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Contractor Management 10 min

A guide to liability insurance for contractors

Written by Pedro Barros
Pedro Barros

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Whether you’re a business hiring contractors or running your own business as an independent contractor yourself, there are risks involved. You could be liable for mistakes, accidents, injuries, or damages that happen in the workplace. That’s why it's a good idea to sign up for liability insurance for protection against such unexpected events.

Liability insurance is like a safety net for your business — it helps you navigate unforeseen circumstances and gives you the freedom to grow your business with peace of mind. If you’re thinking of taking out liability insurance for contractors, you’ll have to spend some time researching to find the right insurance package for you.

This article delves into everything you need to know about contractor liability insurance, from recommended coverage to cost considerations and the crucial step of choosing the right policy for your specific needs.

What is liability insurance for contractors?

Liability insurance for contractors, or Contractor Professional Liability Insurance (CPrL), is designed to protect against claims stemming from your contractor operations, like accidents or property damage. If things go awry, it covers the legal fees, medical expenses, and costs for any damages that may result. 

With CPrL, you protect yourself from the significant financial risks that come with lawsuits or claims. CPrL helps keep your business secure and operational when unexpected incidents happen. 

Who needs independent contractor liability insurance?

Do independent contractors need insurance? What about the businesses that hire them? Let’s answer these questions below. 

Independent contractors 

Any independent contractor who’s not employed by a larger firm should consider liability insurance essential, as they are not shielded by a larger firm’s insurance. 

Individuals involved in high-risk work, such as electrical, plumbing, or construction projects, should have liability insurance coverage. These types of contractors face risks daily, from property damage to personal injuries. Insurance adds a layer of personal protection and reinforces these individuals’ commitment to professional integrity and responsibility.

Businesses that hire contractors

Businesses that hire global contractors need to be equally vigilant about liability coverage because they are liable for any legal or contractual issues that result from a contractor’s work. This is especially true in cases where clients or government regulations require contractors to have liability insurance for project participation. 

Liability insurance is also an investment in the business’s long-term stability and reputation in the industry. It not only fulfills compliance requirements but also protects the business against potential legal challenges. 

Additionally, having liability insurance demonstrates a proactive approach to risk management, which can be a decisive factor in attracting and retaining top-tier contracting talent in a competitive global marketplace.

What insurance do independent contractors need?

This depends on how much coverage you or your business needs, the risk involved in your or the employer’s work, and your budget. 

Contractor insurance essentials 

General liability insurance for contractors protects against common risks, such as property damage or bodily injuries to third parties — both of which can happen during even the most routine jobs. This type of insurance prevents minor accidents from turning into major financial setbacks.

For those offering professional advice or services, having professional liability insurance or errors and omissions insurance is a good call. It covers claims of negligence or failure to deliver promised services. 

For instance, if a client claims that your consultancy led to financial loss, liability insurance can cover legal defense costs and settlements.

Additionally, contractors who use vehicles for work should consider commercial auto insurance, as it safeguards against damages from vehicular accidents.

Workers’ compensation insurance becomes essential when handling larger projects or managing a team. It is designed to cover medical costs and lost wages if an employee is injured on the job. Ultimately, it serves to protect both the workers and the business. 

Equipment insurance is also highly recommended for contractors, as it protects the tools and machinery that are integral to operations and covers losses due to theft, damage, or breakdowns. 

For projects that involve the transportation of materials or on-site equipment, builders’ risk insurance is invaluable. It covers materials and equipment against risks like theft, damage, or accidents during transit or while on the construction site. This coverage ensures financial investment in these assets is secured throughout the project lifecycle.

Large projects

Umbrella liability insurance is a strategic choice for high-value projects, as it offers coverage beyond the limits of standard liability policies. This extra layer becomes important when managing heightened risks or when the financial implications associated with big projects are significantly higher. For example, overseeing a major renovation project in a bustling downtown area, where the potential for accidental damage or bodily injury is significantly higher.

Pollution liability insurance is also useful for contractors or businesses involved in environmentally sensitive projects. It addresses the specific risks of environmental contamination and pollution, safeguarding against hefty legal and cleanup costs. 

Performance bonds provide clients with financial protection by ensuring a project’s completion according to the contract. It reinforces the contractor’s commitment to meeting their contractual obligations, thereby building trust and reliability.

How much does independent contractor insurance cost?

The cost of general liability insurance for contractors depends on several factors, including the trade type, business size, and desired coverage amount. High-risk trades, like roofing and demolition, often face higher premiums due to a greater likelihood of accidents or property damage occurring. 

Insurance costs also depend on the contractor’s history of claims and business experience. More seasoned professionals often enjoy lower premiums, whereas those new to the trade or with a history of frequent claims might find higher rates, reflecting the increased risk they present to insurers.

Here’s a quick breakdown of average insurance costs: 

  • General liability insurance for independent contractors offering $1 million per occurrence has a median cost of around $1,090 per year.

  • Commercial auto insurance, also with a $1 million limit, typically costs about $1,990 annually. 

  • Contractors’ tools and equipment insurance, covering around $5,000, can be around $170 per year. 

  • Errors and omissions insurance, providing $300,000 per occurrence, averages at about $520 yearly. 

These figures can differ based on individual circumstances and market changes. Contractors should assess their specific risks and consult multiple insurance providers to get accurate quotes tailored to their needs.

Does my business insurance cover independent contractors? 

A common misconception regarding business insurance for contractors is that it automatically extends to independent contractors. Typically, these contractors are viewed as separate entities, which means they’re not covered under standard business policies. 

For businesses that hire independent contractors, it’s always important to confirm that they have insurance coverage. Not having proper coverage can lead to significant legal and financial consequences. For instance, in the event of an accident or damage, if the contractor is not adequately insured, your business could face legal claims and substantial financial losses. This step helps you avoid liability gaps that could arise from accidents or damage caused by contractors.

In some situations, businesses might need to consider adding a rider or a separate liability policy specifically designed to extend coverage to independent contractors. For example, extra coverage might be a good idea if your business often hires contractors for high-risk activities, like heavy machinery operations or large construction projects. It ensures that all parties involved have adequate protection and fosters a secure working relationship while mitigating unforeseen liabilities.

Remember to review and update your business insurance policies to reflect your current operations and activity level, especially if hiring contractors is a regular part of your business. Regular updates help you maintain relevant coverage levels and adapt to any changes in your business needs or risk exposure.

How to choose the right insurance for your contracting business

Selecting the ideal insurance for your contracting business starts with understanding the unique aspects of your work. Here are a few tips:

Evaluate your contractor insurance needs

Start by assessing the specific risks tied to your contracting work. Are you frequently involved in high-risk environments, or do your projects typically carry lower risks? What types of problems could arise from your specific services? Answering these questions will help you tailor your coverage to actual needs.

The size of your projects is also a key determining factor. Larger projects may warrant more comprehensive coverage because they often involve more complexity and higher potential liabilities.

You also need to consider the value of your equipment and the number of employees you have. These factors will directly influence the type and extent of coverage you require. For instance, contractors with expensive machinery or a large workforce might need more extensive equipment or workers’ compensation insurance.

It’s also important to regularly review and adjust your insurance as your business evolves. Growth in business size or changes in the services offered can mean your insurance needs will change, too. Keeping your insurance aligned with your current business state ensures optimal protection.

Compare insurance providers and policies

Before deciding on an insurance provider, you should examine their coverage limitations, options, premiums, the claims process, and customer support quality. Are their policies comprehensive enough for your needs, and are their premiums within your budget? 

Additionally, assess how well they cater to claims, as timely and supportive claims will significantly ease your stress during difficult times. 

Furthermore, prioritize insurers with a track record of covering businesses similar to yours. Their experience in your specific field will be beneficial when tailoring a policy that fits your unique risks and requirements. Doing your research, like reading reviews or asking for recommendations from fellow contractors with similar insurance needs, can point you in the right direction. 

Lastly, the financial stability and reputation of the provider are critical considerations. A financially stable insurer is more likely to handle claims efficiently and reliably, ensuring support when you need it most.

Understand the policy terms and conditions

Carefully read the policy documents to understand the coverage scope, exclusions, deductibles, and policy limits. One key aspect to look for is any conditions or actions that could potentially jeopardize your coverage. 

Some policies may have specific clauses related to working in hazardous locations or under certain weather conditions. Or they might include time-sensitive requirements for reporting incidents or filing claims. Awareness of these terms will help prevent future complications. 

If certain terms are unclear, or you need further clarification, don’t hesitate to consult an insurance agent or legal advisor. They can provide overlooked insights and explanations to help you fully understand your liability insurance policy details and implications before you commit to the policy. 

How Remote’s contractor management platform can make your life easier

As a business that’s managing contractors across countries, it can be challenging to juggle the multiple tasks involved in hiring and paying contractors. A global HR platform like Remote offers you a comprehensive, but simple system to manage your contract workforce, whether they are based locally or abroad. With Remote, you can:

  • Manage contractor data and HR processes via a single platform. 

  • Use our localized contracts to onboard contractors in minutes and reduce misclassification risks

  • Handle international payments and pay contractors in their local currency easily

  • Approve recurring invoices quickly, saving time on admin

Learn more about how Remote’s contractor management platform can make a real difference to your international operations. Or contact our team for expert advice on guidance on hiring, paying, and managing contractors today.

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