advice is to find out what those estimates were NOW so if you need to start saving you can do it.

    You will likely have a simple phone audit where they ask you some pretty basic numbers. If you can't answer or they don't like your answers they will request on on site audit or perhaps audit by mail. If it gets to this point have your accountant help you out, but it doesn't sound like that'll be the case if it's just you.

    What I didn't post about insurance audits is you can dispute the audit results. I had to do that on one of my audits in regards to multi classing. The auditor must have been new. I happened to be there, which I try not to. My book keeper was arguing that we multi-class. The auditor said we can't do that. I said just give him the info he needs and we'll dispute. When we got the results, I wrote a letter saying we multi class, stating we gave that info to the previous adjuster, and informed them I had copies if need be. A week later we got a letter back with the adjusted results and no harm no foul.

    I learned that trick from our first audit when they put everyone even the office staff on the roofing WC rate. For comparison purposes my WC rate for office persons is .07%, that's less than 1%. WC for a roofer is 42%. Big difference. When I got the first audit results I wanted to throw up. We worked it out, learned from it, and moved on.

  • Thumb_ferrari-612-gto-3-lg
    Sweebsabout 9 years ago

    "my broker didn't tell me about an audit. He didn't tell me what my premium was really based on. He didn't ask me about any estimates or forecasts, he literally gave me the bare MINIMUM. I did nearly a million revenue that first full year and I paid for it HARD."

    May be time to make a claim against your broker's Errors & Omissions Insurance Policy!

    As a remodeling contractor and previous insurance agent, I have seen both sides. Or maybe 3 sides, as when I was an employee and was injured doing some framing, my boss told me that should I be asked, to say that I was doing trim work,,,he told me that his worker's comp was going to be more expensive if he listed "framing" as part of the work he had us do, jeeez

    Great info by the way.

  • Thumb_avatar25_1Author
    Grumpyabout 9 years ago

    Sweebs, that's really great advice. I didn't know I could do such a thing, and that was 5 years ago I wouldn't even bother with it right now. However in retrospect how can one even prove such a thing?

    Unless there is some form of documentated fraud or forgery, I don't think it would end up more than a he said - she said match in court. This brings up an interesting point though. As a matter of fact, I prefer to communicate via e-mail. When I ask important questions like the above described I like to do it by email so I have in writing answers from him. I suppose printing these emails and saving them with the policy would be a very good thing should a dispute ever arise.

  • Thumb_avatar25_1Author
    Grumpyabout 9 years ago

    22, did the contractors get burnt at audit, or did they really get burnt when they were quoted? Either way they got burnt but it isn't really the auditors fault.

  • No-avatar-62
    HomeFrontabout 9 years ago

    This is a very useful post. I own two other businesses and my GL policy costs me $400/year for 15+ employees and a couple million in revenue. I was erroneously under the assumption that our umbrella policy covered all businesses under my holding company LLC, but have just discovered that our new home repair business isn't covered. I've got a lot to figure out about insurance, whether to do WC or not (not required in TX...but then what about injuries?), etc. Thanks for the helpful advice.

  • Thumb_p1016051
    TarahGruberover 8 years ago

    I'm an insurance broker that specializes in only contractors insurance. This is an interesting blog to see things from the contractor's perspective. I think the reality is that insurance companies have found many ways to exclude coverage from contractors who think they are covered. And they will continue to always look for ways to deny coverage. The best thing you can do is have a broker you can trust.

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