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Highlights
- Contractor insurance with general liability coverage will cost, on average, $142 per month.
- Rates can be affected by multiple factors, such as the type of coverage a contractor purchases, the number of employees they hire, and any claims they may have filed in the past.
- Contractors may be required by state law to carry certain types of coverage, such as general liability insurance or workers’ compensation insurance if they have any employees on staff.
- Contractors can explore several options to reduce their insurance costs, including bundling policies, adjusting their deductible or coverage limits, or getting quotes from multiple providers and shopping around for a better rate.
When a job involves punching through walls and flooring, crawling through tight spaces with power tools, hefting sheet glass into place, or hauling cast-iron bathtubs up flights of stairs, the threat of injury to a contractor—or their client—is a constant presence. Contractors also face significant liability concerns if they accidentally damage someone’s home or if their employees are injured on the job. In addition, they may invest a significant amount of money into tools, supplies, vehicles, storage facilities, or office space. With so many factors to consider, contractors may need business insurance policies that pull together a range of coverage types to protect the legal and financial aspects of the business so they can concentrate on their craft. How much will contractor insurance cost, though, and how easy is it to budget for this necessary expense?
General contractor insurance can include a range of coverage types, including liability, property, business, workers’ compensation, and commercial auto insurance, among others. The cost of a policy depends heavily on the types of insurance selected, the coverage limits and deductibles, and other factors. The cornerstone of any contractor insurance plan is general liability coverage, which can cost, on average, $142 per month, according to Insureon. However, the average cost for general contractor insurance can be much higher if policyholders need to add more coverage.
Factors in Calculating Contractor Insurance Cost
Many components go into the calculation of contractor insurance rates. Some of these factors have to do with coverage selections the contractor can make, but others are pretty set in stone and based on circumstances beyond the policyholder’s control. Evaluating the options in each step can help contractors choose a balanced slate of coverage that successfully protects their business without paying for coverage they don’t need.
Coverage Type
As noted, there are many types of construction insurance or contractor insurance to consider, and costs can vary from one type to another. General liability coverage is a basic form of coverage that every contractor will likely need to protect themselves. Contractors may also be required to purchase workers’ compensation insurance if they have any employees on staff. Beyond that, though, the additional types of coverage are mostly up to the business owner to decide on, as each type will further insulate them against potential risk, but at an added cost. When purchasing contractor insurance, policyholders may first want to determine what types of coverage they need so they can accurately price out their insurance requirements.
Coverage Amount
The coverage amount listed on an insurance policy is the maximum amount the insurance company will pay per incident or per year on approved claims. Adjusting the coverage amount will raise or lower the policyholder’s premiums. Choosing a higher coverage amount could mean that if the contractor is forced into a massive liability settlement, for instance, the insurance company will cover most or all of the settlement. However, the contractor will pay more up front in higher insurance rates for more extensive coverage. On the other hand, choosing a low coverage amount means the contractor pays less in premiums, but might find themselves paying a potentially large sum of money out of pocket if the policy limits aren’t high enough to cover a significant claim.
Discounts
Some insurance companies offer discounted packages in which they’ve bundled two or more types of insurance at a lower cost than the customer would pay if they purchased the policies separately. These insurance bundles can save contractors a significant amount of money thanks to discounted rates. For instance, contractors may get a discount for bundling general liability insurance with tools and equipment insurance.
Insurance companies may offer other discount opportunities as well. For instance, policyholders may get a discount on their commercial property insurance if they have installed a security system on the premises. Contractors may also be eligible for loyalty discounts if they continue working with the same insurance provider year after year. In addition, taking steps that reduce the insurer’s likelihood of having to pay claims—requiring employees to take a documented safety course, paying the entire premium up front, joining trade and industry groups to stay current on best practices, and ensuring that workers are classified properly for workers’ compensation and don’t do jobs outside their classification—can lead to lower insurance rates for some contractors.
Geographic Location
The market rates of doing business are largely determined by location, and the risks and associated costs of contracting are no different. Property insurance rates will be partly determined by the cost of rebuilding and replacing lost or damaged property, and by elements such as weather, the length of the contractor’s working season, and the likelihood of crime in the area. In addition, each state determines what types of insurance a business must carry and what kind of licensing is required, so contractors in a state with more requirements will have to carry more insurance than those working in states with fewer boxes to check.
Number of Employees
Hiring more employees will often increase insurance costs for small-business owners such as contractors, particularly regarding workers’ compensation insurance. Many states require small-business owners to buy workers’ compensation coverage if they have one or more employees, and workers’ compensation insurance rates are directly tied to the number of employees on staff. Having more employees working on a job could also increase the risk of liability concerns such as a worker causing damage to a client’s property. As such, insurance companies may charge higher rates to contractors who have more employees on their payroll.
Claims History
Before offering a policy, insurance companies will look closely at a contractor’s claims history to see if they have filed any claims on their small-business insurance in the past. If the contractor has submitted one or more claims in recent years, that may indicate to the provider that they are likely to file more claims in the future. For example, insurance companies may see a workers’ compensation claim on a contractor’s claims history and come to the conclusion that the contractor or their employees have failed to adhere to proper safety standards when on the job. As such, the cost of contractor insurance may increase in that scenario.
Replacement Cost vs. Actual Cash Value Coverage
The size of a payout on a claim can depend on the reimbursement coverage the customer selects. Contractors often have the option to choose between replacement cost and actual cash value coverage when insuring tools, equipment, and other business assets. Replacement cost is the more expensive type of coverage and will pay the current market cost to replace items lost or damaged in a covered event. For instance, if a tool bag is stolen out of the contractor’s truck bed, the insurance company will pay to replace those covered items with comparable tools, up to the limit of the policy less the deductible. This type of coverage ensures that the policyholder will be able to replace necessary items after a loss without struggling to come up with additional funds out of pocket. However, their contractor insurance price will often be higher since replacement cost coverage is typically offered as an endorsement. Actual cash value coverage, on the other hand, pays out claims based on the covered items’ current depreciated value, which may only be a portion of their original value. While this means the insured will potentially receive less money on a future claim, the cost of their policy will be lower than one with replacement cost coverage.
Types of Contractor Insurance
Contractors and their employees encounter a lot of different risks that may need to be addressed through different forms of insurance. There are quite a few types of coverage that are commonly offered, and many are bundled together into packages with different names by individual contractor insurance companies. The best small-business insurance companies (such as Thimble Insurance, NEXT Insurance, and Progressive Commercial) may be able to provide all the coverage a contractor needs.
General Liability
General liability insurance for contractors is one of the most common types of insurance that contractors carry. It protects contractors from the financial responsibility of damages or injuries that they are found liable for, which may include damage to a client’s property or a client injury that occurs on the jobsite. For instance, if a ladder slips and breaks a large bay window at the client’s home, the contractor’s liability insurance could cover the costs to replace the broken window. General liability coverage could also help cover legal fees, medical bills, and other damages if the client were to trip over a cord that the contractor left out and broke their arm as a result of the fall. As noted, general liability insurance costs, on average, $142 per month. Those looking for cheap general liability insurance for contractors may want to consider shopping around with multiple insurance providers to get the best rate. The best general liability insurance for contractors should be able to offer robust coverage terms at competitive rates.
Professional Liability
Also called errors and omissions insurance, professional liability insurance protects contractors in the event they make an error or are accused of negligence, substandard work, breach of contract, budget overruns, schedule overruns, or other business- or competence-related charges. Professional liability insurance may cover any legal fees the policyholder pays to fight such claims as well any fines they may be assessed. Contractors may decide that they want this type of coverage to insulate themselves against risks beyond what general liability insurance will cover. Professional liability insurance costs about $74 per month, on average, although the total cost will depend on the policy’s coverage limits.
Commercial Property
If a contractor rents or owns commercial space to support their business, they may want to consider buying commercial property insurance. This type of insurance covers all business property and its contents, including office space, storage space, and all of the tools and equipment therein. Commercial property coverage can pay to repair or replace the physical location of the business and its contents when the damage occurs as a result of a fire, burst pipes, theft, or other covered event. If a contractor rents or leases commercial space, the landlord may require them to carry this type of coverage. The cost for commercial property insurance averages about $67 per month, according to Insureon, but this can vary depending on the property’s location, value, and protective features, among other factors.
Business Owner’s Policy (BOP)
A business owner’s policy (BOP) is an insurance bundle including two types of coverage that may appeal to contractors: general liability and commercial property insurance. These coverage terms are offered together at a lower rate than the cost of buying the policies separately, which could help contractors save money on their insurance needs. Averaging $121 per month, a BOP may be a wise purchase for contractors who need to insure a commercial space as well as protect themselves against potential liability concerns.
Workers’ Compensation
Required of businesses with employees in many states, workers’ compensation insurance covers a portion of the medical treatment for employees who are injured in the course of their work. While most employers carry this coverage by law, for contractors it is particularly important, as the potential for injury on a worksite is higher than it is at most desk jobs. The cost averages $318 per month, but workers’ compensation insurance categorizes workers based on the type of work they do, so contractors with more workers performing high-risk tasks might pay more. For instance, crewmembers who handle electrical work will likely be more expensive to insure than those who primarily install drywall.
Tools and Equipment
While a contractor’s tools are covered by commercial property insurance when they are stored at the business’s physical location, the nature of a contractor’s work means that equipment will spend a lot of time in vehicles and at jobsites, where the commercial property insurance does not cover them. Insurance companies offer tools and equipment insurance to help fill this gap, so if tools are stolen out of the truck or from a jobsite, they’ll still be covered. This type of coverage is relatively affordable, with the average cost of tools and equipment insurance coming out to $14 per month.
Commercial Auto
Contractors may need to purchase commercial auto coverage to insure any vehicles used to support their business. The average cost of commercial auto coverage is $180 per month, but rates will depend on several factors. First, the number of vehicles covered and their value will define the initial cost, and the number of employees who drive those vehicles will augment it. Insurance companies will look at the driving records of everyone who will be covered to drive the vehicles, and if any of those drivers have received citations or been involved in accidents in the past, the cost may increase. Contractors can adjust their policy limits to affect their premiums, but the coverage itself is required by most states for business-owned vehicles.
Do I need contractor insurance?
Deciding whether a contractor needs a particular form of insurance can be easy at times if they are required by law to purchase that type of coverage. In other cases, they may need to consider client expectations and demands regarding their contractor insurance, as well as balance the value of protective coverage against their own bottom line.
State Requirements
Each state may have its own set of regulations guiding general contractor insurance requirements. Some regulations apply to all businesses, such as the requirement for workers’ compensation insurance, while others may be tailored specifically to the type of business. For instance, some states may require general contractors to carry general liability insurance. State regulators will likely inform companies of their requirements when the business registers with the state, but it’s a good idea for contractors to check the regulations before they start a job to make sure nothing has been missed, which could lead to fines or loss of licenses.
Client Requirements
Savvy customers want to know about their contractor’s insurance coverage before hiring them because they know that if their contractor is uninsured and damages their home or is injured on the job, they may be stuck paying for repairs out of pocket or potentially covering medical treatment for the injured workers with their own liability insurance. Corporate clients or government entities are more likely to have specific requirements for the types of insurance a business must carry to be able to bid on and win large contracts. Even clients for smaller projects—homeowners looking to hire a contractor to install drywall, for instance—may ask to see proof of insurance before agreeing to terms.
Business Protection
Not all small businesses have cash on hand to repair and rebuild after a major loss, such as the theft of critical tools and equipment, a devastating fire at their commercial space, or an expensive lawsuit filed by one of their clients. Protecting the business from financial risk is one of the best arguments in favor of contractor or commercial construction insurance. Even basic policies with low maximums will help take the edge off the cost of rebuilding financially and physically after a covered loss, and that can be the difference between a business closing or remaining open and financially solvent.
How to Save Money on Contractor Insurance
One of the most important steps a contractor can take when trying to save on insurance premiums is to decide firmly what kind of coverage is needed, along with how much coverage is needed. With those figures and numbers in hand, shopping and comparing options will be much more manageable. Contractors can also consider taking the following approaches to help lower the total cost of their small-business insurance.
- Get a contractor insurance quote from several companies for the same policy terms so they can make an apples-to-apples comparison with their insurance options.
- Ask about bundled policies: A BOP is a good place to start, but insurance companies may offer other bundles for contractors as well.
- Check for other discount opportunities—some companies offer discounts to business owners who also have their personal insurance at the same company, for instance.
- Evaluate the security and safety training offered to employees. Insurance companies may provide discounts to businesses that are actively protecting their equipment, property, and workers.
- Choose a higher deductible or a lower maximum, as doing so will typically reduce a policy’s premiums.
Questions to Ask About Contractor Insurance
Every insurance company will have slightly different policy offerings with varied deductibles, caps, and terms, making it hard to compare them accurately in some cases. Insurance can be complicated, so it’s always worth contractors asking for clarification regarding any aspects of a policy that they don’t fully understand. There are a number of pressing questions that contractors may want to ask insurance providers before enrolling in coverage, including:
- What discounts do you offer, including insurance bundles?
- If I expand to take on other types of jobs—a contractor looking to grow a plumbing business by branching out into simple electrical work, for instance—do I need to reapply for insurance or will it just be covered by my existing policy?
- Will you provide a certificate of insurance that I can show my clients?
- Do I need to buy workers’ compensation coverage if I am the only employee?
- Under what conditions might a claim be rejected?
FAQs
Being your own general contractor can be very rewarding, but tackling insurance needs without any guidance can be daunting. There’s a lot to consider when purchasing business insurance for contractors, and coverage decisions made today can have a huge impact on the financial stability of the business down the road. It can be helpful to address some of the most commonly asked questions regarding this type of insurance so contractors feel more confident about their coverage selections.
Q. What is the cheapest insurance for general contractors?
The least expensive type of policy for contractors is often tools and equipment insurance, which protects the tools and equipment owned by the business even when taken to a jobsite or transported in a business-owned vehicle. For contractors who are trying to minimize their insurance expenses, tools and equipment insurance can be an affordable coverage option to add to general liability insurance, workers’ compensation insurance, or any other type of coverage they are legally required to carry.
Q. Is general liability insurance tax deductible?
The answer to this question depends a little bit on how the business was formed and incorporated, but generally, yes, general liability insurance premiums can be deducted as a business expense. But it’s complex, so it’s a good idea to check with an accountant to make sure everything is correctly set up when filing taxes.
Q. Does a handyman need contractor insurance?
If the handyman is working similar jobs that a contractor would take on, then the answer is absolutely yes. It makes sense to get the same coverage provided by contracting insurance because while a handyman may not be a general contractor, they do a lot of the same jobs and face many of the same professional risks. Laws will vary, but whether contractor insurance is required or not, it’s a good idea for a handyman to carry this coverage to protect their business investment. Despite the similarities, handyman insurance costs may not exactly match contractor insurance rates, depending on the policyholder’s coverage needs and the type of work they do. The cheapest handyman insurance may be available as part of a bundle, but prospective policyholders may want to shop around with the best handyman insurance companies before making a decision.