Contractor’s Guide to Insurance Part 1

Contractor’s Guide to Insurance: Part 1

As a contractor you are a skilled in a trade. Insurance is a very important component of your business
operation. Most contractors are learning as they grow with their insurance. This guide was designed to
provide the background information for you to understand the types of policies you have. With this
guide and a trusted agent who can make risk management recommendations insurance be a part of
your growth strategy not just a line item on your P&L.
This guide is broken into insurance product segments. Each segment will walk you through the risk
factors and solutions as well as provide a deeper understanding of what is covered on that policy. Let’s
get started by defining commercial insurance. This simple definition explains what the insurance
policies you purchase for your business are designed to do.

Definition of Commercial Insurance

A contract under which one party, the insurer, agrees—in exchange for the payment of a premium—to
pay for specified losses the insured may suffer, up to specified amounts, under conditions specified in
the insurance contract.

Commercial Property

Risk Factor

When a fire, theft, or another type of disaster strikes, your commercial property and everything within it
can suffer a significant loss. This can have a detrimental effect on your business.

Solution

Commercial property insurance can help protect the property your business owns and leases, including
things like equipment, inventory, furniture, and fixtures. Whether you own your building or lease your
workspace, commercial property insurance can be purchased separately or can be combined with other
necessary coverage to protect your business’ physical assets.

Commercial Property covers a building you own or lease

Understanding the outside factors that impact your commercial property insurance can be complicated,
particularly for those with little to no knowledge of what goes into the underwriting process. While the
type of business you’re in, your location and the state of the insurance industry in general can all affect
commercial property coverage pricing, there’s often more to it than that.

In fact, when it comes to underwriting and rating commercial property insurance, insurers examine four
key characteristics of a building: its construction, occupancy, protection and exposure (COPE). Together,
these factors can affect commercial property policy pricing—pricing that can fluctuate drastically
following an Insurance Services Office (ISO) inspection. This is especially true if there’s a discrepancy
between what’s on an insurance application versus what’s found during an ISO inspection.

This Coverage Insights examines each aspect of COPE and how it can affect an organization’s commercial
property insurance rating and, subsequently, their insurance rates.

The Types of Property Rating

Before looking at the specific factors of COPE, it’s important to understand when it is used and how
underwriters rate property in general. When rating property insurance, insurers will generally use one of
two methods—class rating or specific rating:

1. Class rating—For the class rating method, buildings with similar characteristics are assigned to the

same class. Insurance rates for class rating buildings will often be an average of all those in a particular
group, with some rates fluctuating based on positive or negative features of a specific structure.
Typically, your building will be assigned a class rating if it has all of the following characteristics:
1. It consists of 25,000 square feet or less
2. It doesn’t contain a sprinkler system
3. It is not fire-resistive
4. It is not used for manufacturing

2. Specific rating—In instances where a building doesn’t fall under the class rating method, a

specific rating will be calculated based on individual characteristics of the structure itself. This is where
COPE comes in. Specific ratings are used for more complex buildings and take into account unique
features—features that are examined closely during an ISO inspection. Following the inspection, ISO or
the insurer will calculate a specific rate.

Construction

With a general understanding of the two rating systems, we can now examine how a building’s
characteristics under COPE can affect policy pricing.

The first and most basic element of a commercial property insurance rating is a building’s construction
(i.e., the materials the building is made of). Based on an ISO-developed system, insurers categorize
buildings into one of six classes. These classes not only take into account the building materials used in
construction (e.g., wood and concrete), but the combustibility of those materials as well.

These classes—numbered in order of combustibility, with Class 1 being the most likely to burn—are as
follows:

1. Class 1 (Frame)—Buildings generally receive this classification if their exterior walls are made of
wood or some other combustible material.
2. Class 2 (Joisted Masonry)—Buildings in this classification typically have noncombustible exterior
walls consisting of concrete block, stone, brick adobe or another masonry material. In addition, Class 2
buildings usually have combustible floors and roofs.

3. Class 3 (Noncombustible)—Class 3 buildings will have exterior walls, floors and roofs made of and
supported by noncombustible or slow-burning materials. This can include materials like metal, asbestos
or gypsum. Often, Class 3 buildings are equipped with steel frames.
4. Class 4 (Masonry Noncombustible)—Class 4 buildings will often have exterior walls made of brick,
concrete block or another type of masonry. Unlike Class 2 buildings, the floor and roof are constructed
of metal or another noncombustible material.
5. Class 5 (Modified Fire-resistive)—The walls, floor and roof of Class 5 buildings will have a fire
rating of at least two hours. Because these buildings are heavily fire resistant, Class 5 buildings generally
have walls, roofs and floors made of solid masonry that are at least 4 inches thick.
6. Class 6 (Fire Resistive)—Similar to Class 5 buildings, the walls, floor and roof of Class 6 buildings will
have a fire rating of at least two hours. In addition, the walls, floor and roof will consist of reinforced
concrete and will be 4 inches thick or more. What’s more, structural steel used in Class 6 buildings will
be load bearing and have a fire rating of at least two hours.

Following an ISO inspection, your building may be assigned a specific class, which could substantially
impact your rates.

Occupancy

The second factor in COPE that insurers look at is occupancy. Specifically, underwriters will examine how
a particular building is used (e.g., for retailing, manufacturing or renting).

In addition, underwriters are interested in the contents of a building and how those contents impact
combustibility. For example, if a building is used as a grain mill, it will likely contain dust that could ignite
or explode. With this in mind, your commercial property insurance rates will vary depending on the type
of work you perform in your building.

Protection

The third factor of COPE relates to protection and the methods used to safeguard a building from fire.
When it comes to protection, insurers will take into account both public and private protection:

 Public protection—In general, public protection is provided by local fire departments, and

an ISO-developed system is used to rate the quality of that protection. Under this system, fire
departments are assigned what’s called a Public Protection Class rating—numbered one to 10,
with one being the best. Essentially, buildings located in communities with low Public Protection
Class ratings will be charged a lower commercial property insurance rate. These ratings take into
account:

I. The caliber of the fire department
II. The adequacy of the water supply
III. The effectiveness of the fire alarm and communication system

 Private protection—Private protection refers to the policyholder’s fire protection

methods. This can include things like fire doors, fire alarms, fire extinguishers and sprinkler
systems. Essentially, the more of these features your building has, the more likely your insurer
will apply a credit to your insurance rate.

Exposure

The fourth and final factor of COPE refers to exposure. Exposure relates to external hazards that exist
primarily due to a building’s location. This can include natural hazards (e.g., wind, hail and lightning) or
man-made hazards from local infrastructure (e.g., highways) or the general public (e.g., high-crime
areas).

The closer your building is to a natural or man-made hazard, the more likely you are to pay higher prices
for commercial property insurance.

What This Means for You

Commercial property insurance rates are anything but static, and a variety of outside factors can
influence pricing. Despite this, you aren’t alone when it comes to managing your risks and gaining insight
into your unique policies. We’re here to help.

Contact O’Connor Insurance Associates at 704-510-8884 today to learn more and speak to a qualified
insurance broker.

Commercial General Liability Coverage

Risk Factor

As a contractor, your business may be susceptible to many risks, such as claims due to bodily injury,
property damage, personal injury, and more. And, if you hire other contractors to perform work on your
behalf, you can be held responsible for any damage they cause on the job.

Solution

Commercial general liability insurance is an absolute necessity for every contractor. This type of
protection provides broad coverage for premises, operations, products, and claims to third parties or
property when you are deemed responsible and liable. It will also pay to defend any covered lawsuit or
action regardless of its merit.

General Liability Insurance: Your Defense Against Liabilities

The only way to effectively protect the assets of your business is to carry adequate commercial general
liability (CGL) insurance coverage. CGL protects your business from damages caused by bodily injury or
property damage for which your business is found to be legally liable.

What Does CGL Cover?

A typical CGL policy provides coverage for claims of bodily injury or other physical injury, personal injury
(libel or slander), advertising injury and property damage as a result of your products, premises or
operations, and can be offered as a package policy with other coverages such as property, crime,
automobile and more. As a safeguard against liability, CGL enables you to continue your normal
operations while dealing with real or fraudulent claims of negligence or wrongdoing. CGL policies also
provide coverage for the cost to defend and settle claims. Here is more detail into what a typical CGL
policy may cover:

 Automatic additional insured: Coverage is provided for written contracts, agreements and
permits.

 Personal and advertising injury: Protects against offenses made by you or your staff during the
course of business, such as libel, slander, disparagement or copyright infringement in
advertisements.

 Defense costs: Provides coverage for legal expenses for liability claims brought against your
business, regardless of who is at fault.

 Medical expenses: Provides coverage for medical expenses if someone is injured on your
premises or by your products.

 Premises and operations liability: Provides coverage for bodily injury and property damage
sustained by others on your premises or in conjunction with your business operations.

 Products liability: Provides coverage for bodily injury and property damage sustained by others
as a result of your products.

How Much Coverage Does Your Business Need?

The amount of coverage that your business needs depends on three factors: perceived risk, where you
operate your business and the type of products you manufacture.

 Perceived risk: Consider the amount of risk associated with your business operations and
functions. For instance, if you manufacture heavy machinery you would generally need more
coverage as compared to another organization that manufactures stuffed animals.

 Premises and operations liability: If you operate in a state that has a reputation for rewarding
high damages, then you may wish to purchase higher limits of liability.

 Type of product manufactured: If you manufacture a dangerous product, you may want to carry
higher limits of liability.

Remember, you can purchase an Umbrella Liability policy to help achieve the desired limit of liability.

Other Ways to Protect Your Business, In Addition to CGL

Here are some other tips for protecting your business.

 Establish a high standard for product quality control at your organization.
 Keep all company records up to date and accurate.
 Train your employees thoroughly and properly.
 Ask O’Connor Insurance Associates for safety and compliance information.

Business Auto Insurance

Risk Factor

As a contractor, you have many exposures associated with your business vehicles–owned or leased.
With a fleet of cars, trucks, vans, or other types of vehicles used in the course of business, a single
accident can potentially put your contractor business in financial jeopardy.

Solution

Business auto insurance provides coverage for vehicles owned or leased by a contractor and provides
coverage for bodily injury, property damage, and other exposures, and could include comprehensive
and collision coverage as well.

When it comes to running a business, vehicles—whether they’re leased, rented or owned—are crucial
for a variety of tasks. Whether transporting materials and tools to worksites, hauling goods for deliveries
or driving to meet clients—companies of all kinds rely on safe and functioning vehicles to serve
customers and generate profit. It is important to protect your drivers and vehicles through proper
insurance coverage. That’s why many organizations turn to commercial auto insurance, which can
provide the following benefits:

 Liability coverage. Collisions don’t just impact vehicles—they can cause expensive damage to
nearby property and valuables. In these instances, commercial auto insurance can provide a
range of protection if and when you damage another person’s vehicle or property in an
accident.

 Physical damage/collision protection. Following an accident, you or your employees may need
to pay for vehicle repairs—both for your own vehicle and any vehicles you hit. Commercial auto
insurance can reimburse policyholders for the costs of vehicle repairs they may need following a
crash, regardless of who is at fault. Many policies even provide coverage for uninsured and
underinsured motorists, providing an extra layer of protection.

 Comprehensive coverage. Collisions aren’t the only source of vehicle damage your business
needs to consider. Commercial auto insurance can provide comprehensive protection for
damages that are unrelated to an accident (e.g., losses related to theft, floods, vandalism and
fires).

 Medical payments. Collisions often result in bodily harm and expensive medical costs for you
and those involved in an accident. Commercial auto insurance policies offer some protection for
these expenses and can cover medical costs.

 Uninsured and Underinsured Motorist Coverage. Uninsured motorist coverage is used when the
at-fault driver can’t pay due to lack of insurance. Underinsured motorist coverage is used when
the driver’s liability limits are lower than the costs of the accident.

 Protection beyond personal auto insurance policies. Simply put, personal auto insurance doesn’t
provide adequate coverage for any accidents that occur while policyholders are driving for
business purposes. In the absence of commercial auto coverage, companies would have to pay
out of pocket should employees get in an accident while making deliveries, picking up supplies
or using a vehicle to perform essential business functions.

 Optional add-ons for even more security. Beyond standard protection for collisions, commercial
auto insurance policies can often be customized to meet your needs. Common policy add-ons
(also known as endorsements) include roadside assistance coverage, new vehicle replacement
cost coverage, towing reimbursement, rental reimbursement and gap coverage for auto loans or
leases.

Commercial auto insurance isn’t just for large fleets. Any car, truck, van or similar vehicle used as part of
your operations needs to be covered. Organizations should have a strong understanding of their
exposures and regularly examine the root causes of collisions and similar commercial auto concerns.
Additionally, businesses should seek the help of a qualified insurance broker with a deep understanding
of their operations and effective risk management strategies.

Contact O’Connor Insurance Associates, Inc. today to learn more.

Contractors’ Equipment Coverage

Risk Factor

You’re constantly moving your tools from one job site to another, exposing your contractor business to
potential loss due to damage or theft. And without your specialized tools and equipment, your job site
may come to a screeching halt.

Solution

As a contractor, you need contractors’ equipment insurance – a policy or endorsement specially
designed to protect your tools and equipment on the move. The policy or endorsement will cover
equipment for a variety of losses, including fire, explosion, vandalism, theft, collision with other
equipment or objects and overturning. Unlike standard commercial property insurance policies,
contractors’ equipment insurance often covers losses caused by floods and earthquakes.

For part 2 of Contractors Guide to Insurance, stay tuned until next week. Contact O’Connor Insurance
Associates to have a conversation with a team member!

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