Budget Now, Survive Later ? Part 5

6. Insurance ? Office liability, Company Liability, Key Man Insurance, Builders Risk, Commercial Vehicle Insurance and Umbrella Coverage

Office Liability ? Generally, if renting office space, the landlord will require a liability policy covering such things as accidents that could occur in the space from visiting clients. While the premiums are relatively inexpensive, this is just another item on the budget.

Company or Business Liability - This is the most important policy a contractor can have. This policy covers damages done to the customer?s property due to faulty workmanship, damage to the property, and injuries to persons as a result of the contractors operations or negligence. Rebar left uncovered in ditch near where children play after work hours, ladders left on the job site or worse still, left leaning against anything higher up are all prescriptions for injuries and lawsuits. One contractor reported having a cave-in in a trench resulting in injuries that he would be personally paying for, for the rest of his life. And it was not something he could bankrupt out of.

Many states are now requiring contractors to obtain general liability insurance in order to obtain a contractor?s license. While this is relatively inexpensive for tradesmen such as plumbing, electrical and HVAC in the range of $600 to $1,000 per year, the rates for builders and remodelers often reaches $8,000 to $10,000 per year or more. Often, the contractor must have a good credit rating, a solid balance sheet, and good work experience.

This is good news, bad news. For the veteran, it means less competition as the stakes for entering the market have just gone up dramatically. For the new contractor, it may mean substantial costs to enter a market made difficult by the recession. For homeowners, it may mean hiring someone less reputable who has neither a license nor insurance protection.

For contractors working in markets that have lots of illegal immigrants, this means even higher bidding against unlicensed and uninsured workers. While hiring illegal immigrants may seem to help with labor costs, ultimately, the contractor is training the competition that may sink him. Working within a contractor?s association may include time and money well spent trying to get enforcement of tough immigration laws. Contractors should also welcome tough licensing enforcement and encourage state officials who are responsible for such enforcement.

Often, the premium for General Liability policies may be paid quarterly, semi-annually or annually. It may be wise to budget for the months when the premiums are due.

Also, general contractors may need to require liability policies from subcontractors. Certainly, generals need to be assured that subs have workmen?s compensation in place for any workers on the job. If the owner of the subcontracting company is also working on the job, he is not required by law to have workers comp on himself. However, the general is responsible for his injuries if he does not have coverage. The general may be wise to require him to have workers comp on himself. Some states allow a waiver to be signed saying that the subcontractor is waiving his rights to make the general responsible in case he is injured. This waiver may not pass the test of a court system but it is better than nothing.

Key Man Insurance ? Some contractors have risen to the point of having a General Manager or Company President who manages the company on a day to day basis. That person has the expertise and industry experience and often is the ?face? of the company. That person may also be the founder of the company or the ?Key Man?. For the protection of the employees and the continuation of the company, a life insurance policy would be prudent. If this policy premium is paid annually, it perhaps can be annualized or divided by 12 months to get a monthly budget amount. If it is a large number, then it should be budgeted for the month in which it is due.

Builder?s Risk Insurance - This policy insures the contractor against damages to the materials that will be used on the job, whether the materials are temporarily stored, on a delivery truck, on the lot waiting to be installed, or installed pending completion of the job. One contractor who did not have Builder?s Risk lost everything due to a lightning strike on a stick frame building, over 60, 000 square feet of wood frame totally lost. While insurance may be expensive, contractors have to be smart about when and what to insure. This insurance may be only a project cost and may only be added to certain projects.

Commercial Vehicle Insurance ? Company autos and trucks need to be covered in the event an employee driving a company vehicle causes injury or property damage as the result of a covered accident. Contractors should check with the insurance agent to see what their exposure is for vehicles owned by the employees but used in the service of the company.

Umbrella Coverage ? An Umbrella is simply the additional coverage available to all policies the company has. For instance, if the policies for Commercial Vehicles have a typical maximum of $1,000,000, the Umbrella may be enhanced to make the limit $5,000,000. In the event of a serious accident resulting in disabilities, lawsuits could possibly exceed the $1,000,000 standard policy with the claimant coming after the owner of the company personally. Umbrellas are common to small, medium and larger contractors.

Even sole proprietors who have been successful may want to protect themselves in this way.

Stay tuned for more Budgeting Now??

Source: http://forums.examprep.org/post/2012/08/31/Budget-Now-Survive-Later-e28093-Part-5.aspx

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