General Liability Insurance for Contractors: Business Insurance 101

Liz Birchwood is a habitual planner, and as her husband Brett’s contracting business has grown, her insistence on thinking through every detail has helped them handle larger projects without sacrificing profitability. But there’s no way she could have anticipated one of their laborers getting distracted while backing up and taking out part of the loading dock at the building adjacent to their current project. The dock damage put the neighbor out of business until it can be repaired, and he’s demanding reimbursement.

Fortunately, Liz planned for the unexpected by obtaining general liability insurance for contractors. Her policy covered the cost of the damage and paid the neighbor for lost revenue. That neighbor was impressed with her response … and now, Brett’s estimating an expansion for him.

What Is Contractor General Liability Insurance?

General liability insurance for contractors protects them financially when something they or their employees do causes property damage or bodily injury or when something the business does harms an outside party’s reputation. For example, insurance for concrete contractors recoups the cost of cleanup when a poorly constructed form allows concrete to ooze onto neighboring property. Insurance for HVAC contractors handles the medical bills when a homeowner’s child trips over a tool and breaks an arm. Insurance for electrical contractors is there to help with damage and repairs when a poorly wired connection causes a small fire.

Who Needs Contractor General Liability Insurance?

A better question might be, who doesn’t need it? Anyone involved in a construction project who might face a claim for damage or injury would benefit from carrying insurance, including:

• General contractors
• Independent contractors
• Excavation contractors
• Roofers
• Plumbers
• Welders
• Electrical contractors
• Masonry contractors
• Carpenters
• Drywall contractors
• Painters
• Paving contractors
• Home inspectors
• Security companies
• Landscapers and tree removal companies

In addition, many companies and government agencies will not work with a contractor that lacks general liability insurance coverage.

What Does General Liability Insurance for Contractors Cover?

Most general contractor liability policies cover a broad range of risks, among them:

Bodily Injury

Insurance for flooring contractors and others in construction covers medical bills and related costs when a visitor to the site is injured.

Property Damage

Insurance for painting contractors and others provides payment for damage to someone else’s property due to construction.

Reputation Injury

General liability insurance for electrical contractors and others funds the legal defense cost when a contractor or an employee injures the reputation of another party, whether that involves spoken comments (slander) or something that’s written, such as a social media post (libel).

Copyright Infringement

General liability contractors insurance addresses the legal defense costs if a contractor infringes on another company’s or individual’s intellectual property, such as accidentally reusing an architect’s plans without permission.

Product/Completed Operations

Suppose a laborer fails to properly secure a support member for a costly piece of equipment, and that member fails two years later, damaging the equipment. Contractors general liability insurance would pay for the repairs or replacement of the equipment.

What Doesn’t General Liability Insurance for Contractors Cover?

While general contractor liability insurance provides broad protection, it can’t be used for all types of losses, for example:

Injuries to the Contractor’s Employees

Costs related to injuries suffered by the contractor’s workers are covered by workers’ compensation insurance.

Damage to the Contractor’s Property

While general liability insurance for electrical contractors and other construction companies covers damage to others’ property, it can’t be used for damage to the contractor’s equipment and tools. Special equipment insurance is available for that purpose.

Intentional Damage

Suppose a disgruntled worker deliberately damages some part of the project. The cost of repair or replacement would not be covered.

Pollution Caused by the Contractor’s Work

If a contractor’s work causes environmental damage, such as a spill of a worksite chemical that flows into a nearby stream, killing fish and plants, it won’t be covered. That requires a type of insurance called contractors pollution liability coverage.

Errors and Omissions

Claims of negligence and financial loss from a client or other third party because a contractor does something wrong require a special type of coverage called errors and omissions insurance.

Contract Liability

Suppose a contractor fails to complete a project by the date specified in the contract, and the client suffers financial harm or loses business. General liability insurance for contractors won’t cover that.

Cyber Liability

Depending on the nature of the work, contractors may need an additional policy for cyber liabilities. In 2013, Target stores suffered a breach affecting over 40 million debit and credit cards. The hackers reportedly accessed Target’s system through a refrigeration contractor working in some of the chain’s stores. Cyber liability insurance protects contractors from the financial impacts of similar incidents. The more technology a contractor uses—and the more that technology is connected to clients’ operations—the greater the risk.

What Does Insurance for Contractors Cost?

Each contractor's general liability policy is unique, reflecting the nature of the business and the work being performed. Factors that affect the cost of coverage include:

Claim History and Experience

The fewer the claims you’ve experienced over the years, the more attractive you are to insurers. Encouraging safe work practices can reduce contractor insurance cost.

Type of Contracting Business

Insurers consider the business's risk profile when determining general liability insurance cost for contractors, charging more for higher-risk tasks. For example, roofing contractors typically pay more than similarly sized landscape businesses.

Job Location

If contractors work in areas with high crime rates, their policy costs may be higher.

Business Size

The more workers a contractor employs, the greater the potential risk.

Insurance Policy Limits and Deductibles

The more coverage you have and the lower the deductible you select, the higher your rates will be.

How Do Contractor Insurance Claims Work?

There’s much more to general contractor insurance than policy costs. Contractors also need to consider how the claim process works.

Know Your Policy Type

Because different types of policies respond differently to claims, it’s important to understand your policy type. Liability insurance for general contractors and other contractors is typically written on an “occurrence” basis that provides coverage for losses occurring during the policy period, regardless of when a claim is made. Umbrella liability policies and auto policies are usually types of occurrence policies. Other types of business insurance for contractors are typically written on a “claims-made” basis. Claims are covered only when they occur and are reported during the policy's term. Your insurance broker will help you understand your coverage.

Related Reading: Why Your Insurance Policy Type Matters

Know What to Do

What happens if someone files a claim against your company?

• First, notify your insurance carrier when you become aware of a potential claim, even if you don’t have all the details. Many policies require immediate notification.

• Next, alert all potential carriers beyond your insurance carrier. Because damages can span multiple years and policies, you may need to contact other insurers, including any representing subcontractors that may have been involved.

• Once you’ve notified all the right parties, your insurance carrier may either agree to cover the claim, deny the claim, or agree to defend you in a legal action. If your insurer sends you what is known as a “reservation of rights” letter, review it with your attorney before responding (and you must respond to protect your rights).