Contractors and Insurance

Insurance is defined as coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril; a means of guaranteeing protection or safety.  Some insurance is optional and some is required.  Contractors have many options and we thought that we would take the time to highlight some of the insurance that is required and other available options in the construction industry - keep in mind this does not cover everything.

 

Workers' compensation is the insurance to pay the lost wages and medical expenses of an employee injured on the job.  It is required for contractors before they are even licensed and all through their licensure unless exempt - meaning there are no employees.  There is no exemption for C-39 roofing contractors.  Contractors are required to disclose within their contract documents whether they carry workers' compensation or if they are exempt.  In California, failure to maintain workers' compensation coverage when required can result in licensure suspension.  Disciplinary action can be taken against the uninsured contractor during the licensure suspension for any work that is done because the contractor is  considered unlicensed. 

 

Licensees in the state of California are required to have a surety bond in the amount of $12,500.00 in order to protect the consumer in case of defective construction or a violation of the Contractors' License Law - this is commonly known as a Contractor's Bond.  There may be a Bond of Qualifying Individual required if the responsible managing officer does not own 10% or more of the voting stock of a corporation/LLC or there is a responsible managing employee qualifying the license.  Cash deposits may be an alternative to these bonds but are not released for three years after the expiration of the license.  Just as with workers' compensation, license suspension will occur if the bond is no longer valid.  Outside of a contractor not paying for the bond and it being canceled or the surety canceling it for another reason, other reasons for a bond to no longer be valid and thereby the license suspended are: (1) judgment or payment of claim which reduces the amount; (2) the surety company is no longer authorized through the California Department of Insurance; and (3) The responsible managing officer no longer owns at least 10% of the voting stock of the corporation/LLC.  Note that the bonds listed above should not be confused with a Disciplinary Bond.  Also note that a license bond is not in the true sense an insurance contract.  The license bond does not protect you like an insurance policy.

 

Commercial General Liability Insurance ("CGLI") is to protect against third-party bodily injury and accidental property damage.  It is not required (unless the contractor is a Limited Liability Company) but contractors are required to disclose in their contract and bid documents whether they carry CGLI.  A CGLI policy will usually cover bodily injury and property damage caused by unforeseeable events or accidents and injury or damage due to defective work. Keep in mind all policies differ and coverage is subject to specific exclusions and various endorsements.  It is important for contractors to determine if a homeowner or business owner would contract with a contractor that does not carry CGLI before contractors decide not to carry it. 

 

CGLI is not intended to cover the contractors work product but rather damages caused as a result of the contractor's work product.  The owner should still have their own property insurance.  Many contracts even require the owner to purchase additional property insurance in order to protect the construction project - often called builder's risk insurance.  The purpose of this type of policy or endorsement is to protect for direct physical loss or damage to the covered property during the construction project.  It protects the work during construction damages caused by vandalism, theft, fire, acts of god, etc; loss to equipment or materials that are meant to be incorporated into the work; and losses made possible by defective design or construction; as well as causing an injury to a person or property; so long as they are not subject to exclusion.  Consequential damages such as delay damages and acceleration costs are usually excluded from builders risk policies.  As a contractor, it is important to determine what type of protection is necessary on the project and make sure that the owner complies with it.

 

Professional Liability Insurance is defined as a policy that pays damages for negligence of professionals, such as architects, engineers, or other design professionals.  These policies generally cover the wrongful act or professional negligence of an architect or engineer on a construction project. 

 

Insurance, legally required or not, provides a way for contractors to limit their risk - to a certain degree.  It is a good idea to consult with legal counsel and insurance professionals in order to gain a better understanding of the above insurance types as well as what else may be available in order to limit risk.