How Contractors Get Lower Rates on Insurance

By: Don Bury
Smart and wealthy building contractors are the ones who associate with winners in their specialties, for good reason. They've come to realize they will never live long enough to learn all they need to know by themselves. They see the value of sharing information and comparing notes. They skip long, expensive learning curves suffered by the do-it-yourselfer's. As a result, they get smart much faster, and avoid making costly mistakes that happen using only trial and error.

For example, consider commercial liability insurance for general contractors. When buying insurance, contractors are typically isolated, and the insurance industry likes it that way. It is nice and complicated, and there are plenty of ways to spread fear, to keep contractors from doing much about it.

You are expected to pay premiums and not ask too many difficult questions. Isolated contractors try to ask intelligent questions, but they have no benchmark idea of what the best deals look like. They have very limited power.

I happen to know that rates are all over the map for contractors liability insurance. Residential remodeling general contractors make a good example. I've seen premium rates range from 0.7% of sales to over 3%. The more policies you compare, the better market intelligence you collect, and the better your negotiating power. Turn on the lights, and it is easy to see what to demand.

Contractors are reluctant to show their insurance policies to their peers, because they are also competitors. Their don't want to show their numbers for sales and payroll for one thing. Also, they are not all that confident they have the best deals, and don't want to feel dumb. When contractors do compare notes, the results are usually surprising. Only a few are getting the best deals, and the rest are overpaying large sums of money.

To get maximum value from comparing notes, you want to do it with others who have very similar operations to yours. Compare with others in your state, with similar license categories, similar sales volume, doing very similar types of work. By doing this you remove confusing variation, which you must do to understanding what your rates should be. Significant claim history can influence rates. If one of your group is paying a lot more, ask about claim history, to see if that explains it.

You've got to keep an eye on coverage variation also.If a policy seems far lower than others, check to see if it is a claims made form, rather than an occurrence form. You can't compare the two. They are completely different animals. Check to see if the limits of coverage are similar. Check deductibles. Check exclusions. With all that said, I've seen insurance companies quote identical accounts with one quote being double the other.

The more contractors work together, the more power they have when it comes to purchasing insurance. If a hundred contractors doing an average of one million in sales organized themselves into a buying group, they could probably buy an insurance company. An organized group of buyers can expect to see costs go down over 20%.
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