What Insurance Coverage Should A Contractor Have? Things You Should Know
COI Management |December 13, 2022
In working with a contractor network, it’s important to know they’re covered – so you’re covered. No matter who your contractor is, they should have standard insurance policies, and depending on the type of work they will be doing for you, and the associated risks, they should purchase additional types of coverage specific to their scope of work.
It can be challenging to know exactly what insurance coverageyou should require your contractor network to obtain, but knowing and understanding the policies will make the difference between protecting your organization and not being adequately covered.
Read on to learn the different types of insurance policies you should consider when your organization is engaging contractors to perform services for your customers.
What Type Of Insurance Should A Contractor Have?
For all businesses, there are standard insurance policies that they should obtain to properly mitigate risk, not just for your company, but also for the contractors and your customers. Below we review some of these suggestions and also encourage all organizations to obtain a copy of the certificate of insurance so there is proof in hand of the coverage. This will also allow you to review dates of coverage, limits as well as the policy types listed below.
General Liability or Commercial General Liability (CGL)
is the most common and important policy that you should require your contractor and vendor network to obtain and provide proof of The CGL policy provides coverage for bodily injury and property damage from an accident during everyday operations, from their business locations or onsite, including products made by the contractor and issues that occur while they are completing work.
Example Scenario 1: Your contractor accidentally drops a flat-screen TV on a valuable antique and damages it. The cost of the antique would be covered under the CGL and the damage to the TV would be covered under bailee insurance, which is described below under additional policy types.
Example Scenario 2: A customer is hurt while a towing company is loading a motorcycle. This would be covered under bodily injury of the CGL.
There is also an option to extend coverage (for faulty work or products completed by the contractor) to your organization by requiring your organization name be an additional insuredon the contractor’s policy. This coverage can be added through an endorsement. It is recommended that your organization’s name be listed as an additional insured . Being listed as an additional insured allows you the ability to submit a claim directly to the contractor’s insurance company or carrier should you need to.
Automobile Liability or Commercial Automobile Liability would be relevant to contractors who will be traveling while performing their tasks for your organization. For example, travel to customer homes, delivery services and other use of company vehicles. Auto liability also covers accidents that involve bodily injury and property damage like the CGL policy. However, the coverage involves any accident while using a vehicle, or any work performed that involves a vehicle.
Example Scenario: Your contractor is lifting a large piece of equipment out of a truck and it falls out onto another vehicle. A commercial auto policy would cover any damage caused to the other car.
Automobile liability is a frequently overlooked policy. If a claim is denied through a CGL policy where a vehicle was involved, such as the above example, you may be able to take advantage of the auto liability coverage, even if you are not listed as an additional insured. Most auto policies will grant you additional insured status via your relationship with the contractor.
Workers’ Compensation covers any medical costs, lost wages, and medical bills associated with the injury or sickness of a contractor while working. Not all businesses have employees or may meet exemption status according to law. In these cases, a workers’ compensation policy is not required and a waiver may be acceptable.
Example Scenario: Your contractor’s employee accidentally hurts their back while pulling a dishwasher out of a cabinet. After visiting a doctor, they learn they will require surgery and will miss time at work. This results in medical bills and lost wages.
Most states require a general contractor to provide workers’ compensation coverage for an injured employee if a subcontractor does not have the coverage. As such, requiring and confirming your contractor has this policy is important. In some cases, an uninsured contractor who is injured on the job site can file a suit against the consumer’s homeowner policy for lost wages and medical care putting you and your company in the middle.
Umbrella Liability is intended to provide coverage in the event of catastrophic events and provides limits above and beyond the primary or standard insurance policies discussed earlier in this article. It can also provide some protection against claims that are not always covered by these insurance policies. Not all businesses have this coverage because they think their risk exposure is minimal to disastrous results. If your network is in a high-risk industry, you may want to consider this policy as a requirement for your contractor and vendor network.
Umbrella liability is also a more affordable option to increase limits to all the standard policies. As such, it is a good option for your contractor to supplement their limits.
Example Scenario: Your contractor has general liability coverage of $500,000 for each occurrence, however, you require $1,000,000. They also have an umbrella policy with $1,000,000 for each occurrence. This means they actually have $1,500,000 in total insurance coverage, which is significantly more than what you require and there is some flexibility in how this is applied.
Additional Types of Policies
Depending on the type of work your network specializes in, you may track additional policy types to reduce your risk exposure. The policies below are some common additional policy types that you may want to consider based on your industry and the type of work being performed.
Cargo Insurance falls under a category of coverage called Inland Marine
Policies. This covers property, including third-party property, that is in transit. Inland Marine Policies are designed to fill a gap for the care, custody, and control exclusion found within your typical CGL policy. CGL policies simply do not cover any customer or third-party property.
Don’t let the term inland marine baffle you. Despite its name, inland marine insurance covers products, materials and equipment when transported over land—e.g., via truck or train—or while temporarily warehoused by a third party. Collisions and cargo theft are the two most frequent causes of inland marine losses and this coverage is not specific to transport over water, which is called “marine insurance” and not likely applicable for most customer networks.
Example Scenario: Your contractor’s truck is in an accident and it damages major appliances that are being transported. The damage to the major appliances would not be covered under the general liability or auto policy but would be under their cargo insurance.
Bailee Insurance is also a type of Inland Marine Policy. It is designed to provide coverage for third-party property that is in storage, repair, or service.
Example Scenario: Your contractor has stored your customer’s property from their home in a temporary storage container to dry the home out after a flood. During the night, the storage container was broken into and items were found missing.
Pollution Liability provides coverage in the event there is contamination of the environment from a pollutant. Pollutants typically are not covered under your standard CGL, auto liability, and umbrella policies.
Example Scenario: A subcontractor does not properly extract roofing insulation that has asbestos and exposes the homeowner and other subcontractors. This results in a class-action lawsuit.
Garagekeepers Coverage is like bailee coverage but is specific to auto services and dealers. It covers damage that can occur to a customer’s vehicle while in the servicer’s care for service and repair.
Example Scenario: A mechanic at your contractor’s service shop is moving the customer’s car out of the shop and accidentally backs into another vehicle. Garagekeepers would cover the damage to the customer’s car.
On-Hook Towing Insurance covers any damage that may occur while a vehicle is being towed or hauled. This includes collision, fire, theft, or vandalism.
Example Scenario: Your contractor is towing a customer’s vehicle and accidentally causes an accident with multiple vehicles. During the event, the customer’s car that is being towed is damaged. To cover the damage to the customer’s car, you would need on-hook coverage.
Professional Liability or Errors & Omissions (E&O) is designed for any business that provides a professional or quasi-professional service such as consultants, architects, designers, and engineers. It will cover any financial losses associated with missed deadlines, work errors, oversights, breach of contract, etc.
Example Scenario: Kitchen cabinets were designed, ordered, and installed by your contractor. After completion, the customer claimed they were not designed as requested and insisted that they be reordered and reinstalled.
No matter what business your contractor or vendor has, it is important for them to have the standard general liability, automobile liability, and workers’ compensation policies. Depending on their industry and the type of work they perform will determine the additional types of policies that they should obtain to close any gaps in coveragethat are not found in the standard policies.
If you are unsure what policy types you should require, it is best to consult a risk manageror insurance agent. Next time you find a contractor questioning your insurance requirements, or you are evaluating your current compliance requirements for the network, you can confidently respond with the necessary standard and any supplementary policies.
Contents are provided for information purposes only and should not be construed as legal advice. Users are reminded to seek legal counsel with respect to their obligations and use of PlusOne Solutions services.
About PlusOne Solutions
PlusOne Solutionshas been an industry leader in the workforce compliance and risk management field by specializing in compliance programs that meet the complex challenges of geographically dispersed contractors, vendors, and employee networks. PlusOne Solutions protects companies from possible financial, legal, operational, and reputational risks associated with contractor and vendor relationships while creating safer work environments.
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