Article Reviewed by a licensed insurance professional: Sam Meenasian (CA dept of insurance license #0F75955).
Estimated reading time: 7 minutes
No matter what kind of contracting business you operate, you need to understand your insurance. Your insurance policies will almost always just hang out in the background, silent partners ready to help you if the worst should happen. The problem is, things that are out of sight can also be out of mind.
This is where many small businesses get into trouble when it comes to insurance premiums. They might have their policies set to auto-renew, and they don’t realize just how much they are spending each month on their coverage. If you don’t have your policies bundled, or if you have experienced steady increases without realizing it, you could be overpaying for your coverage.
Why Are Contractors Paying Too Much for Insurance?
There are many variables that play into the high cost that some small business owners are paying for insurance. Being aware of these common issues can help you keep your premiums reasonable. Even if you work in an industry that is considered to be high-risk, you don’t need to spend an arm and a leg on your insurance coverage.
Set-It-And-Forget-It Billing
One common reason people overpay for insurance is setting up automatic payments and then not reviewing renewals. Many insurers offer a small discount for enrolling in autopay, which can be worthwhile. However, if your premium increases at renewal—due to rate changes, coverage updates, or other factors—you may not notice the higher amount because the payment is processed automatically. To avoid surprises, review every renewal notice and set an alert to check your premium before each scheduled draft.
Layered Coverage or Redundancies
This is more common in situations where bundling is going on for some policies and not for others. If you have essentially the same coverage offered by two policies, you are overpaying for your insurance. Be sure that you are not paying for policies that do the same thing unnecessarily.
Prices That Are Not Based on Current Data
Commercial premiums are generally calculated by exposure bases (payroll, receipts, vehicles, etc.), class/industry rating, claims history, and modifiers. Many policies may also involve audits to true-up estimated exposures, especially when it is a workers’ comp policy; some carriers also conduct an audit on General Liability policies. A more accurate explanation is: your business inputs may be outdated or estimated, which can cause overpayment or a big audit bill at the end of the year. Workers’ comp audits commonly verify payroll and classifications against estimates.
Not Checking With Other Carriers
Request multiple quotes from multiple insurance carriers or through an independent agent/broker who has access to different insurance carriers. Make sure that your business is classified correctly and that adequate coverage limits, deductibles, and key endorsements are selected.
Incorrect Classification
Trade/class codes have a major impact on premium. With the wrong class code, you might overpay, or you might underpay and get hit with an additional premium at audit. Confirm with your agent or carrier that the class codes match your actual operations and job duties. Trade codes need to match premiums for you to be paying the right amount for your protections.
Your Annual Business Insurance Check-Up
All of the above issues are why you need to be sure that you are checking in on your policies from time to time. Things can shift and change over time, and you need to make sure that you have the right coverage for your business. Too much coverage in some areas and a lack in others doesn’t take care of your company the right way.
Step #1:
Collect all the information about your current policies. Know what your revenue was last year, know your payroll numbers, have the information about all of your work vehicles, and be aware of your claims history for the past few years. You will need to have all of this data on hand to be able to determine what factors might be influencing the cost of your policies.
Be sure as well that you look at the number of jobs you have completed, the subcontractors you are using, and take note of any major changes to your business that you can relay to those you are seeking quotes from.
Step #2
Now, you need to ask the right questions as you are looking at coverage and a possible change of pace.
· Should I increase or decrease my deductibles?
· Am I paying for coverage I don’t need?
· Did my payroll increase or not?
· Has my business changed since last year?
· Do the trade codes match my business?
· Do I have all the necessary endorsements that are needed?
· Have I asked about discounts or bundling?
· Have my claims increased since the year before?
Think about this example to help you out. You run a tile installation business. Your policy has you coded as a plumbing company. This is not the right code, and your premiums will be wrong until this is corrected.
Step #3
Ask for multiple quotes using the same limits, deductibles, classifications, payroll, and gross receipts. Confirm key coverage details (additional insured, completed operations, waiver of subrogation, primary non-contributory, and per project endorsements and exclusions) before deciding purely on premium.
Step #4
Work with a skilled insurance team. You will want to double-check all of these variables with the insurance team, who is helping you track down fair rates. They can take a look at all of these variables and seek quotes that will improve your coverage and potentially save you money. You can do this legwork on your own as well, but it can be hard to accurately compare and contrast when you are not in the industry.
Step #5
Make adjustments that make sense for your company. You can switch policies, change deductibles, and end policies that are not ideal for your business type. Make sure that you undertake this process well before you need to make a decision. You don’t want to be down to the wire with only days to renew your policies and just starting the process of comparing and contrasting your options.
A Story That Shows How This Works
Joe originally worked alone. He didn’t have any helpers until he had been in business for a few years. He then changed his legal entity from sole proprietor to LLC, hired two W-2 employees, and started offering new services like framing and remodeling. His policy that protected his business was still set up with him as a sole proprietor. The policy also had him listed as a handyman, but didn’t include new class codes (framing and remodeling).
The short review that his new insurance agent did found the following:
· Wrong classification of his trade
· Incorrect revenue
. No W-2 employees
· Listed as a sole proprietor
Which Trades Are the Most Likely to be Paying the Wrong Amount for Insurance?
· Plumbers
· Roofers
· Handymen
These contractor types need to be sure that they have the right coverage and that they are not classified incorrectly.
Consider bundling coverages if possible, keep thorough documentation of your operations, and adjust deductibles only to levels your business can afford. More importantly, review your policy limits to ensure they match your industry exposures, contractual requirements, and potential loss severity.
Incorrect class codes and incorrectly updated policies could cost you thousands that you don’t need to be paying each year.
Things to Keep in Consideration
Make sure to keep these factors in mind when reviewing your insurance coverage.
Many small businesses discover they’re paying more than necessary or carrying gaps because their policy information hasn’t been reviewed since the last renewal. Annual reviews are the key to making sure that the coverage is right for the business.
Accurate and proper trade codes are key, but if you are not sure about these factors, you need to work with a skilled insurance expert to adjust your policies. Compare carriers on a routine basis to make sure your coverage is competitive.
Our team takes pride in matching businesses up with the right coverage for their goals and needs. We will help you get the right trade codes and coverages in place so that you can be sure that you are both saving money and getting the maximum coverage for your company. We have years of experience taking care of our insureds, and we will treat you like family from day one.
