Additionally, business relationships with banks, subcontractors, vendors, and more require contractors to be insured, Schmidt noted.

MANAGING RISK

Most contractors accept the price of insurance as a necessary business expense, though many admit they’re constantly on the lookout for ways to lower premiums.

“The more you manage your risk, the lower the cost,” Schmidt said. “I don’t view it as expensive. It’s simply a cost associated with doing business.”

Matt Bergstrom, president of Thornton and Grooms in Farmington Hills, Michigan, said he spends about 1-2 percent of sales on business insurance costs.

“Insurance protects against a lot of things and protects different parties,” Bergstrom said. “It protects the contractor against vehicle accidents, stolen or damaged property, equipment and materials damaged or lost in transit, injury, property damage at a residence or business, accusations of theft by an employee or customer, harassment allegations, and a breech or online theft of information. It also protects our customers against property loss, personal injury, and liability for injury if a worker is hurt on-site.

“I don’t know why a contractor would operate without insurance,” he continued. “The risk is way too high. We work with water, gas, and electricity every day and drive a vehicle with tools that encompass our livelihoods. Not to mention, it is required by all municipalities in order to pull a permit.”

Edward McFarlane, vice president of marketing and development at Haller Enterprises Inc. in Lititz, Pennsylvania, said insurance expense is a relative term. “We understand there will be issues that arise, even with the best planning, and, without insurance, these costs would have to be paid out of pocket. It’s difficult to forecast or predict what these costs could be, which, yet again, is another reason to have insurance. We work hard to keep these costs down by managing our claims and have learned from our past issues. We also have a solid communication/training program in place to correct any potential issues.”

DIFFERENT COVERAGE

Grand Rapids, Michigan-based Pleune Service Co. carries crime, general liability, automobile, employee, employee practice, fiduciary liability, and umbrella liability insurance policies.

“In my opinion, no one should be operating a contracting business without insurance,” said Ken Misiewicz, CEO, Pleune Service Co. “Cost is a function of what type of work is performed, how well risk is [and has been] managed, deductible limits, and the size and scope of the business. We spend six figures on insurance, but, as a percentage of sales, it’s reasonable. For us, it’s simply a cost of doing business. With all that said, we do work hard to manage risk and keep costs down. We handle small incidents directly [leaving insurance out of it, when possible] and only look to our coverage for significant events.”

“Additionally, having a competent insurance agent is critical when it comes to selecting coverage and reviewing and understanding risk,” Misiewicz noted.

Butch Welsch, owner of Welsch Heating and Cooling in St. Louis, said, at a minimum, there are four major insurances contractors must carry: workers’ compensation, liability, automobile, and property.

The first and most important — and costly — is workers’ compensation insurance,” he said.

“There is a law in each state that covers workers’ compensation. Not only does it require a contractor to have the coverage, but it also sets the standard amount every contractor must pay per hour of work performed by his people. Each contractor also has what is called his ‘Experience Modification Ratio (EMR),’ which is also prepared by the state. The number is computed by determining the amount of the contractor’s claims on his insurance compared to the premiums he paid in to the insurance. In simple terms, the fewer number of accidents and reportable claims a contractor has, the lower his EMR will be. For these reasons, you’ll hear contractors talk about the importance of safety. The better a contractor’s EMR, the lower the premiums. For example, a good contractor will have an EMR between 0.80 and 0.95. Some even get as low as 0.75. Many general contractors will not accept bids from subcontractors with an EMR over 1, because they feel they fail to perform safe work.”

Welsch prefers to carry a large amount of coverage, such as $5 million, to protect the business in case a very serious incident occurs and the company is determined at fault. “As contractors, insurance is a very big issue,” said Welsch. “Knowing when and how to properly use your insurance requires some very important business decisions.”

CUSTOMER EXPECTATIONS

McFarlane said most customers expect the HVAC contractors they hire to carry insurance.

“We make a point to tell customers we have insurance, because we feel it’s a value proposition,” said McFarlane. “While, we do recognize there are operators in the market that choose to go without it, we’ve found that many people assume everybody has it. After our discussion, customers are more vigilant to the differences that may exist between two potential companies.”

Misiewicz agreed, saying that having commercial liability insurance is assumed in his world. “However, we do regularly provide insurance certificates to our customers to verify coverage. Insurance is typically required when entering into construction contracts, such as bid documents, prime contracts, and more. For many of our larger service customers, there are minimum coverage requirements we need to meet in order to be a vendor.”

Bergstrom said Thornton and Grooms’ policy is to inform customers they are insured. “We often do this not as a competitive advantage, but to provide them with comfort and security. It’s a blanket of protection for all involved.”

Publication date: 12/21/2015

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