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Several factors influence how much a contractor pays for Business Auto insurance. The amount of insurance purchased, the firm’s loss history, employees’ driving records, the condition of the vehicles, deductible levels – all of these have a major effect on the policy premium. However, the way the insurance company classifies the vehicles also impacts the premium in very significant ways.

Under the rating rules for Business Auto insurance, insurance companies use three factors to classify a vehicle: Its gross vehicle weight, how the business uses it, and the normal radius of its operation. The size classifications are:

• Light – 0 to 10,000 pounds gross vehicle weight
• Medium – between 10,000 and 20,000 pounds
• Heavy – between 20,000 and 45,000 pounds
• Extra-heavy – More than 45,000 pounds

The heavier a vehicle, the higher its premium due to the increased potential for severe losses.

The use classifications relevant to contractors are:

• Service – Vehicles used to transport the business’ personnel, tools, equipment and supplies to or from a job location. Only vehicles that the business parks at job locations for most of the working day or uses to transport supervisors between job locations get the service classification.
• Commercial – Construction vehicles that are not eligible for the service classification.
  Service vehicles, because they are parked for most of the day, qualify for a lower premium than do commercial vehicles.

The radius classifications are:

• Local – Not regularly operated beyond a 50-mile radius from where the business garages them.
• Intermediate – Operated within a radius of between 50 and 200 miles.
• Long Distance – Operated within a radius of more than 200 miles.

The larger the radius, the more miles the vehicle is likely to be driven and the higher the premium.

The rules also contemplate the type of contractor that uses the vehicle, though the rating factors tend not to vary greatly from one type to another.

The rating rules have charts showing the mathematical factors that apply for different combinations of size, use and radius. The insurance company multiplies these factors by its basic premium for the vehicle. For example, the factor for Liability insurance for a light service vehicle (a pickup truck) with a local radius might be 1.0. The company will take the basic premium for a truck (for example, $500) and multiply it by 1.0. Conversely, the factor for a heavy commercial vehicle (a dump truck) with a local radius might be 1.50. Multiplying this factor by the $500 basic premium produces a premium $250 higher. This vehicle is on the road more than the pickup and has the potential to cause more severe injuries and damage in an accident, so the premium is higher.

Different factors apply to the premiums for comprehensive and collision coverages, and the effect might be the opposite of that for liability coverage. For example, the factor for the pickup truck might be 1.0 but the factor for the dump truck might be only 0.80. This is because a heavier vehicle should be able to withstand a crash better and sustain less damage than the lighter one. The rules base comp and collision premiums on the original cost of the vehicle, so the dump truck’s higher initial value will offset the lower factor to some extent.

It is important that a business provide accurate information about its use of a vehicle to the insurance company. Vehicles that spend most of the day on the job site should get the lower-rated service classification. Insurance companies can verify a vehicle’s weight through independent sources and its radius by examining lists of work on hand, but they will rely on information from their agents for the use classification. The business that gives its insurance agent detailed information about all its operations is a business that will pay a premium that accurately reflects its loss potential.

A severe property loss, such as damage from a fire or explosion, can cause significant financial hardship. Although most companies have Property insurance in place to protect themselves against such losses, the income lost during a shutdown can be even more devastating. Without the right coverage in place, the company might suffer a blow from which it will be difficult to recover. Business Interruption insurance might be the one thing that keeps the company in business.

The standard Business Interruption policy promises to pay for business income lost due to a necessary suspension of operations caused by loss of or damage to the business premises. For coverage to apply, the cause of loss must be one the policy insures against, such as fire, lightning, windstorm, or aircraft. It is important to understand that “business income” does not necessarily mean “profits.” The policy defines “business income” as the net income (profit or loss before income tax) that the firm would have earned, plus continuing normal operating expenses. Therefore, the policy will not bail out a company that was headed for a period of unprofitability. If the company was expecting a $100,000 loss and continuing expenses (including payroll) of $150,000, the most the policy will pay is $50,000 ($150,000 expenses less $100,000 loss.)

When a loss occurs, the insurer will determine the actual loss the business sustained. To do this, it will examine the company’s financial statements for the time periods leading up to the loss. It will determine which costs were fixed, such as debt payments, permits, and salaries. It will also separate out costs tied directly to sales, such as the cost of producing goods not yet produced. Finally, it will calculate the company’s expected profit or loss for the period. The sum of expected profit or loss and normal continuing expenses equals the actual loss sustained.

The actual period of the loss might differ from the period the insurer calculates. The insurer will pay for business income lost during the “period of restoration.” This period begins 72 hours after the damage occurs to the premises. It ends on the date the damaged property should be repaired, rebuilt or replaced with reasonable speed and similar quality or on the date when business resumes at a new permanent location, whichever is earlier. If the business owner is slow to approve architectural plans or if rebuilding takes longer because the owner decided to make improvements, the insurer will not pay for the entire period of loss. Also, the insurer will reduce the loss period if the company can reasonably take steps to shorten it. These steps might include using temporary facilities, shifting work to undamaged sections of the building, or adding work shifts to make up for lost production.

If the company has to spend extra funds to reduce the amount of lost income, the insurer will cover at least some of them. Examples are additional rent for a temporary location, express shipping charges necessary to get machinery in place sooner, and increased construction costs to hasten the repairs. The insurer will not pay more than the amount of income the company would have lost, and it will only pay for expenses that actually reduce the business income loss.

Many options are available with Business Interruption insurance, having to do with the length of the recovery period, amounts available each month, required amounts of insurance, and others. To help determine those options that a firm might need, a thorough discussion with one of our insurance agents is in order. This coverage is too important to a firm’s survival for anyone to treat it casually.

Construction contracts typically require a subcontractor to name the general contractor as an additional insured on the sub’s Liability insurance policy. It is not unusual for the contract to require this coverage for claims arising out of both the sub’s ongoing and completed operations. The GC is vulnerable to lawsuits arising out of the sub’s ongoing work and from flaws in the finished project. Consequently, subcontractors need Completed Operations coverage for additional insureds.

However, the insurance industry several years ago took steps to eliminate Completed Operations coverage from the policy form most commonly used to cover additional insureds. The 1985 edition of ISO form CG 20 10 provided coverage for the person or organization listed on it for “liability arising out of ‘your work’ for that insured by or for you.” The Commercial General Liability policy defines “your work” as work or operations performed by the named insured or on its behalf and materials, parts and equipment furnished in connection with the work. Courts interpreted this to mean that additional insureds had coverage for the contractor’s completed operations. In 1993, ISO announced that it was revising the CG 20 10 form, stating that it had never intended for the form to provide this coverage. The form now stated that it provided coverage for liability arising out of the named insured’s ongoing operations. ISO also introduced a new form, CG 20 37, which covers the additional insured for liability arising out of the named insured’s work and occurring away from premises the named insured owns or rents.

To illustrate how these endorsements apply, assume an electrical contractor is responsible for installing the wiring in an office building under construction. Part of the job involves connecting automatic thermostats in each individual office to a master heating and cooling control. The contractor’s employees secure the wiring to building studs using staple guns. While securing wire, an employee becomes distracted by a colleague who interrupts him to ask where a tool is. He accidentally squeezes the trigger on the staple gun while it’s pointed at another contractor’s employee, causing painful injuries. The injured employee sues the general contractor and the electrical contractor. The electrical contractor’s CGL policy includes endorsement CG 20 10 and lists the GC as an additional insured. Because this accident happened during the electrical contractor’s ongoing work for the GC, the policy will cover the GC.

Now suppose that the electrical contractor finishes the job and leaves the site with no plans to return. The GC accepts the electrical work as delivered. As the building nears completion, the GC tests all its systems. During the electrical test, loose wiring on the second floor sparks and ignites insulation in the wall, causing a fire that damages parts of two floors. The building owner sues the GC for the damage and rents lost due to the delay. Because the electrical contractor no longer had ongoing operations for the GC, endorsement CG 20 10 will not apply. Instead, the policy would have to include endorsement CG 20 37 to cover the GC.

Note that neither of these endorsements would cover the GC if the GC was entirely responsible for the losses. For coverage to apply, the electrical contractor must be at least partially liable.

All contractors should discuss their contractual obligations with our experienced insurance agents. The agent can advise on which insurance companies are willing to provide the needed coverage, what they will charge, and how they will handle claims. Most contractors need completed operations coverage for their additional insureds. Make sure that you have it before the job starts or the loss occurs.