If you’re a general contractor looking to inform yourself on the subject of business insurance, you’ve come to the right place!
Today’s blog is dedicated to the hard-working GCs of Quebec. If you’re already confused, don’t worry. We’ll get to the definition of a general contractor (GC) later on.
The insurance tips discussed today apply to general contractors both large and small, as well as one-man-operations.
We’ll be covering:
- Definition of a general contractor
- What’s covered under liability insurance
- Why general contractors need business liability insurance
- How to protect your business from liability claims
- The cost of general liability insurance
- RBQ bond
So… What is a general contractor?
Before we dive into the business insurance needs of a general contractor, let’s take a look at the definition.
Wikipedia defines a GC as the following:
“A general contractor is responsible for the day-to-day oversight of a construction site, management of vendors and trades, and the communication of information to all involved parties throughout the course of a building project.”
To put it shortly, they manage a team of tradesmen/subcontractors that are building a project. General contractors are responsible for assembling specialists in each trade to build a project from the ground up.
A “project” could be building a home, large industrial building, renovation, etc.
Here’s a diagram to simplify:
Why Contractors need a “solid” general liability insurance policy
In Quebec, most general contractors have liability limits between $1 million and $5 million.
Why are the limits so high?
Here’s a scenario:
You’re a general contractor and you specialize in residential home renovations. You’re building an “add-on” to the existing structure of a high-valued home in Westmount, Quebec.
You make a mistake during the installation that sets a fire and burns the house down.
In this scenario, you would be held responsible for the damages.
Contractors insurance would cover the cost. Trust me when I say it’s very easy to have a liability claim over $100,000.
What does General Liability Business Insurance Cover?
If we were to “define” general liability insurance in one sentence it would be this:
Coverage if you break someone else’s stuff or accidentally hurt another person, while on the job.
In other words, it protects you from causing harm to a third-party.
A “third-party” could be either a person or a physical object that belongs to someone else.
That’s liability coverage in a nutshell!
Here is another scenario that liability insurance will cover you for:
If one of your subcontractors causes damage to a third-party.
We’ll go into further detail about this point and how it works in just a moment.
Protect your general contractor business from liability claims
A piece of advice I always tell my clients is to use their insurance sparingly. You want to use your insurance as a last resort.
It will keep your insurance costs down in the long run.
Below are two pointers that your business should follow to keep your insurance price down over time:
Reason #1 – Make sure your subcontractors carry their own commercial general liability insurance
We cannot stress this point enough.
Before you hire a subcontractor for a project, make sure they carry their own commercial general liability policy.
Why is this so important?
Let’s say you’re a general contractor and you’re building a home from the ground up, and the electrician subcontractor does a poor job installing the wires.
4 months after project completion, an electrical fire destroys the house.
If the subcontractor (the electrician) has their own insurance policy, you (the GC) have nothing to worry about as the fire will be covered by the electrician’s liability insurance.
But, if the subcontractor does not have their own insurance policy, you will need to use your liability insurance to cover the claim.
Now, why is this bad and how will it negatively affect you as the general contractor?
A) Your insurance premium can increase significantly
B) Insurance companies may view your business as a “bad risk.”
They will view your business as a bad risk because of your lack of due diligence.
Allow me to elaborate:
Before a project starts, it’s up to the GC to ensure that subcontractors carry their own liability insurance.
Insurance companies could, therefore, assume (after a claim such as the above example) that you don’t require your subcontractors to carry their own insurance. They would then assume that this is the case for all of your projects.
If none of the subcontractors carry their own liability insurance, this puts all the risk exposure onto the general contractor.
i.e. Your insurance would be picking up the mistakes of your subcontractors.
And, if all of the liability risks fall onto the general contractor, the insurance premium will reflect this reality by being more expensive.
Any reputable subcontractor should have their own general liability business insurance.
If they don’t, you should seriously consider finding a different subcontractor for the job.
Reason #2 – Frequent claims lead to higher insurance premiums
We frequently advise our clients to save their insurance policy for larger claims; don’t use it to claim for $300.
If your business has good cash flow, we also recommend increasing your deductible to an amount you feel comfortable with. This will help keep your construction general liability insurance premium down.
General Liability Insurance Cost for Contractors
Like all business liability insurance policies, the cost depends on a few factors.
Your annual revenue – the higher your revenue, the more projects you’re completing, which means the higher chance something can go wrong. This will be reflected in your liability insurance cost.
Your experience in the field – GC’s with more experience pay less for their insurance. If you’re just starting out in the profession, you may pay a higher rate than a contractor who has been in the field for many years.
Your claims history – the longer your business goes without a claim, the lower your insurance premium will be.
Your risk management – Demonstrating to your commercial insurance broker that you have a standardized process, by requiring all subcontractors to carry their own liability insurance, will help lower your premium.
This process prevents your business from suffering the consequences of someone else’s mistake.
If you’re a general contractor with a few years experience, between $300,000 and $600,000 in annual revenue and you are claims free, you can expect to pay between $1,000 – $2,000 for your commercial liability insurance per year.
General contractor insurance in Quebec
Here is a list of additional insurance products you’ll need if you’re a GC in Quebec.
Construction bonds are mandatory in Quebec, but this product protects your client in the event you (the GC) default on your contract.
For example, if you’re hired to pour a concrete floor in the client’s basement. The client inspects the floor and notices that it’s not level.
Because you did not perform the job correctly, you’re considered to be in “default.”
The bond covers the cost the consumer would incur to have another GC redo the job if they are unable to recover the amount from you.
These construction bonds come with limits of $20,000 and $40,000 depending on whether you’re a general or specialized contractor.
Tool floater insurance
Consider purchasing a tool floater to cover your equipment if it’s stolen.
As opposed to regular “contents” insurance that covers your stuff at one specific location, a tool floater provides coverage anywhere you go.
This includes the job site, your office, your home, and everywhere in between!
Your tools are covered if they’re stolen, regardless of where they are located at the time of the incident.
This insurance is designed for projects that take longer than 1 day to complete.
Let’s say you’re building a wood deck for someone’s home and you purchase all the lumber in one shot. The raw material (lumber) isn’t part of the deck (yet) and isn’t covered by your client’s home insurance policy, either.
If these materials were to be damaged or stolen, it would be up to you (the GC) to replace them.
But, with an installation floater, all the materials will be covered as long as they aren’t yet installed.
It’s basically the equivalent of commercial property insurance while stuff is being built.
This insurance protection is essentially an installation floater, but for larger projects.
It covers the GC project from the beginning until completion.
Here’s how it works:
If you’re building a new home from scratch, the client (the buyer) will own the house only upon completion.
So, who owns the home during the course of construction?
The general contractor.
A builder’s risk will cover your project if you suffer a claim, like a fire, during the course of construction.
It covers the raw materials, labor costs, and more.
Bid bonds are generally used by general contractor companies that have the expertise to build large scale projects, and it’s very common for the client to require a bid bond along with a GC proposal.
Similar to the RBQ bond, this does not protect you, but your customer.
It guarantees that the buyer will get their project at the agreed-upon price.
For example, if the client wants to build a school. He goes to market, where 8 GC’s bid on the school construction project.
Your GC company comes in at the lowest price, $3,000,000; the client chooses your business to build the school.
1 month later, you realize there’s a mistake; you can’t build the project at that price because you’ll lose money.
The project needs to be $3,500,000 in order to make a profit; an extra 500k.
Because of this, you drop out of the project.
Now, the client is in a sticky situation where they need to go back to market, get new bids; they need to do the entire process over again.
So, after all this mess, what if the new lowest bid for the client is $4,000,000?
That $1,000,000 gap would be covered by the bid bond; it pays the difference to the client.
This is a tricky product to understand, so we suggest calling one of our business insurance brokers directly to get more information.
For those of you are general contractors working out of the USA, we suggest you check out the company Handle and their blog about constructions bonds.
Handle does a great job explaining how bonds work in the USA and which bond products may be best for you.
We just touched on how a bid bond “honors” the agreed-upon price for the client.
We also discussed that bonds are products built to protect the consumer, not the insured.
A performance bond ensures that once the project starts, it’s completed!
Now, why wouldn’t a GC complete a project to its entirety?
The most common reason is due to bankruptcy.
General contractors or the sub-trades can go bankrupt in the middle of large projects, which isn’t good for anybody.
Finding a new general contractor to complete a half-finished project is extremely difficult logistically, and it’s expensive.
Performance bonds are also complicated to understand, but in short it protects the customer (the entity paying for the structure to be built) financially.
Let’s look at a bankruptcy example:
If you’re the buyer, and your project stops halfway because your GC went bankrupt, you are going to incur additional costs in order to complete the project.
A performance bond would pay for those additional costs.
Any type of bond is a product designed to protect the consumer, but that is paid for by the general contractor.
Getting a bid &/or performance bond is quite easy, as long as your business has a good financial standing.
Having the right insurance policy is a critical part of running a general contractor business.
We discussed why GC’s need to have construction general liability insurance and the importance of making sure subcontractors carry their own insurance.
We also looked at how the cost of a general liability insurance policy depends on a few factors, such as experience in the field and your annual business revenue.
Lastly, we talked about additional products like bonds and builder’s risk that you may need to purchase for larger construction projects.
As mentioned earlier, understanding the concept of bid and performance bonds can be difficult, so don’t be shy to reach out if you’d like clarification!
As always, we’d love to help your business when it comes to commercial insurance, give us a ring today at 514-636-0002