Insuring Contractors? Be Careful - It Can Be A Big E&O Headache

by Curtis Pearsall

With very few exceptions, most agents can count at least a few contractors among their clients. Unfortunately, this class of business probably accounts for more E&O claims than any other.

While the property coverages are easy to find markets for, General Liability and Workers Compensation coverages aren't as easily found. And if the market is hardening, finding coverages for contractors will become increasingly difficult.

These are some of the issues that you'll probably face:

• Many contractors, especially the smaller ones, like to self-insure. At the time of a loss, they might try to argue that they thought you bound the coverage for which you recently gave them a proposal. Make your documentation very clear as to whether coverage is bound or not.
• To save money, contractors may try to understate their payroll or receipts to get the premium down. When the account gets audited, they might say that they don't have the money. Then you're stuck with a potential uncollectable audit.
• When you're marketing coverage for a contractor, be certain of the type of work it performs. If a company is writing what it thinks is a carpenter, only to find out through a claim that roofing is also being done, you could have a real problem. Get the contractor to detail in writing the type of work it performs. If you know that a company won't write for your contractor's type of work, tell the insurer up front and document your conversation.
• When something goes wrong with a bond, big dollars are typically at stake. It's critical that you know your agency's level of bonding authority and their proper procedure.

A claim was made against an agency for failing to provide a performance bond required by a contract. A broker asked the agent to provide, one of its clients, a manufacturer, with a performance bond the customer required.

The agent said the bond limit requested was in excess of its bonding authority and suggested that the client determine whether sequential bonds in amounts within its authority could be used instead of a single bond. The broker said this could be done.

The broker told the client the bonding could be provided. Upon getting the contract, the manufacturer learned that the contract required a single bond for the total amount and that multiple bonds wouldn't be permitted. The bond couldn't be provided, and the client's bid was rejected. The manufacturer sued the broker, agent, and carrier for loss of business.

This claim could've been avoided. In this as in other E&O defense situations, it's necessary to document agreements to establish the intent and understanding of the parties. It's important for a bonding agency to know the company's requirements. The agency must also communicate its authority limitations when the requested bonds are in excess of its bonding limits.