“What insurance do I actually need?” For most small trade businesses the answer comes down to four policies, plus workers’ compensation once you have a crew. Each one covers a different kind of trouble, and each leaves gaps the others do not fill. A gap you find on the day of a claim is the expensive kind. This article goes through what each policy is for, what it leaves out, and what to ask before you buy.
| Policy | What it is for |
|---|---|
| General liability | Injury to other people and damage to their property from your work and operations, with your legal defense |
| Commercial auto | The trucks and vans the business runs, at business limits, which a personal policy may exclude |
| Tools and equipment floater | Your own tools and equipment, wherever they are used |
| Umbrella | Extra limits on top of your other liability policies |
| Workers’ compensation | Your employees’ work injuries, which general liability excludes |
General liability: damage you do to other people
The National Association of Insurance Commissioners (NAIC) says a commercial general liability policy covers four kinds of events: bodily injury, damage to others’ property, personal injury including slander and libel, and false or misleading advertising. The Insurance Information Institute adds the part that matters most when a claim comes in: the policy “will usually cover the costs of your legal defense and will pay on your behalf all damages if you are found liable” up to its limits. Say a painter’s ladder slides and puts a hole through a homeowner’s bay window, or a homeowner trips over a cord on the walk. That is general liability.
The NAIC also lists what it does not cover:
The Insurance Information Institute adds pollution: it “is excluded and can be purchased as an endorsement.” If your work involves chemicals, that line deserves a question, whether it is pest control, wash-down work or septic.
Two more questions to put to your agent in writing: how the policy treats injury or damage that shows up after a job is finished, and whether it pays anything toward redoing your own work. The answers are in the policy’s wording, and that wording is what you are buying.
Commercial auto: the truck is not a personal car
This gap is easy to miss when a business starts out in the owner’s own truck. The Texas Department of Insurance puts it plainly: “Your auto insurance probably won’t cover accidents that happen while you’re driving for your business.” Its consumer auto guide lists driving for business among the things most personal policies do not cover. If you keep a personal policy on a truck you work out of, the department’s advice is to tell the insurer, because “if you don’t, the company could deny your claims, and you’d have to pay.” The Insurance Information Institute’s guide for artisan contractors says a personal auto policy probably covers some business use, but “is unlikely to provide coverage” for a vehicle used primarily in business, and will not cover any vehicle the business owns: “For those vehicles you must have a business auto policy.”
The limits are different too. Texas, for example, requires drivers to carry at least $30,000 per person and $60,000 per accident for injuries and $25,000 for property damage. The NAIC says commercial auto policies have higher liability limits, “for example $1 million.” A loaded work truck that runs a red light can do damage well past a state minimum.
Ask about vehicles the business does not own. The NAIC notes that commercial auto policies “may have provisions that cover rented and other non-owned vehicles, including employees’ cars driven for company business.” Say you send a helper to the supply house in his own pickup and he rear-ends someone. His personal policy may treat that as business driving, and your business is the one he was working for.
Tools and equipment: what a homeowner’s policy will not do
It is easy to assume a homeowner’s or renter’s policy covers the tools in the garage. The Texas Department of Insurance warns that “unless it’s just you and your laptop, a typical home policy won’t be enough,” and that a home policy “probably doesn’t cover accidents related to a business.” Tools also spend their days in a truck and on job sites, not at home.
One answer is a floater. In the Insurance Information Institute’s words, a tools and equipment floater “covers the insured property wherever it is used and may include such items as hand tools, power drills, hoisting machines and power pumps.” Before you buy, list what you own with rough replacement values and photos. Then ask whether the policy pays replacement cost or depreciated value, what the deductible is per claim, and whether theft from a locked vehicle is covered. A floater with a deductible higher than your most-stolen tool will not help much.
Umbrella: more limit, not more kinds of coverage
The Insurance Information Institute describes an umbrella as a policy that “provides coverage over and above a business’s other liability coverages. It is designed to protect against unusually high losses.” The NAIC says umbrella limits typically range from $1 million to $5 million, and that they suit owners “with large assets or who may be especially vulnerable to lawsuits.”
The key word is “over.” An umbrella adds limit on top of the liability policies underneath it. It does not fill holes in them. If your auto policy excludes something, check the umbrella’s wording before assuming the umbrella picks it up. Ask which underlying policies and limits the umbrella requires, because those set the real price of the package.
The package policy, and the policy you need once you hire
Liability and property can be bought together in a business owner’s policy (BOP), which the NAIC calls “a ‘package’ product that typically includes property, business interruption/continuation and liability insurance.” A BOP can be a cheaper way to buy the general liability above. It is still not auto insurance, and it is not workers’ compensation.
Workers’ compensation covers what general liability excludes: your own employees hurt on the job. The NAIC describes it as protecting the owner from “the employer’s statutory obligation” to provide coverage for work-related injury or illness. When it is required depends on your state, and the rules differ from one state to the next. They are in Workers’ Comp: When Your State Requires It and What Class Codes Do.
Certificates of insurance: what the paper proves
Sooner or later a general contractor, a property manager or a licensing board asks for proof of insurance. Some boards set the amount by rule. California’s license board, for example, requires an LLC contractor to carry liability insurance of at least $1 million when five or fewer people are listed on the license. The proof is usually a certificate of insurance, and it is worth knowing its limits. Oregon’s insurance regulator says certificates “are not the same as an insurance policy. They are issued for information only; they do not amend, extend, or change coverage.”
That matters both ways:
Before you buy: one page of answers
- List every vehicle the business uses, who owns it and who drives it.
- List your tools and equipment with replacement values.
- Write down who works for you, and how you pay them.
- Note every contract, license or customer that requires a coverage amount or additional insured status.
- Get quotes on the same limits from more than one agent, and ask each one, in writing, what the general liability policy excludes and how it treats completed work, pollution and non-owned vehicles.
Insurance is a contract, and the exclusions decide claims. An hour spent reading them now costs less than learning them at the claim.
General information, not legal or tax advice. Rules change and vary by state; check with the agency named above or a professional for your situation.