For a small construction contractor, a single catastrophic loss — a defective job, equipment collision or employee injury — can quickly surpass total liability insurance limits.
The risk of underinsuring a company, especially when construction costs and labor shortages are at an all-time high, can easily devastate a contractor and force him or her to shut the business doors.
It's traditionally been common practice for insurance providers to base suggested insuraNPK nce limits on a contractor company's annual revenue.
All that changed in the past decade. Now revenue alone is no longer a reliable indicator of potential loss severity, said one broker.
Chris Ciccarelli, vice president of Amwins Brokerage New Jersey, sees claim severity outgrowing small trade contractors.
In a September Insurance Journal article, Ciccarelli wrote that a single catastrophic loss that exceeds liability limits can threaten financial viability.
“Small trade contractors face many of the same risk exposures as their larger industry peers,” he wrote.
These contractors work on high-risk job sites, operate commercial vehicles and equipment and assume similar liability on their projects, he said.
“One loss can quickly exceed the size of the business itself,” especially in light of higher construction costs, labor shortages and increasingly severe claims.
Plus, the cost of insuring small to medium-sized trade contractors is growing. In early 2024, the average cost of commercial insurance rose 6.3 percent.
Saving money on insurance costs is top of mind especially for small contractors, said Corey Sheridan, COO, Affordable Contractors Insurance.
He said as insurance costs rise, many contractors opt for the minimum coverage necessary to meet contractual requirements and maintain cash flow.
In an article for Construction Executive, Sheridan said this strategy might offer short-term financial relief.
“But it can expose contractors to significant risks and potential financial ruin if unexpected events occur,” he said. “When contractors opt for the minimum insurance coverage, they expose themselves to a range of significant risks that can have severe consequences.”
Financial liability is one of the most immediate dangers, but legal complications are another risk, said Sheridan.
“Minimum coverage may not always meet all legal requirements, especially if regulations change or if a particular project has specific insurance mandates.”
In fact, in some jurisdictions, minimum policies might fail to address stringent insurance regulations.
Non-compliance with these regulations can lead to serious consequences, such as legal penalties, project shutdowns or prolonged and costly legal battles. Not only can they drain a contractor's resources and delay project timelines, but the damage to a contractor's reputation can be substantial.
“If clients and partners perceive a business as unreliable or untrustworthy due to inadequate insurance coverage, this perception can lead to lost opportunities,” he said.
A decline in business prospects can further compound the contractor's challenges, he added. Plus, there's the risk of losing valuable business assets.
Contractors who do not have sufficient insurance coverage are at risk of losing equipment and materials in the event of theft, damage or disaster.
Navigating Construction Business Storms
But if revenue is no longer the sole measure of insurance coverage, then agents and brokers must dig deeper to assess a contractor's risk potential.
A provider must look at the full scope of an insured's risk as well as his or her operations, the type of work done and the liability they assume.
Only then can the broker establish limits that truly address exposures contractors face on the job,” said Ciccarelli of Amwins Brokerage.
Though the nature of their work may vary and they may face different exposures, three challenges raise the stakes for all small trade contractors today.
Ciccarelli believes these challenges are higher materials and labor costs, auto exposures and claim and litigation costs.
Though small contractors may set work fees, material and labor availability and costs can change all that as they fluctuate during a project.
Budget pressures can push a contractor to look for cheaper materials or sign on less-skilled labor to balance his or her costs and meet tight timelines.
A small trade contractor looking to take on more jobs has to weigh time constraints, budget pressures and quality of work, said Ciccarelli.
Despite the idea that small trade contractors manage smaller vehicle fleets than larger companies, even one employee on the road means auto risk exposure.
“Bodily injury claims as a result of auto accidents can quickly exceed an entire contractor's revenue,” said Ciccarelli. “As the auto sector remains volatile and claims remain severe, contractors cannot overlook fleet risks alongside the work they perform.”
Finally, he noted, skyrocketing jury awards in recent years have exacerbated potential claim severity. Investigating and defending a claim is costly.
A construction defect claim alone can impact several parties involved in a project. Determining who performed the work, when damage began and how far it spread can get quite complicated.
Subcontractors could find themselves brought into litigation, as well, said Cicarrelli. They, too, can accrue significant costs to investigate and defend a claim.
Agents serving as resources for their small trade contractor clients must start by looking beyond the general overview of the insured, said Ciccarelli.
He suggests that instead providers work to understand exactly what their clients do and how they operate.
“Agents should work to understand where an insured operates, with whom they work, and how they perform work.”
How are labor and material shortages impacting operations? How are contractors keeping up with tight schedules? How does the insured vet subcontractors? Does the insured rely only on certificates of insurance, or do they review policies and endorsements?
Ciccarelli believes agents should not be aiming to make their clients appear risk-free.
“Instead, agents should make sure the insured, agent and carrier understand the actual risk exposures at play and the coverage in place to combat them,” he said.
By understanding the contractual obligations insureds are navigating, agents can in turn ensure their insurance portfolio aligns with their commitments.
“For example, an insured might agree in a contract to maintain certain excess limits without realizing subcontractors are expected to carry the same.”
If a contractor does not meet those requirements or appropriately transfer risk, he said, they could be left responsible for any contract gaps.
“While insureds cannot control rising costs or how a jury might view a claim, they can make their business more defensible in the event of one.”
Ciccarelli believes that concept of defensiblity begins with establishing a culture of safety.
“Regular safety talks, documented procedures and visible safety practices can prove that a contractor prioritizes safety throughout an entire operation,” he said.
These practices do not begin and end on a contractor's property, he stressed. Instead, they extend to fleets on the road and employees on job sites.
Safety talks, particularly around driving techniques and how to manage other drivers in the field, ensures that culture of safety spreads across the company.
“Agents should advise that safety policies, practices and discussions should be formalized, communicated to all employees and documented.”
Once documented, they should be available for easily reference to address employee questions and any potential claims, added Ciccarelli.
“Contractors who are pulled into litigation can prove a documented history of effective safety practices and paint a more accurate picture of how the business operates.”
Cicarelli believes smaller revenue does not necessarily mean fewer risks. Far from it, he said.
Small contractors “assume significant exposures by the nature of their businesses, the organizations for whom they work, and the vehicles on which they depend.”
Agents and brokers who understand those exposures can help ensure the right policies and limits are in place if a major loss occurs, he added.
Putting Together Plans for Insurance Coverage
Sheridan of Affordable Contractors Insurance said understanding the complexities of obtaining comprehensive insurance coverage can be daunting.
“But implementing effective strategies can safeguard a business against unforeseen risks,” he said.
Here is his list of contractor considerations:
• Conduct a risk assessment: Regularly evaluate potential risks specific to projects. Identifying these risks allows contractors to determine the necessary coverage and avoid being underinsured.
• Stay updated on regulations: Insurance requirements can vary significantly by region and project type. Keeping abreast of changes ensures coverage remains compliant and prevents legal issues.
• Review the policy annually: As a business grows and evolves, so do its insurance needs. Conducting an annual review with an insurance provider helps adjust coverage to match the current risk profile.
• Invest in safety training: Reducing jobsite accidents not only protects the workforce but also minimizes insurance claims, potentially lowering premiums over time.
• Document incidents thoroughly: In the event of a claim, detailed documentation can expedite the process and verify that the coverage is appropriate. Contractors should keep accurate records of incidents, including photos, witness statements and detailed reports.
• Seek expert advice: Consulting with an insurance expert can provide tailored insights into the best coverage options for a business. Experts can help identify gaps in current policies and recommend appropriate solutions to mitigate risks.
“These strategies allow contractors to better manage their insurance needs, guaranteeing they are well protected against potential liabilities,” said Sheridan. “This proactive approach secures the business and enhances its reputation and client trust.”
