Contractor Insurance vs. Construction Bonds
Whether you’re planning a home improvement project or working as a contractor, if you’re planning to work on construction or commercial projects, then contractor’s insurance is important for protecting your business against third-party lawsuits.
As a contractor, having protection against third-party lawsuits starts with the right type of insurance. There is also the option of getting bonded, which protects the project owner if an accident occurs while on the job.
Let’s take a closer look at what contractor insurance and construction bonds are, how they are useful, who needs them, and the differences between the two.
What is contractor’s insurance?
Contractor’s insurance is specifically tailored to cover construction industry contractors in Canada.
If damage occurs while working on a construction site or project, then contractor’s insurance protects your contracting business from the following situations:
- If a third-party worker gets hurt on a project or your client gets their property damaged and sues your company for negligence.
- If your property experiences damages and is destroyed by an unexpected occurrence like a fire, theft, or natural disaster.
Now, let’s discuss how contractor’s insurance is useful if or when these situations were to happen.
What does contractor’s insurance cover?
Working on a construction site daily brings the risk of getting injured. When you have contractor’s insurance, it works as a security blanket in case you should experience an unexpected event like a fire or lawsuit.
Since it’s financially inconvenient to cover monetary damages or injuries, here are the typical cases that contractor’s insurance can cover:
Damage by Subcontractors or Employees
As a contractor you often hire subcontractors to complete jobs on your behalf. If there is a lawsuit as a result of the subcontractor’s negligence or faulty work, it could come back on you as the general contractor. Your liability policy would protect you in the event of damage done by a subcontractor.
If your employees damage an existing structure, like a house or building you’re hired to work on, then your contractor’s insurance policy may cover the cost to repair or replace the damages. Here are typical incidents that are covered:
- A power tool malfunctions and breaks a part of the plumbing line and causes a flood.
- A hammer accidentally falls from the roof and shatters the interior floor.
- Debris falls from a construction site, lands on a parked vehicle, and cracks the windshield.
Along with in-progress work on a construction site, we will discuss how contractor’s insurance covers completed projects.
Completed Projects
Once your project has concluded, contractor’s insurance also provides coverage in the event your completed work goes through property damage or a third-party individual gets injured on the premises.
These are common examples of what could happen after your project is completed:
- A window that is partially installed falls and damages the floor of the house or building.
- A roof caves in and injures a third-party individual.
- A pipe leaks in the basement and causes flooding and water damage.
As you can see, having contractor’s insurance is worth it because even after your work is completed, these incidents could happen, and your policy can protect you in the event of fault work after completion.
Now that we’ve discussed what contractor’s insurance is and what it covers, let’s turn our attention to construction bonds and explain the differences between the two.
What is a construction bond?
When you have contractor’s insurance, it is an agreement between you and the insurance company that covers your business and employees. However, a construction bond is not insurance.
A construction bond acts as a legal contract whereby the surety company certifies that a contractor will fulfill the obligations based on the terms laid out in a construction contract. In any case, a construction bond does not provide you or any contractor with financial coverage in the event of a claim.
In Canada, if you’re a contractor or a business owner working within the construction sector, construction bonds are also known as:
- Contractor bond
- Construction completion bond
- Construction surety bond
Keep in mind that once you’ve agreed to a construction bond, that means a third-party company has issued you a surety bond, which places the liabilities on a surety company in case you fail to fulfill your obligations to the project.
What do construction bonds cover?
Construction bonds are a contractual agreement between three parties; you (the contractor or construction company), the party who wants to hire you, and the surety bond company.
The construction bond reassures the surety and potential client that you will complete the project requirements set out in the contract.
The Differences Between Contractor’s Insurance and Construction Bonds
Now that we have discussed contractor’s insurance and construction bonds, here’s a breakdown of the differences between the two agreements:
Repayment Terms
Having an insurance policy covers you, your business, and your employees on the job.
If an unexpected accident or damages occur while you’re working on a site, you don’t have to pay back a claim, if it is covered by your insurance policy.
On the other hand, if you don’t fulfill a construction bond, you are responsible to pay back the surety bond company with your funds.
Protection
Think of construction bonds as partial protection for the contractor. Contractor’s insurance gives coverage on claims of unexpected damage on the work site and resulting injuries.
As a result, when a contractor has insurance and is bonded, homeowners are more likely to hire you when you have both versus contractors who only have construction bonds. Many homeowners are requiring liability policies from their contractors, as lawsuits become more common in our world.
All in all, contractor’s insurance protects against third-party claims, while being bonded doesn’t have anything to do with making a claim, but covers failure to meet contractual obligations.
Duration
Generally, when you’re working as a contractor, you should have contractor’s insurance throughout the year. You will usually pay a premium on an annual or monthly basis. At the same time, construction bonds are required when you agree to work with a surety bond company and accept a contract.
Contact James Campbell Insurance Today
For more information about the contractor’s insurance coverage that we offer, give us a call at James Campbell Insurance at 1-833-459-1065 or contact us here.
Our team of experts is here to help you with all of your insurance needs.