Use Contracts to Keep Insurance Affordable

If you want to keep your general liability-insurance premiums in check, you may want to start with a thorough analysis of your client and subcontractor contracts. Well-worded documents that clearly establish the responsibility of all parties, but especially the remodeler, will keep claims against your company — and ultimately your premiums — to a minimum.

Obtaining general liability insurance has become a remodeler's biggest nightmare, thanks to a wave of claims for construction defects and other litigation, says Mark W. Kinsey, a partner with wife Carol in PKG Insurance Associates Inc., Doylestown, Pa. "Not only do they have to contend with soaring rates, lack of availability for general liability and other issues that are putting a squeeze on insurance, but they have to make certain that they can cover themselves properly from the unexpected or escalated job costs that result from a claim," he explains.

Kinsey says construction-defects litigation has hobbled residential contractors’ ability to get affordable insurance in places such as California, Colorado, Florida, Nevada and other high-growth states. "The rules have changed. The legal system has changed," he says.

Contracts can aid in preventing liability claims against the remodeling contractor if they’re worded properly, updated regularly and checked by an attorney who knows construction law and local building codes. Insurance companies are cautious, so they prefer to do business with firms that have their own ducks in a row, Kinsey says.

He offers the following tips on how remodelers can protect their businesses:

• The clarity of the contract with the homeowner and subcontractor is key. It should plainly identify who's responsible for what.


• Contracts can be ambiguous and contain statements that may actually negate each other. To avoid potential problems, remodelers need to have their contracts reviewed annually by an attorney who specializes in construction law. Local laws change, and sometimes these changes must be part of a contract, or they may necessitate a reevaluation of general liability-insurance parameters. Remodelers also need to have any contract they're thinking about entering into reviewed by a construction attorney before they sign on the dotted line.


• Consider your relationship with subcontractors. If a general contractor hires you and you use subcontractors, you're the one responsible for them on the job, unless otherwise indicated.


• Every year, get together with trusted advisers, including your banker, attorney, financier and insurance broker, to evaluate the business — your plans, funding, insurance and all the other elements — to make certain everything is in sync.


• Make sure your insurance carrier knows your business and looks at any contract you may be going into. Make sure your coverage wasn't voided because of language in the contract before the job even begins.


• Get assurance that if there's any type of litigation or problem on a project, your insurance company will defend you if you're enjoined in court and that you won't have to pay for your own defense.

"In today's legal environment, the strength of the contract is everything," Kinsey says. "Handshakes and your word will not protect you." But a carefully written and frequently reviewed contract can go a long way toward shielding your company and saving some money on insurance premiums.