Insurance
is like a hard hat – a good choice on nearly any construction project. But many
contractors don’t have full coverage. Let’s take a realistic look at a contractor’s
insurance options.
We’re
talking about two types of coverage; liability insurance and workers’ compensation
insurance. Liability insurance protects the general public. If there’s a loss and
if the contractor is at fault, the liability insurance carrier steps in. Workers’
comp covers employees injured on the job.
States
set up three roadblocks to slow any contractor trying to operate without full coverage:
- Classification rules.
- Licensing laws.
- Contract disclosures.
Classification:
All states require workers’ compensation coverage for employees. But notice the
word employees. Subcontractors are not
employees. Just calling someone a sub
rather than an employee doesn’t make it
so. States and the IRS have rules on what makes someone a subcontractor rather than
an employee. See my blog post for practical guidance. Misclassification can earn
an employer fines and even a prison term. That’s what happened recently to the owners
of Triple Star Roofing in Northwood, Ohio.
Triple
Star had between 30 and 50 roofers working their jobs. Management considered all
to be subcontractors. Most were paid weekly. Triple Star reported no employees.
That saved Triple Star plenty on workers’ comp premiums. But it also exposed the
owners to a five year prison term and a $10,000 fine for misclassifying employees.
Licensing:
Where a contracting license is required, applicants usually have to show proof of
insurance for both liability and workers’ comp. For example, Rhode Island requires
liability coverage of at least $500,000. There’s no way around that. But a contractor
who has no employees doesn’t need workers’ compensation insurance. That’s true in
every state. I’ve seen estimates that 60% of all license applicants in California
claim to have no employees.
Contract
disclosures: Some states now require disclosure of both liability and workers’ comp
coverage in contracts for residential work. Here’s a summary:
- California requires disclosure of
the name of the carrier and the policy number on home improvement jobs.
- Florida – Miami-Dade County requires
disclosure of insurance coverage in residential repair, remodeling and home
improvement jobs.
- Idaho – Contracts for residential
work have to disclose that the owner has the right to see proof of insurance
coverage.
- Maine – The contract has to include
a statement suggesting the owner ask the contractor about compensation and
liability coverage.
- New Jersey – The contractor has to
either confirm liability and compensation coverage or admit that no coverage
exists.
- Oklahoma – Contracts that include
roofing have to either confirm that workers are covered by compensation insurance
or include a written statement advising that workers do not have coverage.
- Rhode Island – The contract has to
disclose that the owner can demand a certificate of insurance before work begins.
What’s
the penalty for failing to make required disclosures? In some states, the contract
is unenforceable. In other states, it’s a violation of the state’s consumer protections
laws. That can be a felony and may come with jail time.
No
matter what you decide to do about insurance coverage, you’re better-protected with
a professional-grade contract. Construction Contract Writer offers good options
for both insured and uninsured contractors. The trial version is free.