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Expert in contractor insurance answers your questions

The CCB asked Oregon retired insurance broker Kelly Atwood some questions about liability insurance and bonds. Atwood specialized in contractor insurance during his 45 years in business. Here are his answers.

(Note: This information is intended to help you develop questions for your agent. This information is general; you may have unique circumstances. Always get answers to your specific insurance questions from a qualified, licensed agent.)

How do I find an agent?

Exclusive agents work for companies like State Farm, Farmers, Allstate, etc., and are generally limited to selling their company-specific products. Independent insurance brokers, on the other hand, have access to multiple markets and multiple companies, including surplus lines carriers that accept risks that other companies may not.

Do most agents sell both surety bonds and liability insurance? Will I get a better deal if I buy both from one agent? 

Most insurance brokers market surety bonds and liability insurance. There are companies that will give a discount on the surety bond if the liability insurance is purchased as well. Generally, it benefits the construction contractor to purchase from a broker as the broker may get a better rate on both coverages.

Is it important to find an agent who specializes in contractor insurance (liability and surety bonds)? 

Over the last 15 years, the construction exposure has been a huge loss item for insurance companies. As a result, many companies will not cover exterior envelope exposures (windows, doors, siding, roofing, garage doors, etc.). This is particularly true in the Pacific Northwest because water intrusion issues are just part of living here. Agencies that specialize in construction coverage know the types of insurers and the companies that will provide higher-risk policies.

Under what circumstances does my liability insurance cover workmanship claims?

General liability insurance, as a rule, does NOT cover poor workmanship. However, it DOES cover the property damage resulting from negligence or poor workmanship. For example, a plumber mounts a sink on a wall and drills through the water line during the installation. Later, the water leak causes damage to the wall and floor. A claim is filed with the plumber’s insurance company. The company pays for the repair to the wall and floor but does not cover replacing the pipe.

What are exclusions and what are some typical ones in the construction industry?

Exclusions are events or occurrences (losses) that are NOT covered by the insurance policy. There are policies to cover some exclusions, but not all. Common exclusions are intentional acts, negligence, “exterior installation and finish systems” (EIFs), asbestos, lead-based paint, subsidence (cave-in or sink), garage door installation, and window installation. The outer envelope and vapor/moisture barrier risks are generally excluded or limited in coverage. An agent experienced in construction insurance can explain what is covered and not covered.

I’m retiring soon and want to make sure I have coverage for at least a few years in case a client files a claim. What do I need to know?

Oregon’s statute of repose lasts for 10 years from the date of the last completed project. It is highly recommended to carry general liability insurance for the 10-year period following the final project. This will ensure that if a claim is filed, the contractor has coverage for defense costs involved with sorting out who (often which subcontractor) has the completed operations coverage for the work in question.  A minimum liability policy will cover defense costs, subject to a deductible.

What is completed operations?

The CCB requires contractors to carry completed operations insurance. This is an occurrence type of policy that covers losses based on the date the loss occurred, even if this is years after a project is completed.  

In contrast, a claims-made policy requires that specific policy to be in force at the time of the loss. Claims-made policies are NOT the best option for the construction industry and require a special (tail coverage) policy to be purchased to avoid a gap in coverage if changing to an occurrence policy.

If I switch insurance companies, what do I need to be careful about?

If an individual changes companies with occurrence-type coverage, there is no concern. The companies will subrogate to resolve a claim, meaning they will work out payment between them.

Normally I paint houses but I’m thinking I might learn roofing. Do I need to notify my agent?

Absolutely. Roofing has its own exposures, and many insurance companies do NOT like the roofing exposure. A qualified agent can walk a contractor through the roofing exposures, and the insurance carriers that will accept that exposure. To avoid claim denials or increased premiums, you must disclose all the types of construction work you perform to your agent. If you change anything in your operations, your agent needs to know.

If I forget to make a payment, do I get a notice before my policy is canceled?

All insurance carriers are required to send notice of cancellation 30 days prior to a cancellation. In many cases, the agency also sends a delinquent notice to the contractor.

What are certificates of insurance and additional insureds?

Certificates of insurance are simply proof that an individual has insurance coverage to conduct the business they are conducting. General contractors require certificates of insurance from subcontractors to make sure their subs are insured and that the subcontractors insurance is primary in the event of a claim for the subcontractors work/damage.

Additional insured are individuals or companies that have a financial interest in the project and want to have the other parties’ (general contractor’s, subcontractor’s, supplier’s) insurance as the primary insurance in the event of a loss. They are named as covered (additional) insureds on the insurance policy. This is standard business practice in the construction industry.

If I have subcontractors, do I need to make sure they have as much insurance as me? What happens if my sub turns out not to have general liability insurance?

Many insurance companies require the general contractor to only contract with subcontractors that carry the same limits of insurance as they do. If the general contractor fails to follow through, a claim could be denied. Or, contractors that don’t meet that requirement might get paid less on a claim because the insurance company will  adjust the settlement  based on the difference between  what the subcontractor actually carried and was supposed to carry based on terms of the contract.

If the subcontractor does not having general liability insurance, the general contractor could be obligated to pay the claim or pay a bigger premium for liability insurance. It is IMPERATIVE that general contractors verify their subs have adequate coverage.

What happens if my surety bond is used to pay a claim?

A surety bond is secured by the financial assets of the contractor obtaining the bond.. Bonds are designed to assist homeowners in getting claims resolved although employees, suppliers and others can also access the bond if they are not paid. Once a bond is exhausted, the bonding company will go to the  contractor to recover its funds. If the contractor does not repay the bonding company, the contractor  may find it VERY difficult to obtain a new bond, which is required by the CCB  for a contractor’s license.