What insurance a contractor needs, by the shape of the business

Three things carry a one-person operation, and each answers a specific accident.

General liability answers what you do to other people and their property. The NAIC describes a commercial general liability policy as covering four categories of events a business can be held responsible for: bodily injury, damage to others' property, personal injury including slander and libel, and false or misleading advertising (NAIC, Insure U: Small Business Insurance). Its two contractor-shaped gaps are worth knowing on day one: professional errors and omissions, which the NAIC lists among the risks the policy does not protect against, and damage to property in your own care, custody, or control, an exclusion IRMI records courts reading more than one way (IRMI, care, custody, or control). More on the general liability page and on professional liability.

Your tools and your truck. Business property coverage, in the NAIC's listing, can include the building, inventory, furniture, equipment and supplies, machinery, and computers, owned or leased. For a contractor the equipment is usually mobile, which is a different form from a shop policy; see tools and equipment coverage. On the vehicle, the NAIC advises that a business owning or leasing one needs commercial auto, notes commercial limits run higher than personal ones, and warns that personal auto policies may exclude business-related liability, so an owner relying on personal coverage for business use should read the provisions closely.

Nothing else, yet. A solo operator with no employees, no subs, and residential customers does not automatically need workers compensation, an umbrella, or a bond. What a client asks for is a separate question from what a risk requires, and "bonded and insured" in particular is two instruments rather than a bigger policy: see the bonded and insured guide. Start on independent contractor insurance if this is where you are.

Hiring changes the legal picture more than it changes the work. The NAIC: "Nearly all U.S. states require employers to purchase a workers' compensation insurance policy to cover employees," with requirements varying by state and business type and the state insurance department as the place to check. Read "nearly" as doing real work in that sentence, because the exception is large.

Texas is that exception. TDI states that "in Texas, private employers can choose to carry workers' compensation insurance coverage, but it is not required in most cases" (TDI, workers compensation for employers). Opting out is not free. Labor Code 406.004 requires an employer that does not obtain coverage to notify the division in writing, and 406.033 removes three defenses in an employee's injury suit against a non-subscribing employer: that the employee was contributorily negligent, that the employee assumed the risk, and that a fellow employee's negligence caused the injury (Texas Labor Code ch. 406). We do not tell anyone which side of that to take; we do say that the choice has a statutory shape and should be made with the statute in front of you.

Whichever state you are in, hiring also introduces payroll as the thing your premium is measured on, and payroll is measured after the fact. That mechanism, and the audit at the end of the term that settles it, is the subject of the contractor insurance cost guide. The coverage itself is on the workers compensation page.

Bringing on a sub raises a question the tax code answers before the insurance one does: is this person actually a subcontractor? For the IRS, an employee is an individual who works at the control and direction of another, and having the right to control is what matters rather than exercising it constantly; the diagnostic questions include who sets the hours, who sets prices, who buys the supplies, and who pays expenses such as insurance and advertising (IRS, independent contractor defined). Note that insurance is on the IRS's own list of signals. A "sub" you insure, direct, and supply is being described by that test as something else, and the workers compensation question from the previous section comes back.

Assuming the classification holds, the practical requirement is documentary. Collect the sub's own general liability, get named as additional insured by endorsement rather than by a line on a certificate, and know what the endorsement actually says. The document and its limits are covered in the certificate of insurance guide, and the division of responsibility between the two parties in general contractor versus subcontractor.

One question to put to your carrier rather than to a website. The standard general liability form makes the first named insured keep records for premium computation and settles the premium by audit at the end of the term. How your carrier treats payments to subcontractors who could not produce their own coverage is a matter of that carrier's rules, and answers vary. Ask before the audit, not during it. If you are on the other side of this relationship, start at subcontractor insurance.

A residential customer asks whether you are insured. A commercial contract tells you what to buy, at what limits, with whose name on it, and by when. Three items on that list are new.

Additional insured status for the owner and often the general contractor above you, added to your policy by endorsement at your request. Limits somebody else chose, which may exceed your license minimum and may pull in an umbrella. And coverage for the building under construction, which is a property question rather than a liability one: a builders risk policy, in IRMI's definition, is property insurance covering buildings and structures while under construction. Who buys it is a contract term, and the AIA's standard general conditions put it on the owner, though a contractor can carry it instead. That page is builders risk.

Two trade-specific items also tend to surface at this threshold. Work that disturbs soil, refrigerant, fuel, or solvents runs into the general liability form's pollution exclusion, which the post-1986 ISO policy writes broadly, and contractors pollution liability exists to fill that gap (contractors pollution liability). And anything you design or specify rather than only build moves the claim out of general liability, which the NAIC says does not answer for errors in the professional service. If you are the party signing the prime contract, the general contractor insurance page is the one to read next, and the full set of coverages is indexed on the coverage section.