Contractor General Liability is a must-have for any type of contractor that works on residential, business, or commercial projects, and finding the right type of contractor’s insurance policy is important.
All of us want to save money when we can and none of us want to pay more than we need to. I get it. However, when it comes to construction insurance, most business owners focus on the cost of insurance only. There is so much more.
Besides knowing what exclusions your policy has, knowing if your policy is an Occurrence policy or a Claims Made policy is important. An occurrence policy has lifetime coverage for the incidents that occur during a policy period, regardless of when the claim is reported. A claims-made policy only covers incidents that happen and are reported within the policy’s time. The more affordable policies and most policies that, in my experience, contractors purchase online are the cheap Claims-Made policies.
Other important factors to consider when purchasing a contractor’s general liability policy are how your policy responds to claims. As mentioned earlier, there are Claims Made policies, Occurrence policies, and some that have what insurers refer to as a Sunset or Manifestation clause.
So, what’s the difference and why should you care? The easiest way to understand a difference is by looking at a claim example:
A leak in the roof installed by a contractor begins in year 1 and was discovered during that same year. It also continues during year 2. All three types of policies (occurrence, sunset, and manifestation) effective during year 1 would provide coverage for year 1 because the damage occurred and was discovered during the policy term.
- An “Occurrence” policy effective during year 1 may also cover the damages that happen during years 2, 5, etc.
- A “Sunset” policy will only cover damages that happen within a specific time frame.
- A “Manifestation” policy will only cover damages if they “manifest” (become evident) within the policy period.
So if policy A was effective from 12/1/2019 and expired on 12/1/2020 and there was a leak in the roof on 12/2/2020, the contractor would have no coverage unless the same policy was renewed.
So why would any contractor choose anything but an “occurrence” form policy? One simple answer: Price. Compared to occurrence form policies, sunset and manifestation policies can be up to 50% less expensive, depending on the insurance company, contractor type, exposure, and other factors.
At The Contractors Resource Center, we caution our clients to carefully think about choosing the latter 2 options. In some cases, however, where the risk of later property damage or injury is very low, it might be a considerable option, especially for smaller contractors. For example, a lawn care, flooring, or painter contractor may not have much concern that their work will cause harm down the road.
What About Faulty Workmanship?
One important distinction is that all three will not automatically include faulty workmanship. So, if a contractor makes a mistake while performing his or her work, without such endorsement, there usually wouldn’t be any coverage for the work performed. For example, if a plumber breaks a pipe that is being worked on, all policies should pay for the water damage caused by the leaking water. Or if the pipe later breaks and has to be replaced because of the plumber’s wrongdoing, the damage to the pipe wouldn’t be covered. Only faulty workmanship covers damage to the portion of the building being worked on.
While a pipe may not be a big deal (cost-wise) to replace, but other cases can be much costlier. Imagine you were hired to replace windows in a high-rise and it later turns out that the windows weren’t sealed correctly, causing damage to the building and requiring all windows to be reinstalled. Without faulty workmanship (or sometimes listed as professional liability) coverage would most likely be denied.
One final point:
The majority of the policies we recommend and provide for our clients do cover Faulty Workmanship and will cover the costs of materials to fix and or repair any faulty workmanship should a claim arise and Faulty Workmanship is discovered.
The Bottom Line:
Contractor liability policies can be confusing and Do Not buy on price alone. Ask about the Exclusions of your policy and understand whether your policy will have Occurrence, Sunset, and or Manifestation language in your policy. It’s sad but true. Too many business owners buy on price alone and too many insurance agents don’t take the time to explain the coverages and provide the important heads up to their clients on what they may be buying and why at the end of the day, a cheaper policy just may bite them in the ass.
If you would like a Complimentary Insurance Consultation on your Insurance Policy Options, please call Kevin at 800.992.1712 Ext#712. We are here to help! Or, to get started on a customized quote for your business. CLICK HERE.