What contractors should know about general liability and umbrella insurance policies
This week, we’re getting you up to speed with everything you need to know about general liability and umbrella insurance policies. Find out what exactly these policies cover, how much coverage you might need, and how they work when a claim is filed.
Topics we cover in this episode include:
- Why contractors need general liability and umbrella policies
- What general liability coverage and rates are based on
- How your insurance company handles a claim
- Umbrella and excess policies
- How the size and net worth of your company should be factored into the coverage you get
- Current trends in general liability and umbrella premiums
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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
TRANSCRIPT
[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today we are talking about what contractors should know about general liability, umbrella, excess insurance policies. And we have our experts with us today, Wade Carpenter, Carpenter, and Company CPAs. And we have Stephen Brown in the other corner with mcDaniel-Whitley Bonding and Insurance Agency.
And I’m Rob Williams, authoring the Pumpkin Plan For Contractors. And my company is IronGate Entrepreneurial Support Systems. On the Contractor Success Forum, we are talking about this because we discuss how to run a more profitable, successful construction business.
Why contractors need general liability and umbrella policies
[00:00:50] Rob Williams: And that makes me think of why are we even interested, first, about having general liability and umbrella policies?
[00:00:58] Stephen Brown: Well, somebody makes us get it. That’s why.
[00:01:01] Rob Williams: Yeah, that’s true. And that is why we have it. And I guess some of these people will get it and not want it or really raise the floor part, the part that you’ve gotta cover yourself. And I’ve done that and it’s actually saved me money, but you gotta make sure that you’re in the cash position.
We have this because successful companies are the companies that stay in business and make it through the hard times and the bad times. And what is one of the big things that’s gonna get you through these bad times? It is your general liability and your umbrella policies because it’s not, if it’s gonna happen, it’s gonna be when something happens. Because even the very best contractor, something is gonna happen in your career if you stay in business long enough, right?
[00:01:46] Wade Carpenter: Yep. Yeah, I guess what I was gonna say is, if you spend all your time paying attention to your success and then some catastrophic event happens, you don’t wanna wipe out all the stuff you’ve worked so hard for. So, Stephen, tell us about it.
[00:02:01] Stephen Brown: Well, first of all, let me say, there’s different types of insurance that contractors need, but the main parts are general liability, worker’s comp, auto coverage, equipment coverage, and umbrella liability. So we’re just talking about general liability and umbrella liability because a lot of that is in insurance specs and you’ve got all the insurance in place you need except for that when you bid a job, then you gotta call your insurance agent and say, do I have this insurance?
Otherwise they’re gonna make you get it, and then you’ve gotta pay for it after you’ve already gotten the job. So paying attention to insurance specs in the job. The specs are in there what you’re required to cover. So, general liability, the old guys, and, older than me guys–
[00:02:45] Rob Williams: Older than you?
[00:02:46] Stephen Brown: Liability, but that’s, that goes back to the–
[00:02:49] Rob Williams: Wow. I Google that, but I don’t think Google was around then to–
[00:02:54] Stephen Brown: Yeah. So general liability is to protect the public So that’s why they called it that. General liability protects your company against claims that happen in the course of you doing your work. Bodily injury claims and physical damage claims. So a lot of contractors thinks general liability covers your workmanship and it does not. Now, if you’re a general contractor and one of your subs has a claim, and that sub’s coverage doesn’t pay, then your general liability does. So if you’re a general contractor you pay a rate for your subcontractors. It’s very small, but they’re required to carry general liability. Does that make sense?
[00:03:35] Rob Williams: It does. It does. And yeah. And it gets the commercial, they almost always do. In the residential, a lot of times they would land on ours and we really tried to fight against that, but.
[00:03:47] Stephen Brown: That’s right. If you’re, if you as a general are not enforcing that your subcontractors have insurance, then it’s on you. But nevertheless.
[00:03:55] Rob Williams: We’d charge them for it, but it’s still, they would still, if something happened, it would be on us and that could have damaged us. I think we were fortunate we, we made a lot of money on it because we charged a lot higher rate than our rate. But yeah, they–
[00:04:08] Stephen Brown: There you go. Well, a lot of GCs do that for subs that don’t have insurance, but I don’t think it’s good business practice as a rule, but sometimes you do what you have to do.
What general liability coverage and rates are based on
[00:04:19] Stephen Brown: So here, general liability is based on payroll for contractors. So however much payroll you have is how much you have to pay for general liability. It’s based on what you do. So if you’re doing masonry, then there’s a masonry code for general liability. Everything that you can do as a contractor, there’s a code for general liability. Grading, dirt work, concrete. So as I mentioned before, construction, unlike any other type of insurance business, allows you to break out those classifications for what you do, what your guys do.
So generally each employee of yours is assigned a classification of what they do, and there’s a rate, and it’s a rate per thousand dollars of payroll. So general liability is usually no more than two or 3% of your payroll cost. That may be on the high side, but it just depends. If you’re doing really risky work, the rate is higher.
If you’re doing work that’s not as risky, the rate is lower. And the reason is over the years, they have claims based on the type of work you do. And now roofing claims are higher because if you’re a roofer and that roof leaks and damages the building, that’s covered by the general liability policy. So that’s property damage. Bodily injury or property damage.
[00:05:40] Rob Williams: So now we just said that it doesn’t cover our workmanship.
[00:05:44] Stephen Brown: It covers the resulting damage from you, or your sub’s faulty workmanship.
[00:05:49] Rob Williams: Okay.
[00:05:49] Stephen Brown: it doesn’t pay to replace the roof, but it pays for the damage that’s done by the roof. The roof still has to be fixed so it doesn’t leak.
[00:05:58] Rob Williams: Okay. That’s a great point. That’s a great point.
How you can get a better general liability rate
[00:06:00] Wade Carpenter: So you talked about, payroll obviously is the main factor, but are there other things that go into it, like losses and deductibles? What kind of things can a contractor do to work on that rate, if anything?
[00:06:14] Stephen Brown: Well, there’s almost always, and now in the policy, a property damage deductible, and that’s usually anywhere from $250 to $2,500, just depending on how risky the work you do. So that’s for property damage that occurs. But I can say that any of my contractors that have been in business for at least 20 years have had a liability claim and it’s things happen. Crazy things.
[00:06:43] Rob Williams: –If it’s when, isn’t it? When something’s gonna happen? Not if.
[00:06:47] Stephen Brown: Right, and that general liability policy, and of course, I encourage everybody to read theirs, but they’re not. But you know, the insurance policy tells you what’s covered and what’s excluded from coverage. So it’ll exclude things like silica dust and asbestos liability and other things.
So bodily injury and property damage are always covered, but what about accidentally underground collapsing something? A trench or piping or anything? Well, there’s an endorsement built into the policy to cover that. Accidental pollution coverage is great. I have a had contractors hit underground fuel lines that have caused a big pollution claim. So having that endorsement on it, paid the claim.
[00:07:34] Rob Williams: Wow, so, so back when Wade was asking a question, we talked in another episode about workers’ comp and that mod rating and stuff that you get. Does a mod rating apply?
[00:07:45] Stephen Brown: There’s no mod for general liability.
[00:07:47] Rob Williams: No. Okay.
[00:07:48] Stephen Brown: But if you have a bunch of general liability claims, then you know, you’ve got to work on getting things cleaned up with your agent because you may need to find another carrier.
How your insurance company handles a claim
[00:07:58] Rob Williams: I remember when I had a claim, I don’t know if it was on my automobile or if it was on there. A lady hit my truck when she was texting and somehow she won the case in the court because the jury felt sorry for her, the insurance company and the lawyer was like, no, we’re going to court. This is just ridiculous. And then they got five times what they were asking for because they felt sorry for this, it was a lady that cleaned houses and she already had a broken back and they just felt sorry for her, so they gave her $80,000. But she was texting and not looking and ran into one of our trucks. So it’s okay.
[00:08:31] Stephen Brown: Well, that’s important. I’m glad you brought that up. That’s a very important part of insurance in general. Guys, when you turn a claim into your insurance carrier, they’ve got to handle it however they want to. Sometimes they’ll settle and it’ll make you crazy, but if it’s really bogus, you’ve gotta really go on record, make sure your agent and you have carefully documented what’s bogus about it, and you go on record about it. And then it’s up to your. agent to stay in touch with the claims adjuster and find out what direction they’re heading because they can settle it any way they want because once it’s turned over to them to protect you, then they’re gonna do whatever’s best for both of you.
[00:09:12] Rob Williams: Okay. So if a claim does happen like that, isn’t that going to raise my rate in the future years? Cause they had to pay a– I know workers comp when we were in this self-insured pool, I knew how that was calculated, but I don’t know how the general liability is calculated in the future years.
[00:09:29] Stephen Brown: Well, general liability, these claims happen. Now, if there’s a bunch of property damage claims that are your fault over and over again, then carriers are gonna want to get off of it. But it’s a general rule. If things–
[00:09:41] Rob Williams: Won’t write you or they’re gonna raise your rate? They just won’t write you?
[00:09:44] Stephen Brown: They may not write you and your agent has to find someone else to–
[00:09:47] Rob Williams: Ah, okay.
[00:09:48] Stephen Brown: And the rate may be higher.
[00:09:50] Rob Williams: Because you’re going with a different company or different– it’s riskier. Okay. But they–
[00:09:54] Stephen Brown: But it’s a general rule. If something happens beyond your control to cause a general liability claim, and it just happened, they’re not gonna raise your rate. They’re gonna stick with you. So it’s important to have good loss control procedures in place, safety procedures, and have a relationship with your your insurance carrier where their loss control people you know personally. They come by and visit you and they help you with your contracts and your safety program for your employees. So that’s a big part of what we have to do in risk management for contractors, guys.
What about umbrella and excess policies?
[00:10:27] Rob Williams: Okay, so the big question I get all the time is what is this umbrella policy and excess policy? Do I need this and how much do I need? I just don’t get it. That’s the–
[00:10:37] Stephen Brown: Well, a lot of times, remember a general contractor/owner wants to pass the risk on to you, so they’ll require large, huge limits. So the bigger the limits, you can get there by buying what’s called an umbrella excess liability policy. So as a general rule, they have umbrella policies and excess policies.
[00:10:56] Rob Williams: Okay, so, so that is when they require you. Yeah, a lot of it, that is the way we did business. It’s because whoever we were working for when I was had the factory, I was actually working for GCs a lot. On the GC side, we determined our limits. But it was whatever we needed to be able to do those jobs and that’s what determined it. We never considered our own risk.
But what let’s, so we’ve got that and we have to look at those bid sheets and know how much we have. So, but what about, I do get the question of, well say it is a GC or somebody that they’re determining their own risk. They’ll say, how much do I need? I don’t understand. So and a lot of times the answer I get from people is, well, how much are they worth?
[00:11:40] Stephen Brown: Yeah.
[00:11:41] Rob Williams: And that’s how much you need or something. And I don’t know that really lines up, but.
[00:11:45] Stephen Brown: Well, as an insurance agent, we’re not supposed to tell you or recommend how much umbrella coverage to get.
[00:11:53] Rob Williams: Oh, I didn’t know that. See, there’s, again, maybe that’s why I get this question because–
[00:11:58] Stephen Brown: I could tell you what a prudent contractor your size would have in place.
[00:12:03] Rob Williams: Okay.
[00:12:04] Stephen Brown: Based on insurance specs and from hundreds of jobs and also what your assets are. So if I’m handling your bonds, I know what your assets are and I know what needs to be protected.
So I can give you some ideas, but basically the underlying limits of an umbrella policy are your worker’s comp, your auto, and your general liability limits. So you might have a million dollars on your auto, you may have a million dollars on your worker’s comp. You may have a million dollars on your general liability. And the umbrella picks up over that.
[00:12:38] Rob Williams: Yeah, talk about that for a minute. That’s what people don’t–
[00:12:41] Stephen Brown: That’s why they call it an umbrella, because you can picture the umbrella over these other underlying coverages to give you added protection. I don’t know who thought of that, but.
[00:12:51] Rob Williams: Might have been Travelers because they have the little umbrella thing in their logo.
[00:12:54] Stephen Brown: You never know. You could be exactly right. But anyway, the umbrella policy covers limits over and above your underlying limits. So the old umbrella policies actually would have some coverage that if it was excluded under the underlying policy and it wasn’t excluded in an umbrella policy they’d have to pay for that.
But now these days, umbrella carriers make sure that their policy matches the underlying policy. So whatever the terms and conditions of your underlying policies are, are also applicable to your umbrella.
Except in the umbrella instead of a deductible, they have what’s called a self-insured retention. You can think of it as a deductible, but that’s how much you’re liable to pay if it gets into the umbrella. So I’ll give you an example. I had a contractor employee have a wreck. And it was vague on exactly whose fault, both contributed, but the woman was hurt and disabled. And there were a lot of people in the vehicle.
So anyway, the insurance company settled for the full amount of the million and for the full amount of the umbrella. So you say, well, why would the insurance company just max that out? It’s because the case in court was probably gonna get more than that. So the nice thing that the insurance company did was this contractor only had a million dollar umbrella, but what they did was they made sure they settled. The lady that got hurt, her attorney, for the million dollars, the full amount and the million dollar umbrella. My customer was only liable for $10,000, the self-insured retention, okay. And there was no deductible under general liability.
But the nice thing is that the claim adjuster made sure that in order to accept that 2 million settlement, they agreed not to sue the contractor for more. So that was lucky. Sometimes that doesn’t happen.
And so then you say, well, how much umbrella do I need? I would say at a bare minimum, a million dollar umbrella, but it’s really closer to two now. So umbrella premiums are lower than general liability premiums because they’re excess, they’re above the underlying limits.
So you got like a million dollar deductible before they have to kick in. So they’re reasonably priced. And last year they were crazy expensive because of all the auto claims. All the auto litigation. If you put your name on the side of your vehicle and it’s a commercial auto, you’re gonna get all the attorneys from TV drooling.
[00:15:21] Rob Williams: Yeah. But the CPAs are gonna like it because when you get that logo on there, people think it makes it more deductible somehow in all your mileage or something. I don’t know if that’s–
[00:15:31] Stephen Brown: Well, you wanna advertise your business and if you’re at a job site, you want people to know whose truck is whose.
[00:15:37] Rob Williams: Yeah.
[00:15:37] Stephen Brown: I’m not saying don’t put your name on your truck, but I’m just saying it’s a fact. And they’ll find out if it’s a company owned vehicle. That’s one of the first things they do is see how it’s titled. So don’t worry about that guys. Don’t not put your name on your truck because of that. But nevertheless, you know the lawsuits go where the insurance is and if there’s no insurance, a bad claim, then they’re gonna sue you to try to get the assets of your company.
Per-project Umbrella policies
[00:16:02] Wade Carpenter: I’ve had contractors that do something that’s way beyond their scope or something, and normally maybe they had a million dollar limit or something, but this particular contract might ask for 5 million or, maybe they thought a project was more risky or something like that.
Is there a way to insure just one project under one of these?
[00:16:25] Stephen Brown: Yeah, you can get a per project umbrella from some carriers and and just by the umbrella required for that one project. So, in other words umbrella carriers don’t necessarily have to be your insurance company. Your agent may go to another company to purchase the umbrella, and they have to make sure it matches up with the underlying coverages. Does that make sense?
[00:16:48] Wade Carpenter: Yeah.
[00:16:48] Rob Williams: Yeah.
[00:16:49] Stephen Brown: So if you need a hundred million umbrella for a project, then you have to do what’s called layering the umbrella, because no one carrier will write the full hundred million umbrella. They’ll take 10 million, and one will take 20 excess of that 10 and one will take 30 excess. So they layer it in order to build up those limits to what you need. That’s how insurance companies spread the risk.
[00:17:12] Rob Williams: Yeah one thing, Stephen, it’s, I think it’s important for our guys to know the difference in the pricing of this kind of insurance. The general liability. That first million dollars, is it a lot more expensive than the additional add-on?
[00:17:26] Stephen Brown: Yeah, the first million dollars, of course, is the most expensive, and then it goes down the higher your limits are. And that’s because there’s more layer of deductible, you could say, from the underlying policies.
[00:17:40] Rob Williams: Yeah, and I used to like to talk to my guys about, compare it to life insurance. There’s a good chance that a lot of things are gonna land in that 1 million, then if you’ve got $5 million of coverage, they’re not gonna land in the two and three and four and 5 million.
So those small claims are all under the small part, but like life insurance, it’s the same price for the next– you either die or you don’t die, so you claim the whole thing if you got a $5 million life insurance policy. I haven’t heard of any partial deaths that paid in the life insurance that only claim the first 1 million. So it claims the whole 5 million.
[00:18:15] Stephen Brown: Well, I guess there’s a partial claim in life insurance that if you had a terminal illness, but yeah, I know what you’re saying.
[00:18:23] Rob Williams: Could be some riders that pay it early. Yeah.
[00:18:26] Stephen Brown: But, nevertheless guys what I want you to take away from this is that general liability umbrella coverage is a huge part of your risk management plan. It’s a, it’s huge. It’s reasonable. You can build the cost into your job. The cost isn’t gonna bankrupt you . You’ve got to bid those costs into your bid.
So, you get the rate for your employees and you build the general liability and workers’ compensation into your job cost rate. And you have that number to plug in before you bid a job.
How the size and net worth of your company should be factored into the amount of coverage you get
[00:18:55] Rob Williams: You know, Wade, I wanna go to you for a second before we get, I know we’ve been talking on this for a while, but we hadn’t talked about the size of the company and that kind of stuff. Because a lot of the times the CPA has been involved in these decisions and they talk about the net worth of the company and those kind of things when they’re determining the amounts. Does that have anything to do with our, how much liability insurance you get and why is that?
[00:19:20] Wade Carpenter: Well, as I said earlier, you don’t wanna build up a company and if it’s worth 10 million and they can take, or whatever the number is. If you insure for 3 million or something like that, and then, and have it destroyed in a heartbeat if something catastrophic happens.
Current trends in general liability and umbrella premiums
[00:19:36] Wade Carpenter: But you know, my question to Stephen now, you’ve been doing this quite a long time, and what do you see happening in 23, 24? You talked about the auto limits and auto wrecks and stuff like that. I mean, are prices going up on these policies? What trends do you see in this?
[00:19:52] Stephen Brown: I’m seeing general liability premiums staying pretty much the same. And the umbrella’s coming down just a little bit because there was a lot of auto-related claims driving those umbrella prices up last year. But I’m seeing more reasonable umbrella and general liability rates.
And remember, GCs, you gotta pay a very small rate for subcontracted work. Within buildings and outside of buildings, subcontracted work. And it’s usually two or three tenths of a percent to insure your subs. And the contractors say, why do I do that? They’ve got their insurance. They’re double charging me.
Well, your sub’s insurance might lapse. Are you watching it all the time? There may be exclusions on their policy. Are you reading their policy? So, the subs have to be covered under your policy to some degree, and there’s a charge for that. Just I’ve got some older contractors are just ambivalent about that.
I’m like, guys it is what it is. So anyway you figure it out at the beginning of the year and at the end of the year you sort it all out, kind of like you do worker’s comp.
[00:21:02] Rob Williams: The lawyers like to name anybody they can get on the lawsuit. Pretty–
[00:21:06] Stephen Brown: Right. And when that happens, turn it into your agent and let him turn it into your insurance carrier. Just let them handle it. It’s so nice. That’s what you buy the policy for. You’re just, you are like, oh, I gotta, good attorney, I gotta do this. No, you gotta do construction work. You gotta make a profit.
[00:21:23] Rob Williams: Yeah I’ve learned so much. One of my best friends, I don’t know if you, if we’re allowed to admit, is a trial attorney and I spent hours in the car with this guy. It’s amazing, these stories that I hear. And then sometimes the way they choose to get a case and the way, the amount, and that’s kind of part of where I was going with the amount of the company, what they’re worth is.
And that is where the liability– and if they can find out how much insurance somebody’s got, I’m still not clear on that and whether the lawyers can get that.
[00:21:54] Stephen Brown: Yeah. Well, if you’re a contractor, you’ve seen a lot of close calls.
[00:21:59] Rob Williams: Yeah.
[00:22:00] Stephen Brown: That’s a fact.
[00:22:01] Rob Williams: Yeah.
[00:22:02] Stephen Brown: Where somebody or something was gonna get hurt or damaged.
[00:22:05] Rob Williams: Okay.
[00:22:06] Stephen Brown: I had a situation with a beam that just went right to the security shack. It was another security company, but it just, security guard ducked and it missed their head by about a foot.
[00:22:18] Rob Williams: On that subject I used to be confused of, say I had a million dollar policy, I don’t remember what my policy amounts were. But let’s just say it was a million dollars. And then do you need a million dollars of umbrella? And I’ll specifically think about 2009 when things went down, I had a few million excess on top of that, and it was based kinda on my net worth like that, that I had, that I was wondering at risk of losing. Well, then when we lost everything in 2009, I actually dropped my umbrella policy. I don’t know if that was smart. I didn’t end up getting sued, but it was like, okay I don’t have $4 million of assets sitting out there to be sued for.
So we don’t have many assets, so I got this million dollars and that’s all I need because that’s what the contractors are going for. And I don’t know if that’s right or not, but sometimes that is what the lawyer’s gonna ask for when they see the judgment. They’re not gonna ask more than they can collect.
And I’ve heard these conversations because they think, not that they don’t think they can get the judgment, but they’re like, well, I’m not gonna waste my time suing somebody for $4 million when they only have $1 million, because we’re not gonna be able to collect the last. So I think maybe it’s not really our liability exposure, it’s how much the lawyer’s gonna go ask for.
Which is a crazy way to think about it.
[00:23:35] Stephen Brown: Well, that’s the only way to think about.
[00:23:37] Rob Williams: Yeah.
But– lawyer’s for, not what the real liability is.
[00:23:42] Stephen Brown: Yeah. But beside just getting sued, think about the property damage that you can do that you’ve gotta fix.
[00:23:48] Rob Williams: Oh.
[00:23:49] Stephen Brown: Because of some accident.
[00:23:51] Rob Williams: Okay.
[00:23:51] Stephen Brown: So think about that too. Bodily injury and property damage, that’s general liability. So that’s it guys. Unless y’all have any other questions.
[00:23:59] Wade Carpenter: It is been great.
[00:24:00] Rob Williams: All right. Well this is interesting. This subject, there’s so many different ways you can go with this, but the just understanding that an umbrella is on top, right? And it covers the all the different ones. That’s confusing to people. They don’t, they rarely realize that it’s not just on top of your general liability, it’s also on top of your workers’ comp, right?
And it’s also on top–
[00:24:21] Stephen Brown: Well think of it more as excess liability coverage.
[00:24:25] Rob Williams: Okay, across everything. That’s what–
[00:24:27] Stephen Brown: Yeah. Workers comp, general liability, and auto.
[00:24:30] Rob Williams: All right. Well thanks a lot. This is great. And we always need to know. Some of these things are not as fun, but general liability can be fun too, right? That’s what we are. All these–
[00:24:40] Stephen Brown: It’s a blast.
[00:24:41] Rob Williams: Yeah. Woo. All right. Here on the Contractor Success Forum. Thank you guys for listening to us today. Go to Contractor Success Forum dot com. Hey, listen to us on our YouTube channel, Contractor Success Forum. That seems to be where we’re growing the most. That seems to be easier, YouTube is actually picking up. I hear you can actually listen to it now, like in the background, just like the podcast.
But listen to us, share us, ask us questions. What do you want us to talk about? And I don’t know about you guys, but I am getting more feedback from listeners asking questions and calling in. So that’s a good thing.
We love to hear from you. We’re here for you to make things better in the construction business and make your businesses run more profitably and successful.
And Wade Carpenter, Carpenter and Company CPAs, Stephen Brown, McDaniel-Whitley Bonding and Insurance Agency. And I’m Rob Williams, authoring the Pumpkin Plan for Contractors with IronGate Entrepreneurial support Systems. Thanks for listening. See you soon.