A few years ago, I was at a trade show promoting NARI membership when a prospect asked me if NARI still required insurance to be a member. I said, “Yes, of course,” and he replied, “That leaves me out.” I was stunned. How could a responsible business owner open their company and themselves to the risk of losing all businesses assets and other personal assets? It was beyond me. This column identifies what you need to understand to protect you and your company from loss.
Loss from Several Sources and Causes
Loss of tools on the jobsite due to theft, loss of home due to negligence of a subcontractor, and injury of an employee in a work-related auto accident are a few situations that, if not covered by insurance, would mean a major financial hit to your company.
You must learn enough about insurance and risk management to run your own safety and risk management programs. Legal and regulatory procedures have made risk management a vital part of every business. Mitigate risk and protect yourself by following these five actions:
- Identify the risk. Until you know the risk you are taking, you cannot plan to reduce it. Carefully analyze your operations to determine things that can go wrong. Remember that Murphy’s Law works overtime, and some believe Murphy was an optimist!
- Avoid the risk. That is the best way to control risk. If an analysis of the job indicates a likelihood of something going wrong, perhaps do not take the job or subcontract the parts most likely to cause a loss. Your attorney may be able to help word your contracts and subcontracts to exempt you from some risks.
- Assume the risk. If risk cannot be avoided, it may be possible to include the potential loss in your operating expenses. For example, in many states, remodelers can enter some form of risk-retention program for workers’ compensation. Self-insurance can be a useful tactic if the company is large enough. Another way to assume part of the risk is to have insurance with a large deductible—perhaps as much as the first $100,000 of each claim. Risk retention may be appropriate in some cases but is a major commitment. Before doing so, a detailed study should be prepared by an actuary and risk-management professional.
- Control the risk. Plan your operations to minimize the impact of risks you cannot avoid. There may be safety programs and equipment that will not add appreciably to operating cost but will reduce the probability of loss occurring.
- Transfer the risk. The most common way to transfer risk is insurance. Another way is to word contracts to transfer risk to the owner or to a subcontractor. If you are not the prime contractor, this could be you!
Which Type of Insurance Must I Have?
Although general liability and workers’ compensation are the most basic types of insurance needed, you may need other types of insurance, such as employment practices liability, extended environmental liability, and remodelers’ protective liability policies. A good commercial insurance agent may suggest other types of coverage depending on your specific operations and projects.
Policies that protect against loss of property or losses arising from loss of property are also important. If a property loss occurs, it will probably reduce or eliminate some revenue, and there may be added costs of temporary relocation or modification of operations. Some companies will write policies that cover not only the property loss, but also the resulting overhead and profit if the property had not been lost. This can be important for small companies. If only the out-of-pocket cost is covered, the loss of overhead and profit can break the company.
How Do You Determine What Is Enough?
As a minimum, remodeling companies should carry at least $1,000,000 in general liability; $1,000,000 liability limit on commercial auto policy; and your workers’ compensation must meet your state’s statutory requirements. In addition, you may want to consider an umbrella policy to cover catastrophic losses. How much over those minimum limits you need to carry will depend on your company size and risk exposure. Your insurance agent will be the best adviser to help determine any additional needs.
What About Subcontractors?
If you use subcontractors—and most of you do—be sure to get Certificates of Insurance from all of them. You also need to require all subs have the same limits on their policies. Additionally, be sure your company is listed as additional insured in your subcontractor’s insurance policies. This will enable you to be alerted of any lapses or cancellations. Finally, determine if subcontracted work is excluded from the general liability policy.
Selecting an Insurance Agent
It’s almost always best to do business with an independent insurance agent who represents many insurance companies, so you have choices and competitive pricing. By having an agent handle your important insurance products who represents only one company, you get what they offer—whether it’s good or bad for you. QR
Brian Downs, CRA, has been president of Downs & Associates and a Construction Risk and Insurance Specialist specializing in contractors and the trades since 2001. A former remodeling contractor himself, Downs earned his Certified Remodeler Associate (CRA) designation and became Lead Certified to better understand the current needs, concerns and issues contractors now face. Downs has been a member of NARI since the early 1990s, serving in various capacities and committees.
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