Insurance for Contractors - What you need to know
By Blake Johnson

As every contractor who has recently gone through an insurance renewal knows, cost is (way) up and coverage is (way) down. With very few exceptions, most small to medium size contractors are now or will be upon renewal, in the Excess and Surplus market. Basically there are two distinct markets providing insurance for contractors.

One is the "Standard" market and that is companies like Travelers, St. Paul, Auto Owners, CNA or Ohio Casualty. These markets continue to provide broad coverage at a reasonable cost. The other is the "Excess and Surplus" market and they consist of insurance companies none of us had heard of two or three years ago. Because this market cannot, by design, compete with the standard markets, their pricing is substantially higher and their coverage terms are more restrictive.

The Excess and Surplus market place has always served a very important role when it came to providing coverage for hard to place, high-risk operations. It has also been there to provide coverage on that driver who had a less than desirable driving record and while the standard market had no problem with the overall operation, they cared not to cover this driver. As more and more standard carriers have abandoned the contractor market, it has been a boon for the Excess and Surplus markets. It would be an understatement to say that this market has been flooded with requests to write construction risks. This is the primary reason why owners have been left pulling their hair out the day before their coverage expires waiting to find out what it is going to cost.

One of the biggest challenges we face as an agency dealing with contractors, is the residential issue. Many commercial contractors do perform some residential work. If you are a general contractor it might be the occasional custom home you build or remodel at the request of an owner. If you are a commercial specialty contractor, it might be the occasional custom home you wire, roof or in which you install an HVAC unit. When it comes to the Excess and Surplus market, you simply cannot afford to do both. If doing both is important to the organization then separate companies need to be established. It should also be noted that when it comes to residential work, it doesn't matter how much or how little you did or may do. I believe the same standard applies to being dead, you either are or you are not and there is no in between.

Given the fact that there are more carriers interested in entertaining a strictly commercial contractor, it only makes sense to take advantage of this by creating two companies. Yes, you will take a hit on the residential work but this higher premium will not be assessed against the majority of work you do, that being commercial. In most cases you can also get better coverage terms as a strictly commercial contractor.
Carriers are more likely to provide a broader Additional Insured Endorsement, Primary Wording, Per Project General Aggregate or Waiver of Subrogation if there is no residential work involved.

If you decide to set up a separate company within which to do residential work, you should revisit the standard market for acceptability on your commercial work.
Sometimes the only reason a standard carrier no longer wants to remain on an account is due to the residential work the company either did in the past or plan on doing in the future. If it can be shown that this exposure or work no longer exists, the carrier may reconsider. This applies more to the specialty contractor then it does to the general contractor. Unfortunately, for the small to medium sized general contractor the only option available today is the Excess and Surplus market.

There are other issues that need to be considered when setting up a separate company. There are other insurance, accounting and legal issues that will need to be addressed with your accountant and attorney. The other insurance issue has to do with making certain that "Completed Operations Coverage" is maintained (where possible) on both the commercial and residential work that has been completed. This issue has more complexities that are impossible to address and each company has its' own uniqueness that are better discussed on an individual basis.

Blake Johnson is with the Minard-Ames Insurance Group of Phoenix.