Terms and Conditions: Understanding Liability Insurance

All remodelers should have general liability insurance coverage. It provides you with a backup against claims for property damage or personal injury resulting from your construction activities. When my clients get sued, the first thing I do is look for an insurance policy that might cover the claim. The problem is that general liability insurance these days is so expensive. So what options do you have?

Operating without insurance coverage. You might be saying to yourself "I'm a good contractor. I can control the quality of my work. I've never been sued. I don't need insurance coverage." The flaw in that outlook is that you can't control everything. And it only takes one claim to put you out of business. For example, if you accidentally drop a ladder and hit a car, you are responsible for the cost to fix the car. And if it hits a person, you are responsible for all their medical costs, lost wages, pain and suffering. In addition, you are responsible for the attorney fees to defend yourself against the claim. If you have insurance, the insurance company will pay for the claim and a lawyer to defend you, which can cost more than the claim itself.

Buying the least expensive policy. You might decide to shop around for the cheapest insurance policy you can find. While saving money is a good goal, you must analyze what you are buying.

1. Occurrence vs. Claims Made Policy
Insurance policies are renewed on an annual basis. So let's say you purchase a policy for the year 2006 and you have five projects during the year. Then, in 2008, one of the project owners discovers a leak around the windows you installed which caused damage to the floor. They call you. You turn the claim over to the insurance company you paid premiums to for 2006. If you had an "occurrence" policy, that insurance carrier will provide coverage, even if 2006 was the only year you purchased that policy with that company. The reason they will provide coverage is because the cause of the damage "occurred" during the year you had the policy.

If the policy you purchased in 2006, however, was a "claims-made policy," the insurance company will deny coverage. Why? Because the claim was not made in 2006 when the policy was in place. It doesn't matter when your construction activity occurred. Only if you have a claims-made policy in place in 2008 will they cover your claim.But what if you switched to an occurrence type policy in 2008? Since the defective window did not get installed in 2008, that insurance company will not cover the claim. So you may be without coverage even though you paid premiums every single year.Unfortunately, the claims-made policies are usually much cheaper so contractors buy them without fully understanding the ramifications. And if you want to change the claims-made policy to an occurrence policy, you will need to purchase "tail-end" coverage at an additional premium, ultimately bringing the cost of the policy up to or exceeding the premium level you would have paid for an occurrence policy in the beginning.

2. Admitted Insured
Another item that will bring the cost of a policy down is using an insurance company that is "not-admitted" in your particular state. Many states have developed a pool of money which is available to insured contractors whose insurance company is bankrupt. This pool of money is used to pay claims and cover legal fees, but is only available if the insurance company that insured you is an "admitted company" — approved to be part of the group for your state. If they are not approved and they go bankrupt, you are left without coverage, even though you paid all those premiums. So, while you may save money upfront, you may end up paying a lot more in the end.

The lesson? It is OK to go with the cheapest insurance policy as long as you understand what you are buying.