Can a Property Owner File a Claim Against the Contractor’s Insurance?

The construction trade is full of potential pitfalls. Mistakes and accidents happen, and some of those issues can be extremely expensive. Whether a third party gets hurt around the job site or the contractor causes property damage, someone needs to pay to make things right. In most cases, that’s what insurance is for, and the contractor will typically initiate a claim against their policy to take care of it.

But who can actually file a claim against the contractor’s insurance? Can the property owner file a claim, or does the contractor need to submit it? And what if the insurance won’t cover all or some of the costs? Let’s take a look. 

Contractor liability for property damage

The day-to-day work of a contractor can involve a lot of risks. General liability insurance helps limit the financial impact of those risks. This insurance generally protects the contractor from being financially liable for damage caused to the properties of customers, neighbors, or any third party not related to the project. It also offers a safety net against suits for injuries caused to folks who aren’t on the payroll.

Painting with a broad brush, general liability offers coverage against expenses caused by workplace accidents to anyone other than an employee or officer of the company, though policies may vary. 

State requirements

In many cases, general liability insurance is a requirement for contractors seeking to get a license within a state or city. In order to receive a trade license, these contractors must present a policy proving they carry general liability insurance (as well as other policies) worth the state or city’s minimum requirement.

The required limits of these policies depend on the state. For example, Oregon requires residential general contractors to carry policies with a minimum limit of $500,000 per occurrence. In Georgia, the minimum requirement is $300,000 per occurrence.

When is the minimum general liability not enough?

While most states do have minimum insurance limits in order to secure a license, it's important to remember that minimums may not cover all of a contractor's insurance needs. Contractors can carry policies valued at much higher limits — and they might choose to do so, as an accident can easily exceed minimum limits.

For example, let’s say that a homeowner hires a contractor to replace a retaining wall on their property. Between demolishing the old wall and building the new one, torrential downpours occur, leading to a mudslide. That wet earth and rainwater then roll downhill and damage several homes in the neighborhood. The minimum general liability limits could run out quickly as the claims start pouring in on this one occurrence. 

Who can file a claim with the contractor’s insurance?

In general, anyone can file a claim against the contractor’s insurance. This includes the contractor himself, the property owner, or any third party affected by an accident. But let’s take a step back and look at how this actually plays out.

In the event of accidental damage occurring, the hope is that the contractor will make it right. The contractor might choose to pay for the damage out of their pocket. They can then claim the losses during tax season while keeping their general liability premiums where they are. Or they can file a claim with their insurance company. They may even pay for the damage out of pocket and then attempt to recover the funds from their insurance carrier. 

But for any of those scenarios to happen, the homeowner or third party may be required to wait for a reasonable amount of time.

A “reasonable amount of time” can be a gray area — it depends on state statute, and can be defined differently if there is no statute in place. If the contractor is responsive to the issue, it’s typically preferable to give them a good-faith opportunity to make it right.

But there are instances where the property owner or a third party might need to file a claim against the contractor’s insurance themselves. Instances might include:

• The contractor is refusing to accept fault for the accident
• The contractor is refusing to communicate or is dodging the affected party
• Reasonable time elapsed without a resolution

In any of the above cases, the property owner or third party has the right to file a claim against the contractor’s insurance to cover the damages caused by the contractor.

Note: It is important for property owners hiring a contractor to obtain a copy of their insurance information before the project starts. A third party such as a neighbor, passerby, or the municipality may come after the property owner’s insurance policy to be made whole for damages. To prevent claims against their own insurance policy, the property owner can supply a harmed third party with the contractor’s policy information.

What if the insurance company won’t pay?

Just because a property owner or third party files a claim against the contractor’s policy doesn’t mean the insurance provider will pay. There are a number of reasons why a contractor’s insurance company would refuse a claim, including: 

• The type of damage isn’t covered by the policy 
• The contractor is not deemed to be at fault
• The policy expired
• Damage occurred during a lapse in coverage
• Damage was caused by contractor negligence 

Of course, this isn’t an exhaustive list. It’s important to keep in mind that the insurer will only cover damage up to the policy limit. If the damage estimate is $40,000 and the policy limit is $25,000 per occurrence, the insurer isn’t responsible for covering the extra $15,000 in damage. 

In these situations, property owners can:

• File against their homeowner’s insurance to recover the money (less the deductible)
• Submit a claim against their homeowner’s insurance and have their insurance carrier go after the contractor’s insurance carrier for reimbursement.
• Hire a lawyer and pursue the matter in court, suing the company owner for personal liability 

To help clarify these differences, below is a list of common materials covered by an installation floater:

• Concrete block
• Beams 
• Lumber 
• Plywood
• Sheathing 
• Siding 
• Brick 
• Shingles 
• Flooring 
• Carpet 
• Drywall
• Tile 
• Paint 
• Cabinetry 

What’s not covered by an installation floater?

Tools and equipment you transport from job to job are not considered to be “installed” items. You might own or rent some of these items for your business, but it’s important to know that an installation floater does not cover the following: 

• Hand tools 
• Power tools 
• Compressors 
• Generators 
• Concrete forms 
• Ladders 
• Planking 
• Scaffolding
• Excavators
• Mobile storage units 

How much does an installation floater cost?

Since an installation floater can be added to your contractor's policy by endorsement, or stand on its own, there can be additional costs associated with this coverage. The amount of those extra premium dollars will be determined by a number of factors. Below are some variables that may affect cost:

• Value: The higher the blanket value you place on materials, the more the premium will be. All else being equal, coverage for $50,000 worth of materials will cost more than $25,000 worth of protection. 
• Business category: Some subcontracting businesses are more prone to losses than others. An insurance company may charge more premium for businesses that incur more claims for stolen or lost materials than other entities.
• Coverage type: Some installation floaters may offer coverage on a named peril basis. This basis would typically include causes of loss such as fire, water, theft, and vandalism. Other policies give you the more expensive option of all-risk coverage, which covers all perils except those that are specifically named and excluded in the insuring agreement. 

Installation floater vs. builders risk insurance

An installation floater may be secured through a comprehensive builder’s risk policy or purchased as a more customizable standalone solution, and it’s important to note the differences between the two when choosing a policy. An installation floater applies strictly to building materials while a builder’s risk policy includes additional coverages such as general liability and business property protection.

Primarily, you can include high-value materials on an individual installation floater policy, whereas a blanket endorsement attached to a builder’s risk policy might exclude unique items. 

You may pay more in total premium for a builder’s risk policy because it offers a broader range of coverage than an installation floater.

One step at a time

A solid insurance strategy for contractors and subcontractors means assessing coverages for each of your jobs. As your business evolves your insurance needs may do the same. Every project has its own distinct requirements so it's important to keep pace by keeping your insurance portfolio up to date.

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