By Ted Devine
Contractors and construction workers perform some of the most dangerous work there is – and they’re often competing on price with professionals who cut corners or skimp on quality to keep their costs low. While the temptation to operate a lean business to minimize short-term expenses may be significant, contractors should be aware that skipping essential protections (such as commercial liability insurance) can be devastating to their business’s long-term viability.
Here’s a look at four hidden – and potentially costly – risks that threaten contractors and construction professionals.
Hidden Risk #1: Losing Personal Assets in a Lawsuit
One of the most common misconceptions among contractors (and owners of small businesses in general) is that their personal assets are safe from lawsuits filed against their business. Unfortunately, this is simply not true. If your business is fined or saddled with a judgment, the court has the authority to go after your personal assets to cover any costs your business assets can’t cover.
Costs may include your lawyers’ fees, evidence and court docket costs, among others. You will likely have to take some time off work to appear in court. In other words, you’re looking at a hefty pile of bills – and that’s assuming you’re not found liable.
If a judge rules that you are responsible for causing damages, you could face settlements or judgments that exceed the funds your business has available. And don’t think shutting your doors will protect you from a costly liability payment: if you’re responsible for paying damages, the court can legally seize money from your savings account, repossess your car, come after your home, and otherwise bleed you dry, depending on relevant state laws.
Manage the risk: Luckily, contractors can shield their personal and business assets by investing in commercial liability insurance, which pays the costs of lawsuits (including lawyer’s fees, court costs, settlements, and judgments) filed against your business. Compared with the relatively hefty fees associated, the monthly premium for coverage of $250,000 can be as low as $60 or $75.
Hidden Risk #2: Waivers and Contracts Do Not Fully Shield You
Liability waivers and contracts (both with employees and clients) are an essential part of risk management for any contractor or construction worker. But they aren’t bulletproof. Courts have been notoriously unpredictable about upholding the agreements outlined in waivers and contracts: sometimes they let the terms of such documents stand, and sometimes they don’t.
Most often, a court’s decision depends on individual circumstances of a case and even the legal strength of the original document.
Manage the risk: Contractors can bolster the strength of their risk management documents by implementing three key steps:
- Work with an attorney to draft all contracts and waivers to ensure that they will hold water if challenged in court.
- Supplement these documents with other risk management efforts (including adequate business insurance). In the event that a contractor’s waiver is challenged in court, insurance will cover the related costs. Even better, if the waiver is thrown out, insurance can also cover any damages assessed.
- Keep lines of communication open. Discussing and addressing small problems before they become big liabilities can go a long way toward minimizing the cost and hassle of legal challenges.
Hidden Risk #3: Liability Exposure from Business Insurance Gaps
During slow periods in construction work, it’s only natural to cut costs by eliminating unnecessary expenses. But contractors too often make the mistake of ditching their insurance policies when work dries up for the season. This can have disastrous consequences. Here’s why:
- No coverage for completed-products lawsuits. If a client decides to file suit over work you completed months ago, your insurance company won’t provide coverage if you’ve let your policy lapse, which leaves you on the hook for all the legal costs and associated expenses.
- Difficulty securing coverage for next season. Perhaps even more troubling, starting and stopping insurance coverage over and over is often viewed as a red flag to insurance companies. Contractors who start and cancel one policy after another will likely have trouble finding an insurer willing to cover them in the future, which can make it difficult to secure projects, bring in revenue, and keep the business afloat.
Manage the risk: Avoiding the high expenses associated with letting coverage lapse is simple: Keep your insurance policy in place year-round. If you’re worried about affording your premiums during the slow months, talk to your insurance agent about a payment plan that allows you to pay more when you’re bringing in more revenue. You may even be able to secure a policy that provides stronger coverage when you need it more and lighter coverage during the rest of the year.
Hidden Risk #4: On-the-Job Injuries
Contractors and construction workers face significant risks for on-the-job injuries. Even the most careful professionals are subject to the whims of chance and nature: There’s little you can do to prevent a member of your crew from suffering heat stroke during a particularly steamy summer day or stop a dropped hammer from landing on someone’s toe.
And because of the high cost of medical bills, it’s common for workers to turn to their employers to collect compensation for injuries that occurred on the job. But what’s even more expensive for your business is if one of your employees thinks that they got injured or sick because you failed to provide a safe work environment.
As with other types of lawsuits, you’ll face hefty legal bills to defend yourself regardless of whether or not you’re ultimately found liable – and those bills aren’t covered under General Liability Insurance policies.
Manage the risk: The powers that be recognize that workplace injuries are a very real threat to contractors and other professionals. To help business owners manage that risk, most states require workers’ compensation insurance for any businesses that have employees (and in some cases, even for sole proprietors).
Workers’ comp covers the various costs associated with treating workplace injuries by providing money to pay medical bills, recovery costs, and even employee wages if they have to miss work while recovering. Most workers’ comp policies also include a type of coverage called employer’s liability insurance, which funds the legal costs associated with injury- or illness-related employee lawsuits.
Protecting Your Construction or Contracting Business
Whether you’ve been serving clients for decades or you just launched your business this year, you face significant risks in the work you do every day. And in our increasingly litigious society, the likelihood that someone will file a lawsuit after a mistake (or a perceived mistake) is higher than many business owners realize.
Maintaining a financially strong contracting or construction business demands proactive risk management. Luckily, managing your risks doesn’t have to be all-consuming. By investing in certain business liability insurance policies, you can focus on your work with the peace of mind that comes from knowing that your business and personal assets are safe from the many elements that can throw a wrench in your plans.
Ted Devine is the CEO of insureon, the leading online provider of small business insurance with more than 30,000 small business clients nationwide. Prior to this role, he was the president of Aon Risk Services.