General liability insurance is one of the first types of policies you will need when starting a new business. At Clinard Insurance, we see many new small business startups. Starting your own business is popular these days with the layoffs we see in our economy. Often the best choice is to pursue something you enjoy doing which is why we see a lot of people starting new businesses around their building skills. But just because you love building things doesn’t mean you know how to best protect yourself and your business from lawsuits.
Here are some tips for pitfalls to avoid when buying general liability insurance.
Choosing the right broker. The first place people go for their business insurance is the insurance company that handles their home and auto insurance. In some cases this will work out well. But the risk is that your current agent is licensed to sell you general liability insurance for your new business, when in fact he has very little experience evaluating the hazards and risks of your particular type of business. I would suggest that you go out and find an agent who specializes in insuring other small businesses like yours. Ask your competitors who used them. At Clinard Insurance, we have a niche specialty in small contractors and we speak their language and understand their needs. If your agent doesn’t specialize in your business, I suggest you find one that does.
Claims or event filed policy type: Construction claim policies became popular in the mid-1980s and have been around ever since. The promise of these policies was lower rates, but at what long-term damage? In some cases there is no cost savings. Claims made policies for a contractor are the worst possible policies you can buy. Let me explain: with policies filed with claims, you can only claim your policy during the year they are in effect. Contractors have progress on the road, not always just in the same year as the project is built! And if you want to leave that company and move to another company, you’ll need to purchase additional insurance to cover you for the next 10 years…yes, 10 years! Why? Because the law allows clients to sue for construction issues up to 10 years after the project is completed.
You build a new room extension, everything goes well and you and your client are very happy with the final result… 4 years later your client calls you and says that the roof is leaking and that water has entered the house and its new $25,000 has ruined grand piano. He expects you to repair the roof, drywall, wallpaper, carpets and of course replace the wing….
A claims policy will not allow you to make a claim 4 years later unless you have stayed with the same company the entire time. If you want to change companies after you have a claims policy, you have to make a decision. If you want protection for claims that have not yet occurred, but will happen in the future, you will need to purchase “tail” coverage. This cover extends the period within which you can make a claim. And tail cover isn’t cheap.
If you decide not to buy the “tail”, you will not be able to make a claim against the claim policy. And to make matters worse, some companies don’t offer the 10-year extension.
So…. When your claims policy needs to be renewed, you need to decide:
- Do I leave the company and pay the additional insurance for coverage for the next 10 years, or do I go without protection.
- Will I stay with the same company? Their prices on the new year may remain the same or rise sharply.
- Will I switch to another company with better rates and coverage?
This limits the marketplace available to you and makes it harder to accept a better offer from another insurance company. Claims-based policies can work in other industries, but for contractors, they’re a disaster. After reading this report, please take the time to see if your current policy is an incident form or a claim form…..
Insurance company ratingIt is up to you to do the due diligence and ask your agent about the financial health of the company where you are purchasing your general liability insurance. As the previous tip suggested, sometimes the claims can be very delayed and you should know that in 10 years your company can pay a claim for you. Only use insurance companies with an A rating or higher to protect your business.
Exclusions, understand them clearlyBe sure to take the time to ask your agent about the policy exclusions and what they may mean for you. Here are some exclusions that contractors should consider when purchasing general liability insurance:
Pesticides, Herbicides and Fungicides Exclusion, Labor Practices Exclusion, XCU Exclusion, Contractor Warranty Exclusion, Professional Indemnity Exclusion, Asbestos, Independent Contractors. If you are not sure exactly what these mean for you on your policy, please contact your agent and get the help you need to understand it clearly. This can change the way you run your business.
SubcontractorsMake sure you understand how your policy deals with subcontractors. Are you covered if they don’t have insurance or not enough for the loss? How much coverage should you demand from your subcontractors? How often should you request insurance certificates? How can you be sure that the insurance certificate is legitimate. (I’ve seen fraudulent certificates for sale on eBay before). If you are not clear about the answers to these questions regarding your business and your general liability policy, you should call your agent immediately and get the answers you need to get a good night’s sleep.
As you can see, buying general liability insurance is not as simple as calling your agent and asking for a quote. You need an experienced professional who understands policy types and your business. At Clinard Insurance, we specialize in helping small contractors navigate the dangerous waters of the insurance world. If we can assist you further, or if you would like more information about Clinard Insurance Group, please visit our website.