Winter Premium Woes

A contractor at a seminar I was hosting asked me the question, “Why do I have to pay insurance premiums when I don’t have any work?” His question had nothing to do with my subject matter, so I gave a brief answer and quickly moved back on topic. Thinking back now I realize that, given our economy, it was an appropriate question that probably warrants more discussion.

You need to keep continuous coverage in force to protect your business from potential construction defect claims that may occur after your current project is complete. The key question asked with virtually every claim is, “When did the damage – the event – take place?” A project you completed several months, or even years ago, may result in a claim today.

Here’s an example of how this works. Let’s assume it’s October and you are installing drywall in a new home. As you’re hanging a wall in a bathroom, you unknowingly put a screw into a water pipe behind the wall. You have no clue this has occurred because the water isn’t yet activated.

You have no work coming in, so you cancel your policy in November thinking you will reactivate your policy in the spring when more work is available. In December, the house you worked on is sold and the new homeowner turns on the water. Water leaks from the damaged pipe causing thousands in property damage.

You’re covered, right? Wrong. Even though you purchased a state-of-the-art general liability policy that complied with the general contractor’s requirements at the time you performed the work on the home, you cancelled it prior to when the event took place.

The damage occurred in December when the water was turned on. Interestingly, the damage to the pipe itself would be covered because that damage “occurred” during policy period you had in place in October. However, the resulting water damage did not actually take place until after you cancelled the policy.

I understand the winter months especially can be difficult for contractors. Try working with your agent to lower estimated payrolls during slower months so billings are at a minimum. Or, better yet, try to pay your annual premiums up front or at least before the winter months hit so cash flow is less of an issue. Whatever you do, you will be far better off in the long run if you can manage your premiums effectively to avoid a lapse in coverage.

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