The number seven has long been associated with good fortune; visitors to Las Vegas dream of getting them lined up on their favorite slot machine. However, while Lady Luck often shines upon the number seven, her evil twin Penelope Peril has been known to crash the party from time to time. Especially when shopping for contractor’s liability insurance. The following are seven of the most egregious perils you can face when choosing contractor’s general liability insurance.

1. Going with Joe Blow to save a little dough

A friend tells you he’s found super cheap insurance and gives you the phone number to the company’s call center. You dash off to call them, dollar signs sashaying through your imagination as you think of the money you’re going to save. Here’s where the fun starts.

First, the receptionist transfers you to sales, where someone who sounds like she could be the receptionist’s twin sister answers. You ignore the screeches and caws, believing them to be caused by transmission. As the squawking reaches a climax, she gives you a price. Switching to Raven Mad Insurance, will save you a couple of bucks. With all that money, you’ll be able to buy that nose-hair trimmer you’ve had your eye on. Is the company highly rated?

She replies like a politician at a picnic. “We’ve got a number one rating!” What she fails to mention, is that it is one out of five stars. You sign on the dotted line, and then six months down the road, discover that Raven Mad Insurance has flown the coop. They had a low rating, even lower cash reserves, and their owners ran for the border when their chickens came home to roost. Don’t let this happen to you. Instead,

  • Ask for the insurance company’s A.M. Best rating, which grades on a scale of A to F, just like in school. If you have any doubts, verify that rating directly with A.M. Best. They’re the accepted standard for insurance company quality.
  • Standard and Poor’s is another valid rating source. They rate insurance companies, in part, on financial strength and stability.
  • Be aware that when you bid on jobs with government agencies, your insurer must have at least a “B+” rating with A.M. Best. Why spend money on insurance if it isn’t going to benefit you?

2. Going to an oil refinery when you need to gas up your ride.

Like most people, you go to the gas station when your car gets a bit thirsty. That station is set up to take care of you, the individual customer. Imagine how much time it would take for you to navigate your way through the bowels of a major oil company just to buy fifty dollars worth of Premium Unleaded. The corner gas station deals with the refinery, so you won’t have to. You just drive up to the pump, get your gas, pay, and go on your way. The gas station works as your agent.

Insurance is the same way. Some of the largest corporations in the world are insurance companies. The people that work for them are trained, but you, as a customer, are not. Let’s say you place a call to Mutual of Tombstone Insurance Company for a quote. Their rep is going to give you one single quote for your contractor’s general liability insurance. Do you think he’s going to tell you Acme General Insurance has a lower price and/or a higher A.M. Best rating? No way. His bosses want him selling policies, not being a consumer advocate.

A reputable insurance agent or broker, such those found at FarmerBrown.Com Insurance, has your best interests at heart. FarmerBrown.com Insurance is not beholden to any insurance company. We’ve got a slew of carriers to choose from, and care enough to make sure you get the best price as quickly and as easily as possible. Remember:

  • Calling the insurance company directly means you might not necessarily get the best quote available in the market.
  • Your FarmerBrown.com agent/broker is uniquely qualified to find you the best possible coverage for the lowest possible price. We operate in all 50 states, have a staff of insurance experts and speak your language.
  • Do you already have insurance but are concerned about price, rating, reliability, or any other issue? We’ll gladly help. Call FarmerBrown.com Insurance Agency today (866) 709-8335 and speak to one of our licensed agents. Or visit our website, www.farmerbrown.com.

3. If you were non-admitted, would you admit it?

That’s the big question when it comes to insurers. Some insurance companies are admitted; that is, they and the other admitted companies in their market participate in a program that guarantees continuation of coverage if one of them fails. Here’s how it works.

In any given market, you might have 10 insurance companies vying for business. Let’s say that five of them are admitted, and five are not. The five admitted companies each pay into a guarantee fund that is held in escrow. If one of the companies suffers a financial catastrophe and cannot cover its claims, the fund kicks in. In essence, those five insurance companies step forward to protect each others customers in times of dire need.

The non-admitted companies don’t do that. If one of them fails, its customers are on the hook with little to no protection. Fortunately, insurance companies do not go out of business every day; for the most part, they are adequately supervised and regulated. However, for peace of mind and financial safety, it is always preferable to elect coverage with an admitted insurance company wherever possible. You can find admitted insurance companies functioning in most markets. Remember:

  • Admitted means protected. An admitted insurance company’s customers are protected by the other admitted companies operating in the market. That minimizes risk. The situation is akin to investing in a financial institution that is FDIC protected.
  • Non-admitted means the insurance company is on its own. If it runs out of money and must shut its doors, its customers are left high and dry. This is akin to investing in a financial institution that does not enjoy FDIC protection.

Last time, we discussed three pitfalls lurking in the shadows when you’re trying to settle on the right contractor’s general liability insurance policy. Today we’re going to consider four more:

4. May the force (of your insurance) be with you.

If you’re a general contractor, hiring subcontractors is a part of what you do every day. You might be a home builder that subs out plumbing work, or roofing, or carpentry. When you’re working on a big project, it can be cheaper and easier to hire someone to do parts of that project, so that you can get your work done on time and within budget. You might not be the world’s biggest, meanest, monster “truckdrivingest’ contractor, but you’re no newbie, either. You know the importance of having good insurance that is paid up and in force; you’re not about to get caught with your proverbial breeches down. But wait, unbeknownst to you, a potentially hidden danger awaits, ready to pounce.

That danger lies in your subcontractors’ coverage – or lack thereof. “Now just a cotton-picking moment,” you think. “I always require my subs to have liability insurance. I’m covered.” Are you sure? Think again. How do you know for a fact that your subcontractors are covered? Do you take that strictly on their say-so, or do you require proof? And if you do, what constitutes proof, anyway? Suddenly, the outlook tilts, and you find yourself on a slope that is more slippery than the roof of an A-frame in an ice storm.

How do you know for a fact that your sub is covered?

If you’re like many general contractors, you require him to provide you with documentation showing that he is insured, that he holds you harmless, and that he has named you as the certificate holder. “That’s that,” you think with satisfaction, as you file the document with your other important papers. Think again.

Does that document guarantee that your sub is insured? Not necessarily. What if, after getting the COI, your subcontractor canceled his insurance to save a few pennies? Or perhaps he omitted some crucial information on his application, leading his insurance company to declare that he no longer meets their underwriting standards….and cancelling his coverage summarily. At this point, you’re looking for a brick wall to head-butt.

Do not despair – the solution to this quandary lies in being just a little more thorough.

When signing up your subcontractors, always insist on a current Certificate of Insurance (COI) from his insurer. Check the issue and effective dates to be certain it is current. Don’t just glance at it and hand it back to him. Make a copy of the form, and then have your administrator call his insurance company to verify the information on the form. Has anything changed since the form was issued? Is he still insured? Are you still held harmless?

“Oh man, now I know how my insurance man practices birth control,” you tell yourself. “With his personality!” It seems nit picky, but like the old saying goes, better safe than sorry. Take these few extra easy steps to ensure that you’re protected. If one of your subs lets his insurance lapse and commits a major goof on the job, then guess who’s coming to dinner. It will likely be a land-shark dressed in a pinstripe suit and eager to make partner at his law firm.

5. Occluded by the exclusions

Henry Ford was once asked why the Model T didn’t come in different colors. He replied, “You can get it in any color you want as long as it’s black.” That was a clever way of saying, “we’re not going to deal with colors.” In other words, Ford excluded every other shade in favor of black. Insurance companies also have their exclusions, though they are a bit more straightforward about it.

Every insurance policy has exclusions – events that the insurance company will not cover. One example is nuclear war; others include earth movement, asbestos, and formaldehyde. Be sure to read over the exclusions on your policy, and if you don’t understand something, call customer service to ask for an explanation. At FarmerBrown.com, by the way, our staff of customer service executives stands ready to help you better understand your insurance policy.

6. I am what I am, but it’s cheaper if I pretend to be something else.

Let’s say you come from a family of roofers. Your dad was a roofer, his dad was a roofer, and so on. You can trace your lineal heritage all the way back to cave men and palm fronds. You know a lot about roofing, you are well-known as a construction whiz in your community, and you’ve just landed a job to build roofs on all the homes in a passel of housing developments. So you kick your heels together as oversized dollar signs seem to pop up in front of you wherever you go, anticipating the $500,000 you are going to rake in over the next twelve months. Then you talk to your insurance man.

Moments later, you find yourself being scraped off the ceiling by your agent, who apologetically explains that roofing insurance is the most expensive (and highest risk) of all the trades. The job is fantastic, but the insurance bill for the year is going to run you five figures. Roofing is a dangerous, difficult job. You sit in your agent’s office flabbergasted, wondering what you’re going to do next. There’s a good reason roofing rates are so high; in fact, many insurers will not cover even incidental roofing.

So… Don’t be a roofer?

A light bulb snaps on above your head. “OK,” you think, “I’ll just massage my line of business. Instead of being a roofer, I’ll report that I’m a carpenter who does incidental roofing,” or maybe no roofing at all. You get a quote that gives you a 60% price cut. Now instead of $15,000, you’re looking at $6,000. That’s a lot easier to swallow. You sign up for insurance, a happy camper. Then tragedy strikes.

Due to human error, the roofs on 17 houses have to be partially re-done. What’s more, the general contractor that hired you doesn’t trust you to do the work properly the second time around, so he goes with someone else. You sigh and think at least you have insurance to cover the damages. Think again. The insurance adjuster looks the situation over and then advises you that you were not insured for roofing. Instead, you reported that you were a carpenter, so roofing claims are not going to be covered (they’re excluded from your policy). Your claim is denied, and you’re left holding the bag. As tempting as it may be to save a few dollars, never misrepresent the type of work you do.

7. Made in the shade with claims made

A claims-made policy can save you a few hundred dollars, and if you’re strapped for cash, it might make sense to think about it. What is a claims-made policy? In such an arrangement, the insurance company covers you during the effective dates of your policy and will continue to defend you for covered events that occurred during the policy term for a limited amount of time after the policy ends. Let’s see some examples for clarification.

A typical claims-made policy will defend you against claims of damages that occurred during the policy term for up to six months following the policy term. Your effective dates were January 1, 2015 until January 1, 2016. You were hanging drywall when the wall collapsed and damaged the customer’s new Range Rover.

Your insurance company covered the damages, and you thought that was that. However, five years later, the plaintiff comes back and says that the dust created by the collapsing wall caused her to contract Valley Fever, and she sues you. Now, if you had a regular insurance policy, your insurer would defend you, because the event happened during the policy term. However, if you had opted for a claims-made policy, the insurer would not cover you, stating that in exchange for a discounted premium, it limited the period in which it would cover claims to you to six months beyond the end of the policy.

Sometimes a claims-made policy makes sense, and sometimes it does not. Generally, it is best to go with a traditional insurance policy. If you’re wondering about which is best for you, contact one of FarmerBrown.com’s licensed insurance agents for help.

Written by: John Brown
John has more than 25 years of experience in the insurance industry. He grew from a star insurance producer to owning one of the largest agencies in the country; he's a reference regarding contractor's insurance, commercial insurance, and builders' risk insurance.