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We had some work done on our home recently and the contractor wasn’t what I was expecting. When I spoke with the GC (General Contractor), he told me that his sub (contractor) would be at my house, working on some general labor kind of work. This sub drove up in his boxy little car, pulling a little trailer behind him filled with bins and tubs containing all kinds of tools and things. His was a miniature workshop on wheels.

To be fair, I was expecting some big cargo van with pegboards and tools hung everywhere. I probably was expecting a full crew to pop out the back and get to work, setting up table saws, band saws and a welding rig. Maybe I was overimagining things.

We met, had a conversation, and I began to understand that this sub’s real love is carpentry, finish carpentry to be specific. He enjoyed putting the artistic final touches on jobs. He didn’t care for simple cabinet making or shelf building. He really liked making the jobs look great when they were all done.

I mention all of that to remind us that these small craftsmen are an interesting niche within the insurance landscape. They tend to do jobs that are parts of larger jobs. They aren’t usually the primary contractor, and they honestly don’t want to be. That doesn’t mean that they don’t have risks, especially when they take on only a small part of a job.

The Trouble with Being a Specialist

Trade contractors are very similar in many ways to other professionals who did not go to school for a business degree. They didn’t intend to learn how to run a business. While many professionals went to school to learn their profession, trade contractors often learned to do something that they loved to do and had a talent (or skill) for it.

That love, talent and skill turned into something that they did to earn money. Maybe they intentionally connected with someone else who needed the work that they could do. What truly matters is that now they are working as a subcontractor and have to deal with insurance issues and like most insurance clients, they think they know what they need and what they don’t need. That is, until they start seeing the contracts and learning that they probably need more insurance than they have.

The Transition to Commercial Insurance

Subcontractors have to get insurance and hopefully they find someone who knows what they’re talking about to help them, rather than downloading some insurance app or finding an “I’ll get you the best price” agent. Let’s assume for a moment that they have homeowners and auto insurance, and they begin the conversation by asking why they need more insurance since they already pay too much for their insurance.

At this point, it’s appropriate to note that any policy wording addressed here will be quoting from ISO policies. Individual policies will vary, and you should be reading each policy that you’re dealing with to properly advise any insurance client because insurance is complicated, and no two policies are identical.

The risk characteristics of the life of a contractor are significantly different than the risk characteristics of most people going about their daily lives. This creates the potential for gaps in insurance coverage in personal insurance policies. Here are a few examples.

The contractor now has to carry her tools and other equipment with her in her vehicle. Sometimes that property is rented or loaned to the insured. What happens if that property is damaged while it’s being carried around in the vehicle or at the jobsite?

The ISO personal auto policy includes these little exclusions under the liability section.

We do not provide Liability Coverage for any “insured”:
For “property damage” to property owned or being transported by that “insured”.
For “property damage” to property:

1. rented to;
2. used by; or
3. in the care of; that “insured”.

But what about the homeowners’ policy? Surely that policy will provide some coverage for their property, even if it is at the jobsite, right? Well,

here’s an interesting limitation that we find there.

The special limit for each category shown below is the total limit for each loss for all property in that category. These special limits do not increase the Coverage C limit of liability.

$1,500 on property, away from the “residence premises”, used primarily for “business” purposes.

Maybe that’s enough coverage and maybe not but it’s a rough conversation to have after the loss has happened. This isn’t the only place where there is an issue. The liability section of HO-3 includes a business exclusion, which would apply to bodily injury or property damage related to the business this person is involved in.

Maybe you’re already familiar with these issues and more, but the point is that as insurance people, our job is to understand the risks that our insureds are dealing with. Here are a few risk exposures that the small trade contractor is dealing with that they might not be thinking about.

• They could get sued because of their vehicle. Simple things like getting a vehicle stuck in a muddy driveway, which might damage the property, to property damage caused by striking objects on the customer’s property.
• They could get sued for what they are working on at the site, for example, if the contractor is using a jigsaw to cut a piece of trim and the blade breaks, injuring someone in the house.
• They could get sued for what they already finished. Imagine sitting at home six months after completing the installation of cabinet doors and getting a call saying that the customer plans to sue because the door came off in her hand and hit her in the head.
• If the contractor’s business grows to the extent where employees are involved, then you activate the workers’ compensation difficulty and more.

As an experienced insurance professional, you’re thinking about these things, but your potential client may not be thinking about them.

The Transfer of Risk

After convincing the subcontractor that they might need more insurance than just the state minimum personal auto policy, it’s time to introduce them to the wonderful world of risk transfer. After all, the GC that hires our small trade contractor doesn’t want to be held liable for whatever he does. The GC just wants to get paid for a completed job that has as few problems as possible.

When the trade contractor gets involved in the job, she will be liable for the things that she does, which makes sense to her, but there’s more going on than that. When she signs her contract with the GC, she will be exposed to the GC’s liability that’s created when he hired her.

If something goes wrong on the jobsite, and a claim is filed or a suit is brought, the customer can name the GC because ultimately the GC is the person the customer contracted with for the work, knowing that the GC may hire subs. If the GC simply used his own people to do all of the work, the liability picture would not be complicated. The problem arises when the GC subs out the work. Because the GC hired the sub, he can be held liable for what the sub does.

That’s why indemnification conditions end up in these contracts. If the sub does something that the GC could be held liable for, the contract allows the sub to take on that liability. This is done contractually using indemnification conditions. It’s done on the insurance policy by using the correct additional insured endorsements.

Why does this create a potential problem for the contractor? If the contractor doesn’t understand the contract they sign, or the insurance agent doesn’t look at the insurance condition of the contract, it’s possible that something gets missed and the wrong additional insured endorsement gets added, or the right endorsement doesn’t get added.

For example, a common additional insured endorsement reads this way.

Who Is An Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule, but only with respect to liability for “bodily injury”, “property damage” or “personal and advertising injury” caused, in whole or in part, by:

1. Your acts or omissions; or
2. The acts or omissions of those acting on your behalf; in the performance of your ongoing operations for the additional insured(s) at the location(s) designated above.

This portion of that form tells us that the additional insured only has coverage on the contractor’s policy for the things that the insured is doing. There isn’t any coverage for anything that has been done. There’s no completed operations coverage here. That can be fixed, but not if we don’t know that we need that coverage before something happens.

The risks associated with a small trade contractor are not complicated for the insurance professional who is used to dealing with them, but they are complicated for the contractor who isn’t used to them, who might be new at this work, or who might not have any interest in insurance and they just want to build things.

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