Let’s face it. No one loves shopping for insurance, and most contractors, especially New contractors, buy General Liability insurance Based on Price. Big Mistake!
Buying your General Liability Insurance based on price alone is by far the biggest mistake you can make. Now, it’s not your fault and our industry doesn’t help. As a new contractor or a contractor with a renewal coming up, you are swamped with phone calls from insurance companies all claiming to offer the Lowest Price. Sounds good, but the fact of the matter is that the majority of the people calling you are not even licensed insurance agents, they are Marketing Companies! Their goal is to capture some basic info from you and then they sell your information as a New Lead to other insurance agents who are all going to scramble and try to offer the lowest price. It’s ugly and it’s unfortunate.
With General Liability Insurance, the last thing you want to do is buy based on price alone. Business insurance is not the same as your Home or Auto Insurance where there are only a few factors to consider.
Business Insurance is different. Different terms, different types of coverage options, and your General Liability Insurance will always have some type of EXCLUSIONS on what you can and or cannot work on or how and if you are insured and protected if you work with subcontractors.
#1 Most Important Tip is:
Find and work with a Construction Insurance Specialist.
Don’t call your AAA guy or your State Farm gal and expect they will understand the nuances of construction insurance. Sure, there are exceptions to the rule but in most cases, your Personal Insurance broker is not your Go-To source. Get recommendations from other contractors you work with or call your local construction association and ask who they recommend for General Liability Insurance. A construction insurance specialist will help you navigate your options and help you to make certain there are no surprises in the future when a claim is made. And, if you are in the business long enough, it’s not if a claim will be made, it will be when the claim is made. Unfortunately, and especially in California, construction claims are made often and claims are expensive if not properly insured.
Important Tip #2:
Know your Exclusions! Every policy has exclusions. Exclusions are what your policy will NOT cover. Some of the most common exclusions we see in General Liability policies are exclusions for work on Townhomes, Condos, Apartments, ADUs, Tract Homes, and New Home Construction. Make sure to let your construction insurance broker know if you plan on working in any of these areas.
Know some of the basic and most important construction insurance terms such as Sunset Clause, Claims Made v.s. Occurrence and Waiver of Subrogation. There are several other construction insurance terms and coverage options in a policy but knowing these 3 are important and will help you better understand your General Liability Insurance options when it comes to picking out a policy. It’s not just the 1 Million Dollars of Insurance coverage. It’s how and when that insurance policy will ever actually provide that 1 Million Dollars of coverage!
Terms such as Deductible and Premium Payments are pretty straightforward. But, what about Sunset Clause? What’s that mean? The idea of limiting the reporting period for claims is old and relatively self-explanatory. You, as an insured have a limited period in which to report a claim potentially covered under your general liability policy. Any claim reported after a certain period of time may not be covered. The amount of time a claim may be reported differs between policies and carriers. The operative language is typically attached to a policy as an endorsement. This language is important for contractor trades in which claims and or the ‘discovery’ of claims may not arise for several years.
Roofing Contractors, Solar, HVAC, Electrical, and Residential and Commercial Building Contractors are the trades that should pay special attention to these details in your policy. Why? Because issues and or claims typically arise several years after the work is done and if your policy is a Claims Made policy or has a Sunset Clause,…..you may not be covered!
New “statutes of repose” related to residential construction defects were announced in 2022 and these new statutes, provide the time in which general contractors or subcontractors may be held liable for certain construction defect claims. Construction defects are often hidden, and claims are likely to be brought sometime after the completion of the project. Therefore, they are affected by limited reporting periods or “Sunset Clauses.”
The statutes of repose are essentially based on the type of defect. The following is a summary of such statutes found in California Civil Code section 896:
Plumbing and sewer issues 4 years
Electrical system issues 4 years
Driveways, sidewalks, pathways, etc., cracks 4 years
Irrigation and drainage issues 1 year
Untreated wood post deterioration 2 years
Untreated steel fence deterioration 4 years
Paint and stain deterioration 5 years
Landscaping systems 2 years
Dryer ducts 2 years
Depending on the type of work performed by you, a policy with a shortened reporting period may cover the time in which you may be held liable for certain construction defects claims. For example, a contractor may not be liable for a landscaping system claim beyond two years from the close of escrow. Therefore, a policy with a three-year “sunset clause” would potentially cover landscaping system claims. The Bottom Line: If having coverage years after your work is completed is important to you, make sure you understand and know about what if any Sunset Clause is in your policy.
Claims-Made Policy v.s. Occurrence Policy
It’s important as a contractor to understand the difference between a Claims-Made Policy and an Occurrence Policy. There are big differences!
- A Claims-Made policy only covers incidents that happen and are reported within the policy’s time frame. Claims -Made Policies are cheap and are often purchased over the internet by contractors shopping for cheap General Liability Insurance. Not only do these policies limit when claims can be made, they often have several exclusions which limit the type of construction work that can be done. An Occurrence Policy has lifetime coverage for the incidents that occur during a policy period, regardless of when the claim is reported. Occurrence policies are the types of policies we recommend.
Waiver of Subrogation
Before we can understand what a waiver of subrogation is, we should first discuss the rights of subrogation. What does subrogate even mean? Subrogation refers to one party stepping into the shoes of another party and assuming the second party’s rights and responsibilities. It essentially allows one party to take the place of another and is extremely common in the insurance industry. A waiver of subrogation is the waiver of the right to subrogate. Easy, right? Including a waiver of subrogation clause is just another way of allocating and minimizing risks.
Example of subrogation
The easiest and most common example people use to explain subrogation is car insurance. Say you’re in an accident, and it’s not your fault. Typically, you’ll make a claim against your insurance carrier, and the whole thing will (hopefully) go away…for you. However, the insurer’s job isn’t done yet. As a part of the relationship between you and the insurance company, your insurance company will have the right to go after the other party in the accident to recover the cost of the claim they paid out to you. So, when your insurance company goes after the other party that caused the accident, they are assuming your rights and responsibilities in order to do it.
Why should my policy have a Waiver of Subrogation?
If you’re on a construction project where things go sideways, then a waiver of subrogation could be your savior. The best way to explain this is through a simplified example:
Let’s say there’s a subcontractor working on a project. A couple of the sub’s guys accidentally cause some property damage during the course of the project. The GC’s general liability insurance will cover the damage caused by the sub. So the owner makes a claim against the GC’s policy. The GC’s insurance company pays the claim, and all is well. If subrogation is allowed, the GC’s insurance company could go after the subcontractor (and/or their insurance company) to attempt to recover the money they had to pay out in the owner’s claim. However, if a waiver of subrogation is present, the GC’s insurance company will pay the claim and won’t be able to act as if they were the GC (and go after the subcontractor).
Think about that for a second. If an insurance company comes after a sub for damaging the property, that could be huge! A simple accident could put the subcontractor’s entire business in danger! However, if a simple waiver of subrogation clause is present in the construction contract, that nightmare could be avoided.
Are you looking to review your current insurance policies? Contact Kevin for a free insurance consultation and review your options: 530.320.3617 or email: [email protected]
- Kevin and his team of advisors are Active Members & Insurance Advisors to The California Building Industry Association and the National Association of Remodelers. Being actively involved in the construction industry allows the team at The Contractors Resource Center to stay on top of business and insurance-related issues that are important to and impact California Contractors.