Construction Insurance: Tips for Purchasing Contractor’s Insurance

Purchasing insurance is a dreadful task. Not only is it money out of pocket, but many brokers and insurance carriers seem to talk in a foreign language.  In this post, we discuss three tips to help combat the confusion and ease those insurance pains. After reading, you will be ready to speak the language and understand insurance terms. This will keep you confident at the negotiating table. In addition,  the pointers will save you money and reduce unexpected financial shocks.

1. Negotiate with the RATE, not PREMIUM

Contractors are very busy and like to get right to the point. “What’s it going to cost me?”  Cost translates directly into premium.  However, the smarter question would be, “What is my rate?”


Definition The dollar amount paid for each $1,000 of REVENUE or $100 of PAYROLL.
Example With a RATE of $11.5, ABC Contractor Inc. will pay $11.50 in premium for every $1,000 of revenue.


Definition The total REVENUE or PAYROLL whose corresponding liability will be covered by the insurance carrier.
Example ABC Contractor Inc. estimates revenue at $9.5 million.


Definition Total cost of an insurance policy (excluding broker or policy fees).
Example ABC Contractor’s general liability is provided by USA Insurance Inc. for a PREMIUM of $109,250.

The RATE multiplied by the EXPOSURE equals the PREMIUM: ($11.50/$1,000) X $9,500,000 = $109,250. Since EXPOSURE can fluctuate from year-to-year, PREMIUM alone is a poor metric of comparison. For instance, there’s a big difference between paying $100,000 for $5 MM of sales than for $20 MM of sales.  Using the RATE, instead of the PREMIUM, will ensure your year-to-year comparisons are accurate, regardless of revenue growth, stagnation, or reduction.

Negotiating with the RATE places the contractor in a better position. For example, ABC Contractor Inc. performs 10% more work than last year. The insurance carrier explains that the 10% PREMIUM increase is entirely due to the increased business. That makes sense. However, contractors strive for continued savings. A larger EXPOSURE usually means your can negotiate a lower RATE. Ignore the PREMIUM when negotiating insurance and focus on lowering the RATE.

2. Compare the RATE Year-to-Year

Be careful. Although the RATE is a better number for comparison from year-to-year, it can also be affected by LIMITS, COVERAGE, CLASS, and LOSS HISTORY.


Definition The most a carrier will pay for claims against the policy.
Example ABC Contractor Inc’s auto policy will cover liability up to $1,000,000 per accident


Definition The types of losses that trigger an insurance policy to pay.
Example ABC Contractor Inc’s general liability policy covers bodily injury or property damage to a 3rd party.


Definition The risk associated with the type of work the contractor performs.
Example The insurance rates for Riley’s Roofing are high because roofing is a dangerous CLASS of work.


Definition The history of claims made against a company; usually over the last 3 to 7 years.
Example ABC Contractor Inc’s new insurance carrier requested a loss history to see if there were any previous losses that would indicate ABC Contractor, Inc. was risky client.

All these variables play a role in determining a RATE. If none of those variables have changed from year-to-year, then the goal is for the RATE to be lower or at worst the same. Changing the LIMITS and COVERAGE are easy to do. Sometimes changes are necessary to meet the requirements of one unique project. The more changes that are made, the less RATES can be compared between years.

Lowering LIMITS and COVERAGE may leave a company exposed. In our Construction Business Viability Analysis, one of the risk factors examined is “Ignoring Insurance Needs.” When money is tight, contractors often fall into the trap of reducing or canceling coverage altogether. Every reduction can cause a gap. The small savings today may result in a large expense down the road. LIMITS and COVERAGE should be analyzed on a needs basis and not a price basis.

3. Be Prepared for the Final Audit

At the end of the policy period, most liability policies will have a final audit to adjust the estimated EXPOSURE with the actual EXPOSURE.


Definition PREMIUM due as a result of differences in the estimated and actual EXPOSURES.
Example ABC Contractor Inc. actually made $10.5 million in revenue, $1 million more than originally estimated. The extra $1 million at the same 11.5 RATE produces an AUDIT PREMIUM of $11,500.


Definition The lowest amount of PREMIUM an insurance carrier will retain.
Example ABC Contractor Inc. had a horrible year with revenues of only $6 million. Since the insurance policy had an 80% MINIMUM EARNED PREMIUM based on an EXPOSURE of $9.5 million, ABC Contractor Inc. will still be charged for an EXPOSURE of $7.6 million (80% of $9.5 million).

Final audits can cause a great deal of heartache. If a contractor hasn’t been properly accruing insurance expense, what was a good year could turn sour when the AUDIT PREMIUM hits. Inaccurate insurance accrual is identified by the risk factor “Inaccurate Accounting.” AUDIT PREMIUM shouldn’t be a slap in the face. During the entire year, the accounting manager can determine the expected price of the AUDIT PREMIUM by comparing overall revenue to the estimated EXPOSURE. This was the subject of a recent Case ‘n Point article.

In reverse, the MINIMUM EARNED PREMIUM is designed to catch overestimating. Contractors may try to reduce the RATE by increasing their EXPOSURE (i.e. estimate $25 million, lock in a low RATE, then end the year with only $15 million in sales). However, insurance carriers have placed MINIMUM EARNED PREMIUM conditions in the insuring agreement to avoid this type of gaming. Avoid making optimistic estimates as the consequence will hit harder than the savings.

Final Thoughts

Insurance renews once a year. Since you can’t be an expert, brush up on the details when your renewal comes around so you can speak to your broker with confidence, and ensure they are getting you the best deal possible. In summary, we’ve provided three quick tips you should incorporate into your insurance purchasing process:

1. Negotiate with the RATE, not PREMIUM
2. Compare the RATE Year-to-Year
3. Prepare for the Final Audit

and 1 more for good measure…

4. Don’t leave renewals to the last minute. Talk to your broker at least 30 days before renewal to ensure he is working in your best interest and has scoured the market for the best deal.