5 Insurance Essentials

One bad wire can burn a house down. Are you covered for that?

Consider this scenario: You are hungry, so you send a helper out to buy pizzas for the crew. While waiting for the pizzas, he has a couple of beers and, after he leaves the restaurant, he runs into a packed school bus. He drove his own car. Can you be sued? Are you covered? Insurance experts likely will say you can be sued. And you probably aren’t covered, unless you have “non-owned coverage.” This costs little (often less than $100 per year) but only top-notch agents familiar with small business insurance know to recommend it to clients.

Some small- and mid-sized contractors report they spend about $100,000 annually on insurance basics; small electrical contractors often spend much less. But they sleep well, knowing they are covering their customers against losses and they also are protecting their employees and their own financial future.

“Because a contractor has exposure on many fronts, he or she needs several different kinds of coverage to be fully protected,” says Scott Simmonds, an insurance consultant based in Saco, Maine. Start with insurance on an office and any vehicles used in the company’s business—and don’t scrimp. A rule of thumb in insurance is that additional coverage (going from, say, $100,000 to $500,000) may cost less than you think because it is the first module that is expensive.

Those are just the basics, however. To be fully covered, you need much more.

General liability—This is the cornerstone of your coverage, Simmonds says. General liability covers the damage that results from construction defects. If sloppy wiring triggers a fire that burns down a customer’s home, your general liability will take care of these losses. It’s a must-have in any insurance portfolio.

Workers’ compensation—Almost all states require workers’ comp coverage, which offers financial protection (medical payments, for instance) for employees hurt on the job. Workers comp is crucial, says Gerry Goldsholle, an insurance expert and CEO of FreeAdvice.com. Strong advice from experts is, don’t try to game this. Some contractors say they have no employees, that everybody is a sub. When a hurt subcontractor sues, usually that defense will crumble. Another, common mistake is failing to buy workers’ comp for relatives (many contractors incorrectly think they don’t need it for them). Workers’ comp can be expensive, but ducking this obligation may prove to be more expensive in the long run, Simmonds says.

Umbrella—This is coverage that kicks in when other coverage is exhausted. Say you are slapped with a $2 million judgment but your general liability stops at $1 million. The next million is absorbed by the umbrella.

Non-owned coverage—Buy this coverage and there’s no more worrying if an employee has current auto insurance coverage of his own.

Tool coverage—From portable generators to cell phones and laptop computers, you have tens of thousands of dollars invested in tools—all vulnerable to theft or fire. Make sure professional equipment is covered in full.

The best way to ensure adequate coverage is to keep your insurance up-to-date, Simmonds says. “Consider bidding your coverage every three to five years,” he says. If your business has grown, the limits probably need to be raised. Are you taking on different kinds of projects (more commercial buildings, for instance)? Ask your agent if this necessitates changes in coverage. Once a year, sit down with a knowledgeable agent and revisit, policy by policy, the coverage you have and the prices you are paying, Simmonds says. This conversation probably will take an hour, but the pay-off is peace of mind.