The House Insurance Built
Risk Management for Builders & Contractors

Chapter 1: Identifying Risks in the Construction & Contracting Industry
Part 2: Identifying Your Contracting Business's Risks

As a builder or contractor, you are no stranger to risks. Depending on your profession, you may perform some of the most dangerous work there is. In fact, the Bureau of Labor Statistics found in its "2012 Census of Fatal Occupational Injuries" report [PDF] that fatal work injuries in the private construction sector increased five percent in 2012.

In addition to potential occupational injuries, your construction business faces other hazards, such as liability for construction defects, property loss, and the perils of the road. Plus, the construction industry is full of codes and regulations that, if ignored, could cost you your business.

But in order to know where your contracting company's vulnerabilities lie, you have to scope out potential Achilles' heels. These are the scenarios that could devastate your finances or land you in the middle of a lawsuit.

Once you've pinned down the events that could threaten the future of your business, you can create protocol and purchase insurance policies that mitigate these situations.

To help get your wheels turning, take a look at these risk exposures your contracting business may come across:

1. Safety hazards.

From trips and cave-ins to electrical shocks and falling objects, there's a laundry list of safety hazards on a construction site. And it's not just in your best interests to manage these hazards — the Occupational Safety and Health Act (enforced by OSHA) requires that construction workers must be provided a safe workplace.

So when you have employees, it is your responsibility to ensure that their work environment is free from recognized hazards, such as exposure to toxic chemicals. If you are a one-person operation, be sure you have a safety plan in place to limit your exposure to potentially hazardous materials.

(For more information about OSHA, jump to the "OSHA and You: Creating a Safer Work Environment" section of this guide.)

2. Compliance.

As a contractor or construction business owner, you must comply with certain federal, state, and local regulations that govern construction. These regulations enforce standards for almost every aspect of construction — from handling and disposing of hazardous materials to complying with building energy codes.

For example, if you're an excavation contractor, you must comply with the EPA's National Pollutant Discharge Elimination System (NPDES) stormwater program. If your grading and excavating activities disturb one acre or more, you must obtain coverage under an NPDES permit for stormwater discharges.

For a complete rundown of industry-related regulations, check out the Small Business Administration's (SBA) Construction Industry Guide.

You'll also need a business license or permit to work in most places. Plus, many construction or contracting businesses need specific licenses to operate legally, such as tradesman licenses for electrical, plumbing, and HVAC professionals. For more help, check out the SBA's handy search tool, Find Business Licenses & Permits.

Lastly, your state likely requires you to carry a surety bond called License or Permit Bonds.

If your business fails to comply with federal, state, or local regulations, it could face serious fines and other repercussions.

3. Personal liability.

When you are a sole proprietor or independent contractor, you enjoy all the profits your business brings — but you're also responsible for its debts. If your business incurs a loss, such as a judgment lien, then your personal assets can be collected to cover that debt if you don't have enough commercial capital or insurance coverage.

To separate yourself from your business in the eyes of the law, you can register your business as a limited liability corporation (LLC). If you have adequate insurance coverage, though, you can remain a sole proprietor and still protect your personal finances.

4. Business liability.

Speaking of business debts, there are a slew of liabilities your construction company may face. And unfortunately, each state has its own statute of limitations for the kinds of lawsuits an injured party can bring against your business. So even if you completed a project months ago, your business could still be liable if your work causes harm to someone.

You'll also need to carry the appropriate insurance for your company vehicle to limit your business's liability exposure on the road. In addition to legal considerations, take into account property damage, equipment breakdowns, and repairs — these expenses can easily burden your finances.

When left unmanaged, these obligations, risks, and liabilities could irreparably hurt your contracting business. And if you think being a small business means you can't be sued, take a look at "We the Plaintiffs," an infographic by You'll see how small businesses are often targeted in our litigious society.

In the next chapter, we discuss how small business insurance can help address your business liabilities by reducing your potential for loss.

Next: Chapter 2: Understanding Construction & Contracting Insurance Policies

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