In this guide
Most contractors need a set of coverages rather than one policy: general liability for property damage and injuries to others, workers' compensation for employees, commercial auto for work vehicles, and tools and equipment coverage for what you carry between jobs. Requirements depend on your trade, your state and the contracts you sign, so the real task is learning which of these your licensing board, clients and lenders will ask to see before you start work.
Key takeaways
- General liability is the core policy, and it includes "completed operations" coverage for problems that show up after a job ends.
- Workers' compensation rules are set by each state and usually apply once you have employees, and subcontractors can create exposure.
- Personal auto and homeowners policies generally do not cover business vehicles or tools, so separate coverage is typically needed.
- Licensing boards, general contractors and property owners often require specific limits, certificates and additional insured status.
- Trades differ widely: a roofer, a remodeler and an electrician face different risks and exclusions.
The core coverages for contractors
| Coverage | What it generally handles | Typical contractor example |
|---|---|---|
| Commercial general liability | Bodily injury and property damage to third parties, plus defense costs | A client's guest trips over your extension cord, or a leak you caused damages a finished floor |
| Workers' compensation | Medical costs and lost wages for employees hurt on the job | A carpenter's fall from a ladder |
| Commercial auto | Vehicles used for business and liability from driving them | A work truck rear-ends another car on the way to a site |
| Inland marine / equipment floater | Tools, equipment and materials in transit or on site | Tools stolen from a locked trailer |
| Builder's risk | Structure and materials under construction | Fire damages a home mid-build |
| Professional liability | Claims about design, specifications or advice | A design-build firm faces a claim over a plan error |
| Umbrella | Extra liability limits above primary policies | Contract requires higher limits than the primary policy provides |
For an overview of the general category, see our small business insurance guide. The rest of this article focuses on how each piece plays out on a contractor's day-to-day work.
General liability and completed operations
The U.S. Small Business Administration (SBA) describes general liability as protection against financial loss from bodily injury and property damage, including legal defense. For a contractor, two parts of the policy matter in particular.
- Premises and operations. Covers accidents that happen while you work, such as a dropped tool damaging a customer's car.
- Products-completed operations. Covers injury or damage that arises after the work is finished, such as a water leak months after a plumbing job. Because claims can come long after a job, ask how long this coverage responds and whether a change of insurer affects older work.
Pay special attention to exclusions that affect trades. Some policies limit or exclude work on residential condominiums, tract housing, roofing, wrap-ups, mold, silica or asbestos, or exterior insulation systems. Your own defective work, meaning the cost to redo it, is commonly not covered, although damage that results from the defect may be.
Watch out: General liability is not a warranty. It generally does not pay to fix your own faulty workmanship. If you are concerned about errors in design or plans, ask about professional liability or contractor's professional coverage. See General Liability vs. Professional Liability.
Workers' compensation and subcontractors
Construction is a physically risky field, and workers' compensation is the system that pays medical bills and part of lost wages for employees hurt on the job. Rules are state-specific: most states require employers with employees to carry it, but thresholds, exemptions for owners, and treatment of part-time or seasonal workers vary. Our guide to workers' compensation goes through the basics.
Subcontractors create a second issue. If a subcontractor does not carry workers' compensation or is classified incorrectly, the hiring contractor may face premium audit charges or direct responsibility for injuries, depending on the state. A common practice is collecting a certificate of insurance from every subcontractor before they start. Be aware that a worker you call an independent contractor may be treated as an employee under state law, so the classification question deserves attention.
Workplace safety rules apply as well. OSHA requires employers to report a work-related fatality within 8 hours, and an in-patient hospitalization, amputation or loss of an eye within 24 hours, under its reporting rule (29 CFR 1904.39). Insurers often ask about safety programs and training because accidents drive claim costs.
Vehicles, tools and materials
Vehicles
If you use a truck or van for business, a personal auto policy may exclude or limit that use. Commercial auto insurance is designed for business vehicles, and it can include hired and non-owned auto coverage for rented vehicles or employees using personal cars for errands.
Tools and equipment
Tools are often your largest movable asset. General liability does not cover them, and a standard property policy mainly protects property at a fixed location. A contractors' equipment floater, a type of inland marine insurance, is typically used to cover tools, equipment and sometimes installed materials against theft and damage while in transit or at job sites. Watch for conditions about locked storage and for how rented equipment is treated.
Materials under construction
Builder's risk insurance covers the structure and materials during a project. Contracts determine who buys it, so clarify whether the owner or the contractor is responsible. Installation floaters are another option for trade contractors who install items such as HVAC units or flooring.
What clients, lenders and licensing boards may require
Many contractors learn about insurance when a contract arrives. Common requirements include:
- Minimum limits. $1 million per occurrence and $2 million aggregate is a frequently requested general liability limit, but requirements vary by project and client.
- Certificates of insurance. A document showing that you are insured. Read Certificate of Insurance (COI) Explained.
- Additional insured status. Owners or general contractors often ask to be added to your policy for work you do for them. See Additional Insured Status Explained.
- Waivers of subrogation and primary/non-contributory wording. Terms that affect how claims are shared between policies.
- License bonds. Many states and cities require contractors to post a surety bond to get or keep a license. A bond is not insurance. It protects the customer or government, not you. See Surety Bonds vs. Insurance.
Licensing varies by state, trade and locality, and some states do not issue a general contractor license. Check with your state's contractor licensing board for requirements.
How risks differ by trade
Insurers classify contractors by trade, and the classification affects both rates and coverage. A few examples of why:
- Roofing and work at heights are associated with more severe injury claims, so premiums and exclusions tend to differ.
- Electrical, plumbing and HVAC work can lead to fire or water damage claims long after the job.
- Painting and finishing may face claims over overspray and surface damage.
- Remodeling of older homes can involve lead-safe work rules under federal EPA regulations for pre-1978 housing, and insurers may ask about certifications.
- Excavation and demolition can involve underground utility strikes.
Describe your work accurately on the application. If your operations change, say you start doing roofing work, tell your agent, because uncovered operations can lead to denied claims.
Steps to get your contractor coverage in order
- List what you do. Include trades, percentage of residential vs. commercial work, use of subcontractors and heights or hazards.
- Check legal requirements. Review state and local licensing, workers' compensation rules and any bonds.
- Read contract insurance clauses. Note limits, additional insured and notice requirements.
- Gather payroll and subcontractor data. Insurers rate workers' compensation by payroll and class code.
- Compare quotes. Request quotes from several insurers for the same limits and compare exclusions, not just price. Some insurers specialize in construction.
- Track certificates. Keep subcontractors' certificates current, and renew your own before expiry.
Some small contractors consider a business owner's policy, but eligibility depends on the trade, and BOPs typically do not include workers' compensation or commercial auto.
Frequently asked questions
Do I need insurance to be a licensed contractor?
It depends on your state, trade and locality. Many licensing boards require proof of liability insurance, a bond, or both, and some require workers' compensation coverage. Check with your state's licensing board.
Does general liability cover my tools?
No. General liability covers harm to others. Tools are covered by property or inland marine policies, such as an equipment floater.
Do I need workers' compensation if I only use subcontractors?
It varies by state. If subcontractors are uninsured or deemed employees, you may be responsible for their injuries. Ask your state workers' compensation agency or a licensed agent.
What is completed operations coverage?
It is the part of a general liability policy that responds to injury or property damage that occurs after your work is finished and the project left your control. It is important because construction defects may show up later.
Is a surety bond the same as insurance?
No. A bond guarantees to a third party that you will meet obligations, and you may have to repay the surety if it pays a claim. Insurance protects you against covered losses.
Sources
- U.S. Small Business Administration – Get business insurance
- OSHA – 29 CFR 1904.39, Reporting fatalities, hospitalizations, amputations and losses of an eye
- Triple-I – Understanding inland marine insurance
- Triple-I – Small business insurance basics
- Triple-I – Understanding business owners policies (BOPs)
General information only. This guide explains general concepts and is not insurance, legal or financial advice. Rules and prices vary by state and insurer. Check your policy documents and speak to a licensed insurance professional or your state insurance department about your situation.