By: Ryan Rogers, Commercial Lines – Executive

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Executive Summary:

Contractor insurance gaps can develop when your policy no longer matches the way your business operates. Four common problems include inaccurate information on your insurance application, taking on work outside your primary trade, relying on uninsured subcontractors, and overlooking workers’ compensation exposure. Reviewing these areas before a claim can help you identify potential gaps while there’s still time to address them.

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Have you ever been on a leaky boat? Imagine stepping into a boat that looks perfectly sturdy on land. You expect it to keep you dry… until it hits the water and you find yourself in trouble. Soaked and sinking, you realize a sneaky little hole has left you exposed.

Contractor insurance gaps paint the same picture. What might look like a solid business policy can turn out to be full of holes, leaking coverage where (and when) your company needs it the most.

At Grimes Insurance Agency, we understand how the details of a contractor’s operations can affect coverage, eligibility, and cost. With over 75 years of commercial experience, we’ve seen how seemingly small details can create significant problems when they’re not addressed before a claim. 

In this article, we’ll look at four common contractor insurance gaps, what causes them, and what you can do to identify them before they become a problem.

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Note: This article focuses primarily on general liability and workers’ compensation exposures. A complete commercial insurance policy may also include commercial auto, property, tools and equipment, and other coverages.

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1. What Happens if Your Contractor Insurance Application is Inaccurate?

One of the first places a coverage gap can develop is before your policy is even issued. 

When you apply for contractor insurance, your carrier needs an accurate picture of your business to determine what it is willing to insure and how to structure your policy. That’s why many contractor and roofer policies require a supplemental application before coverage is bound.

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Contractor Supplemental Application Example:

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These applications can ask about details such as: 

• The types of work you perform
• Whether you work on new construction or existing structures
• How often you use subcontractors
• Whether subcontractors carry their own insurance
• The size and scope of your projects
• Your estimated gross sales and payroll
  

A supplemental application is more than paperwork. It lays the foundation for the coverage and pricing you receive. The information you provide helps your insurance carrier understand the risk they’re being asked to insure. 

What happens when the information isn’t accurate?

Sometimes an inaccurate answer is an honest mistake and can be corrected by talking with your agent. Other inaccuracies may be identified during the annual insurance audit, which reviews your business information and actual exposures.

 However, waiting until the annual audit to make a change can end up being costly. 

One of the most common mistakes we’ve seen happen is misestimating gross sales or payroll estimates. If your actual numbers are significantly higher (or lower) than your estimates, you could owe additional premium when those numbers are reviewed. 

An example: a costly underestimation

In one prior roofing client example, the company estimated their annual sales at $6,000,000. Using this number as a factor, their original premium was rated at $50,000. 

However, their sales nearly doubled their estimate, producing $11,000,000 in gross sales. After the yearly audit, they were billed an additional $39,000 in premium to settle the difference.

Sometimes, your business simply changes after the application is completed. And oftentimes, the change is for the good. Either way, the end result can be the same: your policy might not be reflecting the business you’re actually running. 

How can you avoid this gap?

Complete the application based on how your business actually operates, not how you expect it to. 

Before binding coverage, review your answers carefully. Make sure your work, subcontractor use, project types, sales, and payroll estimates accurately describe your business.

When you’re unsure how to answer a question, ask your agent to walk through it with you before submitting. Client education and understanding are an essential part of preventing coverage gaps. 

If you’re ever unclear about your supplemental application information, or have additional insurance questions, feel free to give us a call, and Grimes Insurance Agency can help you sort it out. 

2. Can Taking on Different Types of Work Create a Contractor Insurance Gap?

As a contractor, you probably consider yourself according to your primary trade: 

“We’re a siding contractor.” “We’re a roofer!” “We’re a concrete contractor.”

But what happens when you start taking on work outside of that category? 

A siding contractor, for example, may occasionally accept roofing, gutter, or exterior projects. That flexibility can help your business grow… but it can also create an insurance issue if your policy only reflects your primary trade.

Adding a higher-risk service can affect your classification, eligibility, or premium—even if that service represents only a small portion of your business. 

Why can mixed-trade work create coverage problems?

Insurance carriers use classifications to evaluate the risks associated with different types of contracting and commercial work. These look like numbered “class codes” assigned to your business, based on the type of work you offer. 

For example, a business may earn most of its revenue from siding, but occasionally take on roofing work. Roofing presents a different risk than siding, so your insurance carrier may need additional information before determining how that work should be classified and rated. 

Want a more in-depth understanding of class codes? Read our Guide to Comparing Contractor Insurance Quotes to learn more about why these classifications matter.

How can you avoid this gap?

Tell your agent when your services change, even if the new work is occasional. Before adding a service, ask how it may affect your existing coverage, classification, eligibility, and premium.

If you regularly perform significantly different types of work, you may also want to discuss your business structure with your insurance agent and other professional advisers. Separate entities may make sense in some situations, but they are not appropriate for every contractor. 

3. Does Your Contractor Insurance Account for Your Subcontractors?

Subcontractors can be helpful additions for your business operations. But hiring another company to perform work doesn’t automatically eliminate your exposure.

Imagine you hire a subcontractor who damages a customer’s property. Or their work contributes to a claim. Or, maybe they end up injured during a project.

You might expect their subcontractor insurance to respond, but do you actually know what coverage they carry?

The thing is, your general liability policy does not necessarily provide the same protection regardless of whether a subcontractor has their own insurance. Some policies may provide coverage in certain situations, while others may exclude work performed by uninsured subcontractors or apply different conditions. 

Your policy’s language controls how your coverage responds to subcontractor-related exposures.

Why is this a common contractor insurance gap?

Texas is different from many states because not all contractors are required to hold a license or insurance. Whether a contractor needs a license can depend on the trade and the location where they work. Texas-specific licensing information should be reviewed alongside your own insurance requirements.

This can make it especially difficult to understand who you’re hiring, what insurance they carry, and how your own policy responds if they don’t have coverage.

What should you check before hiring a subcontractor?

Before hiring a subcontractor, consider:

• Does your contractor policy require specific insurance?
• Does the subcontractor carry general liability insurance?
• Does the subcontractor carry workers’ compensation insurance?
• Does your policy address uninsured subcontractors?
• What documentation should you collect?

Maintaining up-to-date documentation, like certificates of insurance (COI), is the best way to stay on top of these details before gaps happen. A certificate of insurance is the document you provide to customers, project owners, or contractors (like yourself) to prove your business carries the required insurance coverage.

Other helpful records to keep on file include:

The goal isn’t simply to collect a certificate and check a box. It’s to understand where responsibility falls if something goes wrong.

If you regularly rely on subcontractors, talk with your agent about how your specific policy treats their work before you need to rely on that coverage.

4. Could You Have a Workers’ Compensation Insurance Gap?

It’s important to understand that not every insurance gap involves liability. Workers’ compensation can create another significant area of exposure.

Texas has different standards from many states when it comes to private employer workers’ compensation coverage. In fact, most private employers in Texas aren’t required to have workers’ compensation coverage. However, choosing not to subscribe can create different legal and financial exposures if an employee is injured. 

The fact that workers’ compensation may be optional doesn’t mean the decision has no consequences.

How can you address this potential gap?

One option is to add workers’ compensation to your insurance policy. It may be an important way to protect your business, employees, and operations, but every business has different circumstances.

Talk with your insurance agent about your options and the exposures your company may face before deciding whether workers’ compensation is appropriate for your business.

How does your claims history affect your workers’ compensation costs?

If workers’ compensation is the right choice for your company, your claims history can also affect your premium costs through your experience modification factor (EMOD).

In simple terms, your EMOD is a scaled value that shows how your business compares to others within the industry based on your workplace losses. A higher EMOD increases your premium. A lower EMOD decreases it.

 

Interested in learning how to lower your company’s EMOD score? Read about How Much Contractor Insurance Costs to learn 4 ways to keep your score in check.

What Should You Do if You Think Your Contractor Insurance Has a Gap?

Contractor insurance gaps often develop when your business changes but your insurance doesn’t change with it. 

Maybe the application doesn’t accurately describe your business. Maybe you’ve added work since the policy was issued. Or maybe you’ve assumed coverage where your business’ policy simply doesn’t include it.

Each one can create an exposure that’s difficult to recognize until something happens.

If your business has changed since your last policy review, you don’t have to wait for renewal (or a claim) to find out whether your coverage still fits. Give our team a call, and we’ll connect you with an agent to review your current coverage. 

At Grimes Insurance Agency, we can help you identify potential gaps and determine whether your policy reflects the business you’re actually running. Unsure if Grimes may be the right fit? Learn Why West Texas Contractors Trust Grimes with their business insurance needs. Even if you don’t work with our team, we want your business to be well equipped with the right coverage.

By: Ryan Rogers, Commercial Lines – Executive

If you’ve ever received multiple contractor insurance quotes and the premiums look nearly identical, how do you know which one is right for you? Price is easy to compare, but it doesn’t tell you whether two policies provide the same coverage.

To most policyholders’ surprise, price alone rarely tells the whole story. Two quotes can carry nearly identical premiums and still protect one business dramatically better than the other. So, what else are you supposed to look for? It’s a question we’ve helped answer for decades. 

At Grimes Insurance Agency, our commercial lines team has helped contractors compare their options for over 78 years. We currently represent several commercial contractors and are dedicated to educating clients about the right coverage for their business.

By the end of this article, you will know:

• What to look for when comparing contractor quotes
• How to know which contractor coverage is the best fit
• What questions you should ask when comparing

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A quick note before we dive in: everything below focuses on general liability coverage. A full commercial insurance package for a contracting business typically also includes commercial auto, property, workers’ comp, and sometimes umbrella coverage – each with its own set of considerations. 

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What Should I Look for When Comparing Contractor Insurance Quotes?

There’s more to your insurance policy than price, especially when insuring your contractor business. The thing is, businesses are built differently. While you may be in a similar contracting market, your business is unique to you. In the same vein, your policy should be, too. 

What your policy covers should be specific to the work you do. From our experience with local contractors, there are four items you should pay attention to when comparing your insurance quote:

1. Your company’s classification codes
2. How your company’s policy is rated
3. The exclusions listed on your policy
4. How your policy includes subtractors

Let’s break each of these down together.

1. Verify your insurance classification codes

A classification (often shortened to class) code is a number used by insurance companies to group businesses and jobs by their levels of risk. 

Think about it like a library; There are thousands of books all organized by genre, author, and title. The same idea applies to insurance classification codes. Contractors, barber shops, and insurance agents are all classified differently. 

Why do class codes matter?

Class codes can drive your premium rate. Specifically for general liability insurance, it can also affect your eligibility for a policy. 

Think about it this way: a plumber’s class code carries a lower rate than a roofer’s simply because roofing naturally has a greater risk. Even something that sounds low-risk, like window cleaning, can jump into a much higher-rated class once the work goes above two stories. 

Who assigns classification codes?

Because not all states rely on the same kind of classification system, it can vary. However, a common system insurers use is the National Council of Compensation Insurance (NCCI).

There are also specific classification codes for different types of commercial insurance. Meaning, you often have more than one class code to look for. This article is specifically discussing general liability. However, other types of commercial insurance that use specific class codes include: 

• Workers’ compensation
• Commercial auto
• Commercial property

Class codes can get more complicated when you look beyond general liability. To understand how classification codes affect different types of commercial insurance, USA Business Services Inc. breaks down how these codes are used across different policies in its guide to commercial class codes.

How can your contractor business be misclassified?

You could be accidentally misclassified in a few different ways. Sometimes the wrong information gets passed along, or maybe your underwriter made an assumption based on incomplete details. 

Either way, the fix is the same: ensure that your insurance agent has a full, accurate picture of what your business does before a quote is ever built. If you’re insured as a roofing contractor, but also offer gutter repair services, it’s important to communicate that with your agent so that your class codes reflect correctly in your quoted premium. 

How do I find my classification code?

You might look at your contractor’s quote and realize that you don’t even know your business’ class. You’re not the only one. 

There are a handful of websites where you can search for your classification based on your industry and the type of commercial insurance you’re purchasing. Consider reviewing your class code using one of these tools:

• RT Specialty Connector 
• Insurance Xdate
• NCCI Class Look-Up (must have your NCCI login)

While these tools can be a helpful resource, always verify your classification information with your insurance agent before assuming your codes are correct.

2. Understand how your contractor policy is rated

Contractor policies are typically rated one of two ways:

• Based on your gross sales
• Based on your payroll

On paper, a payroll-based quote often comes in lower. However, in practice, payroll tends to be far more volatile than gross sales. A stronger year, a few new hires, or some overtime can push your payroll up dramatically. 

That difference is more important than you might think, and it typically gets caught (and billed for) when annual audit time comes around. 

In our client experiences, gross sales tend to move less dramatically year to year, making it a steadier number to build a policy around. If two quotes look similar, but one is based on payroll and the other on gross sales, don’t assume they’re apples to apples. The payroll-based policy may look cheaper today and cost you more down the road in unexpected premium jumps. 

Interested in learning more about how these rates affect your commercial policy? Read How Much Does Contractor Insurance Cost? to understand how your policy can be calculated.

3. Carefully review the exclusions listed in your policy

This is the step where quotes that look nearly identical can turn out to be worlds apart.

What is an exclusion?

Exclusions are the specific situations or types of work a policy won’t cover. If a loss were to happen because of the excluded cause, your insurance provider would not pay for the incident. This information is often buried deep in the pages of a policy most people never read. 

An exclusion example: A local roofing company

A recent client insuring their roofing company was paying around $6,000 a year for a policy that excluded “hot work”. Hot work is any labor involving torches or heat, which many roofers use to melt tar or adhesive when securing roof flashing, even if torch-down roofing isn’t their main service. 

When their crew accidentally started a fire that spread to a garage, the total uncovered claim cost roughly $89,000 (ouch!). Because hot work was excluded from their policy, none of the damage was covered, causing the business owner to pay the entire amount out of pocket. 

That’s the risk of chasing the lowest number. Most contractors don’t realize what they may be giving up in coverage just to get to a lower price. 

4. Ask about your policy’s subcontractor usage

If your business relies heavily on subcontractors, this is one of the most important (and commonly overlooked) pieces of a quote.

Some policies will cover labor performed by uninsured subcontractors. Others will exclude it outright. If you’re using subs and haven’t confirmed which category your policy falls into, you could be assuming coverage that simply isn’t there. 

This is especially relevant in Texas, where not all contractors are required to carry insurance or hold a license to take on work. It’s common, which means it’s worth a direct conversation with your agent about how your policy treats uninsured subcontractor work. 

How do I know which contractor insurance quote is best?

Once you’ve looked beyond the premium, you can start comparing the quotes based on how well each one fits your business.

Instead of asking, “Which quote is cheapest?” begin to ask, “Which quote gives my business the coverage it needs at a price that makes sense?”

A simple way to do this is to put your quotes side by side and look for meaningful differences, like this:

	Quote 1	Quote 2
Annual premium	$5,400	$5,900
Class codes	Roofing	Roofing + gutter work
Rating basis	Payroll	Gross sales
Liability limits	$1 million/ $2 million	$1 million/ $2 million
Exclusions	Hot work	No hot-work exclusion
Subcontractor provisions	Excludes certain uninsured subcontractor work	Provides coverage for eligible subcontractor work

Quote 1 is $500 cheaper. But if the contractor performs hot work and regularly uses uninsured subcontractors, the cheaper quote may not provide the coverage their business actually needs. On the other hand, if the two quotes provide essentially the same coverage and one costs significantly more, it’s reasonable to ask the agent why.

So, is quote 1 or 2 the best? Your answer: The better quote is the one that appropriately covers the contractor’s actual operations and needs. 

The goal isn’t necessarily to find a quote that wins every category. It’s to identify why the quotes are different and decide whether those differences matter to your business.

Learn more about how you can find the best insurance for your contracting business:

What Questions Should You Ask Before Choosing a Contractor Insurance Policy?

If you’re having trouble determining how two quotes differ, take them back to your agent and ask them to explain the differences. 

Here are a few questions to start with:

• Why is one quote more expensive than the other?
• Are both quotes using the same classification codes?
• Are there any coverage differences I should be aware of?
• Is either quote excluding work that my business performs?
• How does each policy treat subcontractor labor?
• Is there anything about either quote that you would recommend I change based on my business?

It’s important to remember that you don’t have to do the comparison alone. At Grimes Insurance, your agent is with you at every step of the process. If you find yourself confused between quotes, call our office, and we can help explain your options and which may be the best fit for your business.

The Best Contractor Insurance Quote Isn’t Always the Cheapest

When you first receive a handful of insurance quotes, the premium is probably the number you’ll notice first. But the real question is what your business is getting for that premium. 

Before you choose your contractor insurance policy, put your quotes side by side, identify the differences, and ask your agent to explain anything you don’t understand. 

If you’re still comparing contractor insurance options and would like to walk through them with an agent, give us a call, and we’ll connect you. At Grimes Insurance, we can help you understand the differences between your options and determine which coverage may be the best fit for your business. 

Unsure if Grimes may be the right fit? Learn Why West Texas Contractors Trust Grimes with their business insurance needs. Even if you don’t work with our team, we want your business to be well equipped and covered.

If you’re trying to budget for contractor insurance, you’ve probably searched online, hoping to find an average price. Instead, you’ve likely found dozens of articles saying, “Well… it depends.” 

While that’s technically true, it isn’t very helpful. And we want to give you the tools to actually answer that question. 

For the past 78 years, Grimes Insurance Agency has worked with contractors across all trades and helped them understand why their insurance costs what it does. Whether you’re a plumber, electrician, HVAC, or general contractor, it’s important to realize that your insurance premiums aren’t guesswork. 

In this article, we’ll explain the biggest factors that affect contractor insurance costs, why your premium changes as your business grows, and the biggest opportunity you have to lower what you pay over time.

What Determines Contractor Insurance Rates?

Every commercial insurance policy starts with a rating factor. Depending on the policy, insurers calculate premiums using one of three measurements:

• Gross sales: how much money your business brings in before expenses
• Gross payroll: how much money you pay your employees (before taxes)
• Square footage: the size of your building or property

Which factor applies is based on the type of business and policy being insured. 

Rating Factor	Used For	Why
Gross Sales	General contractors	More sales usually mean more customers and greater exposure
Gross Payroll	Trade contractors (plumbing, HVAC, electrical)	Risk comes from greater hands-on labor
Square Footage	Property or holding company with no sales or payroll	Used more often for leasing property

For most contractors, the primary rating factor is either gross sales or payroll. A company that owns a commercial building but doesn’t actively operate a business there may instead be rated by square footage. 

Once the insurance company determines which rating method applies, every contractor within that classification starts with the same base rate. The difference isn’t the rate itself, but how much exposure your business has. 

How is Contractor Insurance Calculated?

Let’s work through an example together. 

Imagine you’re a general contractor with general liability insurance. Your insurance provider’s current rate is $3.50 per $1,000 of your business’s gross sales. 

Your business is generating $1 million in annual revenue, causing you to pay roughly $3,500 in premiums before any additional adjustments.

The general contractor down the street is making $10 million in annual revenue. Their premium, on the other hand, is roughly $35,000. 

Both you and the other contractor are paying the same rate. The larger contractor simply pays more because they’re completing more work, serving more customers, and taking on more opportunities for a claim. 

This same concept applies to whether your policy is based on sales, payroll, or another exposure measurement.

What Factors Affect Contractor Insurance Costs?

While your payroll or sales are usually the starting point, they aren’t the only things insurers consider. 

The Trades You Perform

Not all contracting work carries the same level of risk. 

An HVAC contractor has different exposures than an electrician. A plumber has different risks than a roofer. According to USA Business Insurance’s latest review, roofing contractors are considered one of the riskiest trades to insure for general liability.

If your company performs multiple trades, such as plumbing, HVAC, and electrical, each classification may be rated separately before being combined into one premium.  Even within the same trade, residential and commercial work often have different rates because not all risks are identical. 

It all depends on the risk your trade poses to you, your employees, and those you’re doing the work for. 

The Size of Your Business

As your company grows, your insurance premiums usually grow with it. The more employees, projects, equipment, and job sites, the more opportunities for accidents and claims. 

Growth is a good thing, but your insurance policy must keep up with your business. Curious about how to avoid claims denials with a growing business? Read about the 3 Most Common Reasons for Commercial Claim Denials to protect your company from possible coverage gaps. 

Your Claims History

Insurance companies also look at how often you’ve had claims in the past. A business with a long history of accidents or lawsuits generally represents more risk than one with a strong safety record. 

This doesn’t necessarily mean one claim will drastically change your premium costs. However, consistently preventing accidents over time can have a meaningful impact on what you pay.

Why Do Contractor Insurance Premiums Change During the Year?

One of the biggest pricing surprises for contractors happens during the annual insurance audit. But there’s no reason to panic! This is a normal, yearly process for businesses.

When your policy begins, you’re estimating what your payroll or sales will be for the coming year. For example purposes, let’s say you estimate your payroll at $500,000. 

Six months later, business is booming, you’ve hired several employees, and you’re now on pace to finish the year at $800,000 (pat yourself on the back!)

Because your premium was originally calculated using the lower payroll estimate, your insurance company will settle the difference during your annual audit. That often results in an additional premium due at the end of the policy period. 

We recommend staying in contact with your insurance agent throughout the year. As things change within your business, make them known to your agent. Updating your payroll or adding new operations as your business changes can spread those costs over time, rather than surprising you with a single large bill. 

Have you made any recent changes to your business? Contact Grimes Insurance Agency to speak with an agent about amending your commercial coverage.

How Can You Lower My Contractor Insurance Costs?

While most pricing factors aren’t things you can control, being proactive about your business’s claims and coverage changes is one of the most helpful options. 

Another option that can dramatically affect your workers’ compensation costs over time is your experience modification factor.

What is an Experience Modification Factor (EMOD)?

In simple terms, it’s a value that shows how your business compares to others within the industry based on your workplace losses (aka: claims, employee injuries, etc.)

Every contractor begins with a standard experience modifier (EMOD) of 1.0. Once your business has enough insurance history, your modifier is calculated using your previous three years of workers’ compensation claims (excluding the most recent policy year).

A higher EMOD increases your premium. A lower EMOD decreases it. 

For example, a contractor with a 1.4 EMOD will pay 60% more on their premiums than a contractor with a 0.8 EMOD. For larger contractors, that difference can save (or cost) tens of thousands of dollars each year. 

The best way to keep your EMOD below 1.0 is to emphasize safety across your business. This can look like: 

• Report injuries early
• Observe employee behaviors and safe practices
• Regularly train employees 
• Investigate accidents to make preventative changes

Dive deeper into what an EMOD is and how it affects your business in this video:

How Grimes Insurance Helps Contractors Find the Right Insurance Rate

While there is no universal price, understanding how contractor insurance is priced is the first step toward budgeting accurately. The only way to know what your business will actually pay is to evaluate your specific operations, payroll, sales, and coverages. 

Interested in getting a quote for your business? Grimes Insurance Agency has a dedicated commercial lines team prepared to walk you through your contractor’s insurance policy. Call our office to explore your insurance premiums and find the right coverage for your business.