Ignorance is bliss.
That is until you have an insurance claim that is uncovered because you didn’t realize that you didn’t have the right coverage. In that case, ignorance is expensive! Ignorance is catastrophic!
As a contractor, you already have commercial property coverage and a general liability policy. On it, you’ve listed all of your equipment, vehicles, buildings, etc. And, unless you’re a sole proprietor, you’ve had to purchase workers’ compensation insurance.
You might be asking, “Where does it end? You mean I’m still not fully covered?”
Yes, indeed! That is exactly what I’m telling you.
All insurance policies have exclusions – things that aren’t covered by your policy. It’s because of those exclusions that you need extra coverages.
For over 25 years, I’ve been helping contractors look over their policies with a fine-tooth comb, helping them spot any gaps in coverage, and then putting in place the protection they need.
So, you might ask, “Dawn, in all your years helping contractors, what are the areas that you often find gaps in insurance coverage?” Here’s what I’d tell you:
- Employment Practice Liability
- Builder’s Risk Coverage
- Errors and Omissions Coverage
- Pollution Insurance
- Cyber Liability
#1 Employment Practice Liability
Employment Practice Liability (sometimes referred to as EPLI) covers an employer in the case that an employee sues an employer alleging a violation in U.S. Labor Laws. These lawsuits allege some unfair or inappropriate behavior by the employer.
Some of the violations include:
- Wrongful termination of employment
- Sexual discrimination
- Racial discrimination
- Age discrimination
- Sexual harassment
- Invasion of privacy
- Wage violations
Employment Practice Liability insurance covers legal fees, judgments, and settlements.
Do I really need this coverage?
If you’re wondering if it’s worth purchasing this coverage, consider these statistics:
- In 2018, the EEOC fielded over 200,000 inquiries regarding potential discrimination claims.
- More than 7,600 sexual harassment charges were filed in 2018.
- The average cost of settling out of court for an employment claim is $75,000.
- The average jury award for an employment-related case is $217,000.
- The average duration of an employment claim spans more than 300 days.
As with all insurance, you will need to consider the amount of risk you are taking on if you do not purchase Employee Practice Liability coverage.
On the low end, an Employee Practice Liability claim will cost you $25,000. On the high end, you could be looking at paying hundreds of thousands of dollars.
What does Employee Practice Liability cost?
In general, the two options for adding this coverage are to pay for an endorsement on your current commercial insurance policy or to purchase a stand-alone policy.
With an endorsement, your current insurance provider will add extra coverage to your existing policy. This might cost anywhere from $300 to $1,000.
If you purchase a stand-alone policy or a policy not connected with your current commercial policy, your policy could start as low as $1,000 per year or be as large as $35,000 or more.
The cost of your Employee Practice Liability insurance will depend on the following:
- The number of your employees
- The state where your business is located
- Your industry
- The coverage limit amount you want
- The amount of your deductible
#2 Builder’s Risk Coverage
Builder’s Risk Coverage provides protection for builder’s materials and any construction that you are building but is not completely finished and is not yet covered by the soon-to-be owner’s insurance.
This coverage comes into play if materials you have purchased for a job are stolen or if a structure receives damage during the construction process.
Why is the coverage overlooked?
The biggest reason contractors overlook this coverage is because they are not fully informed regarding what their General Liability policy covers. Often it’s overlooked because the contractor assumes that a claim of this type could be applied to their commercial insurance policy or they assume that the property owner has purchased the coverage.
Some contractors don’t even know that this coverage is available to them!
Also, as with many other types of insurance, a contractor may not want to pay for the extra coverage this insurance provides. They feel it is too expensive or that they can’t afford it.
How does Builder’s Risk Insurance work?
Let’s imagine you are building a house and something goes woefully wrong before you are finished with the job. Builder’s Risk insurance will cover the costs of damages to the house.
What could go woefully wrong?
Maybe an electrical fire causes significant damage to the home. Maybe it destroys the home. Without Builder’s Risk insurance, you will be responsible to pay for any repairs or for completely rebuilding the home.
You will have to pay for the damages!
Here’s a less dramatic example. Let’s say that you are installing security cameras and equipment at an industrial facility. You have your equipment along with the security cameras, monitors, and wiring secured in a trailer outside of the job site. One evening, the trailer is broken into and all of the security equipment is stolen.
Who will pay for the lost equipment?
You will.
If you don’t have Builder’s Risk insurance in place, you will be responsible for paying out-of-pocket for any stolen material or installed/uninstalled equipment.
The implications for not having this coverage are far and wide, depending on all that you will have to replace using your resources.
How much will I pay for this kind of insurance?
In general, you will end up paying 1% to 5% of the total cost of construction. The premium amount will be determined by the cost of the job materials, level of coverage, type of construction, location/security of the job site, and project type (commercial, industrial, residential).
Builder’s Risk Insurance can be purchased by the job – in doing this you generally report each new job your business will be taking on to your insurance company every month. The insurance company will bill you monthly.
Your other option is to purchase a policy for each specific job.
Builder’s Risk Insurance is generally purchased for each specific job, but some companies allow you to purchase it for the year on a “reporting basis” meaning, you generally report each new job your business will be taking on to your insurance company every month. The insurance company will bill you monthly.
#3 Errors and Omissions Policy
Errors and Omissions Insurance, often called E&O, protects your business from lawsuits resulting from a mistake you made when working on a job. This insurance covers you when a customer claims you were negligent in your work for them.
For a contractor, this is a huge risk!
If your work has an error that results in damage, you could be on the hook to repair whatever is damaged at your own expense.
So when might you need to rely on an Errors and Omission Policy?
Let me give you a couple of examples.
Let’s imagine you are constructing a house. Your employees use the wrong type of caulk in a shower that eventually fails and allows water to leak to the rooms below. And now, months later, the homeowners are experiencing water damage.
Who’s going to pay for removing the mold that resulted from the water damage? Who’s going to pay to remove the caulk and replace it?
You guessed it. You are!
Now let’s say that your company installs the pipework in a new commercial construction. Two years after the work, regular sewage backups start occurring in the basement of the building. After hiring a plumber to fix the problem, they realize that the problem is how the piping was laid. It’s flat…not enough fall.
Who has to pay for the piping to be fixed? Who will pay for the bills that resulted from having the floor jackhammered up and new pipe installed?
Again, the answer is most likely you!
Even if the job was a few years past, you will be held liable for any damage that resulted from work done improperly by you or your employees.
Why does this coverage get overlooked?
Well, for many contractors, there is an assumption that your General Liability insurance will cover this. But that is a false assumption.
Your General Liability policy often will not cover errors or negligence in your company’s services and rarely covers “your work.”
Won’t I only need this coverage for each specific job?
In terms of Errors and Omissions coverage, you must keep this policy up-to-date. When a claim of negligence or error is made, it is not placed under the policy you had when the job was performed. Instead, all claims are covered by your current policy.
Let me summarize it like this: The claim goes on your current policy, not your policy from when the error was made.
How much does this coverage cost?
As with some other extra coverages, Errors and Omissions can sometimes be added to your Commercial Insurance as an endorsement. Most small contractors can add this coverage for anywhere from $100 to $1,000.
You can also purchase a policy as a standalone policy. In this case, the premium will start at $1,000. The premium amount will be determined by the limits you set on your policy and the type of work you do as a contractor.
#4 Pollution Coverage
You might be thinking, like many other contractors, that you’ll never need pollution coverage. You may be thinking you have no real risk of polluting the environment.
So what kind of contractors need this product?
Obviously, if you work in an industry where you deal with hazardous materials like asbestos abatement or waste removal, this coverage is absolutely necessary.
But other contractors need this coverage too. If there is any chance your work might contaminate the environment – land, water, or air – you should consider pollution coverage.
Think about the following types of pollution. Could this happen to you?
- Equipment with a gas or oil leak
- Accidentally spread unknowingly contaminated soil
- Inadvertently spread airborne bacteria or mold through an HVAC project
- Install a tank with a leak resulting in soil contamination
- Accidentally release freon from a cooling device
- And, believe it or not, even milk that spilled on the Schuylkill Highway was one of the larger pollution claims in PA history
Excavators, plumbers, electricians, HVAC contractors, roofing contractors, etc. could all potentially be held responsible for a pollution claim.
What happens if I don’t have pollution insurance but end up with a pollution claim?
Addressing environmental pollution can be very expensive!
Clean up costs as well as litigation costs can add up. And especially for a small contractor, paying these damages can result in a business having to declare bankruptcy.
Also, if you are a sole proprietor, you are at risk of losing your personal assets if you are sued and end up having to pay damages for an environmental pollution problem.
How much will this coverage cost my business?
On average, Pollution Insurance runs around $2,500 annually for a smaller contractor. Larger contractors will expect to pay more.
The cost of the policy will depend on the limits set, and those limits are often determined in relation to the amount of your company’s revenue. For example, if you are a larger company with $18 million in revenue, you can expect to pay $6,000 each year for a $1 million limit.
Some insurance companies will also add this coverage as an endorsement to your commercial insurance package.
#5 Cyber Liability Insurance
Cyber liability is a coverage that many small businesses don’t realize they need, especially if the business doesn’t do a lot of internet business or work. But, if you have a website or an email address, you are vulnerable to a cyber-attack that could cost you hundreds of thousands of dollars.
Cyber liability insurance covers your business if you have a data breach or if a cyber attacker uses your website or email address to exploit your customers.
What happens if you don’t have this coverage?
Without Cyber Liability Insurance you are on the line to pay for any damages done to your own business, any fines and fees that result from a breach, or any damages done to your customers due to a cyber attack. These damages can include:
- Repayment of lost funds
- Restoration of lost data
- Replacement of damaged hardware or software
- Legal fees and settlements
- Government fines
- Forensic work to stop the attack or find the source of the attack
- Cost to notify anyone affected by a cyber breach
- Ransomware fees
On average, a company will spend $200,000 on a single cyber claim!
How much does Cyber Liability cost?
Here’s the surprising news! For a relatively low amount, you can make sure your business is covered up to $250,000 annually for $250. A policy for this amount will cover the needs of most businesses.
If you have a larger business, you may need more coverage. But again, with policies priced at just over $1,000, your business will be protected from a potentially large claim.
Does my business need these coverages?
So you might be wondering, “How do I know if I need one of these coverages?”
Well first and foremost, I would say ensuring that you don’t have gaps in your insurance coverage starts with the expertise of your insurance agent. When it comes to insurance agents, not all have the same expertise.
Your Policy’s Exclusions
Insurance is very complicated, especially the language of insurance. You need an agent who is thoroughly knowledgeable about what is written in your policy. Your agent especially needs to have the know-how required to understand what is EXCLUDED by your policy.
It’s in the exclusions that you will find the gaps in your coverage!
Your Company’s Industry
Not only does your agent need to be able to understand the “fine print” of your policy, but you also need an agent that is familiar with your particular industry.
Insurance is similar to medicine. If you have an issue with your foot, you don’t go to see a neurologist. If your heart has an irregular beat, a visit to the gastroenterologist will do you no good!
With insurance, it is crucial to hire an agent that has experience and expertise in writing insurance policies for businesses in your industry. If you run an HVAC company, you need an agent familiar with writing policies for HVAC companies. If you are an excavation business, you want an agent who knows insurance for excavation companies.
Without that kind of expertise, you can expect to have gaps in your coverage.
Every business has risks unique to that particular type of business. You need an agent that is well aware of the risks unique to your industry!
Wondering if you have insurance gaps? Here are some next steps…
If you find yourself at a place where you are uncertain if you have gaps in your insurance coverage, I would invite you to schedule an insurance review.
You can do this with your current agent, but you will first want to be armed with some questions that will help you determine if your agent can bring the expertise you need to the table.
You can start by simply asking them if you need any of the coverages mentioned above and why they do or don’t recommend them. (If they do recommend these coverages, it begs the question, why have they not suggested them before now??)
You should also ask your agent about their experience working with other businesses in your industry including how many other businesses in your industry they insure.
When you conduct an insurance review, not only can you uncover potential gaps in your insurance program, you also have the opportunity to evaluate your current agent and the additional resources they provide to create a robust insurance program for your business.
At Baily Insurance Agency, we work with our clients to create a complete insurance package – not just a policy with a great premium, but also strategies and resources that help our clients reduce their premiums long-term.
We know the best commercial insurance programs require a comprehensive plan, and we have additional resources available for all of our clients through our partnership with Keystone Insurance Group.
If you want to evaluate your current insurance program, we have put together an article identifying four key resources your insurance agent should offer your business to create an effective insurance program. This resource will help you evaluate your agent based on the tools and resources they bring to your business – resources that go beyond pricing your policy.
Your business is one of your most valuable assets, and you should expect the best in regards to protecting it!
