Should Contractors Purchase Insurance on a Per Project or Annual Basis?
Purchasing construction insurance policies can be a headache. Policy language reads like gibberish, premiums seem to come out of thin air, and, with jobs piling up and clients to appease, the last thing you want to do is dissect confusing policy paperwork.
But operating without a strong insurance package — including general liability, workers’ comp, etc. — is like playing with fire. To make your insurance experience a little easier, let’s breakdown the differences between an annual insurance policy and a per-project insurance policy.
Annual Insurance Policy for Contractors
Many contractors purchase construction insurance policies that provide coverage for all the work they do within a given year. This is known as an annual insurance policy — or sometimes, multi-year policies if they span over a year. Within an annual Commercial General Liability insurance there are two limits: an aggregate limit, the maximum amount the insurer will pay on claims during the entire policy period, and a per-occurrence limit, the maximum and insurer will pay for a single incident.
Compared to per project insurance, an annual insurance policy is more general. While they do consider business type and level of risk, in general they are not personalized to each individual project without special endorsement. For some businesses, an annual insurance policy may leave them underinsured, and others may find themselves over-insured. Likewise, the aggregate limit may be adequate while the per-occurrence limit is too low — or some other variation of a policy imbalance. Annual policies are often times supplemented with other coverages or endorsed to meet their business needs.
Per-Project Insurance Policy for Contractors
Think of per-project insurance policies as pay as you go insurance. You only purchase and pay for insurance for the time you are working, either on a per contract or per day basis. Additionally, you may have the option to pay for the coverages that are needed at that specific time. A full kitchen remodel could carry more risk than a simple sink replacement, and thus requires more coverage.
As is true with all insurance premiums, per project insurance policy premiums depend on a slew of factors. These factors could include: the services being provided for the particular job, the location, cost of the project, business size, and history. The type of the project informs underwriters on the amount of risk involved. Projects located in densely populated areas typically have a greater potential risk of injury. Cost of the project explains how much is at stake and what is at risk, as does business size. History can help lower premiums by asserting your expertise and experience. Brokers gather these factors and underwriters use them to help calculate premiums.
Seeing as project specific policies address the specific exposures a contractor would encounter on a given project, they are often best for those who operate on a smaller scale. For instance, contractors just starting out, with projects coming in on an inconsistent basis, or those who do contracting on the side. Larger contractors may also choose to purchase a project specific policy if they are working on a higher risk project that their regular policy might not adequately cover.
Considering the importance of construction insurance policies in the business of contracting, it is crucial that you speak to an agent or a risk manager to determine which type of policy best suits you and your business’s needs.