Contractor Business Insurance Basics (Education Only)

Insurance is one of the least exciting parts of starting a contracting business, and one of the easiest to get wrong. Some coverage is required by law or by your license; some is required by the customers and general contractors you work for; the rest is a judgment call about risk. This guide sorts out the basics using SBA, state and licensing-board pages checked October 30, 2026.

Which insurance might be required?

Requirements come from three places:

• Your state. Workers’ compensation is set by each state, and so are rules on unemployment and disability insurance for employers. The SBA notes that laws requiring insurance vary by state and points owners to their state’s website. See our workers’ comp guide.
• Your licensing board. Some boards require proof of certain coverage. California: CSLB requires LLC licensees to carry liability insurance with a cumulative limit of at least $1 million for five or fewer personnel of record, plus $100,000 for each additional person, up to $5 million, and requires workers’ comp or an exemption for every active license.
• Your contracts. General contractors, property managers and commercial customers often require proof of insurance before you start, and their contracts may set minimum limits. Read the insurance section of a contract before you sign it, and send it to your agent.

If you use a personal vehicle for work, ask your agent whether your auto policy covers business use before your first job.

What are the common types of business insurance?

The SBA lists six common kinds of business insurance. Here they are in its terms, with notes on how they relate to contracting:

• General liability insurance, for any business. The SBA says it protects against financial loss from bodily injury, property damage, medical expenses, libel, slander, defending lawsuits, and settlement bonds or judgments. This is the coverage customers most often ask contractors to show.
• Product liability insurance, for businesses that make or sell products; it covers loss from a defective product that causes injury.
• Professional liability insurance, for businesses that provide services; it covers loss from errors and negligence. Design-build or consulting work may raise this question.
• Commercial property insurance, for businesses with significant property; it covers loss and damage to company property from events like fire, wind and vandalism. Ask your agent separately how tools and equipment at jobsites and in vehicles are covered.
• Home-based business insurance, a rider added to homeowner’s insurance that can protect a small amount of business equipment and some liability.
• Business owner’s policy (BOP), which the SBA describes as a package combining typical coverage options into one bundle.

Commercial auto coverage for work vehicles and workers’ comp are separate policies that many contractors need as well. Not verified: what any of these policies costs for your trade; prices depend on the insurer, your state, your trade and your history.

How is a bond different from insurance?

A surety bond is a promise from a surety company to pay someone else (a customer, a worker or the state) if you don’t meet your obligations, while insurance pays covered claims on your behalf. Ask the surety or your agent whether you would have to repay the surety for a claim; this varies by bond. Contractors run into two kinds of bonds:

• License bonds, required by some licensing boards. California: CSLB requires a $25,000 contractor bond for every licensee and an additional $100,000 employee/worker bond for LLCs.
• Bid, performance and payment bonds, required by many public and some private contracts. The SBA says surety bonds help small businesses win contracts by giving the customer assurance that the work will be completed, and its surety bond program backs bonds for small businesses that might not meet other sureties’ criteria.

How do you decide what else to carry?

The SBA’s general rule is to insure against things you wouldn’t be able to pay for on your own. A practical way to think it through:

• List what could go wrong on a typical job: someone gets hurt, a customer’s property is damaged, a vehicle accident, stolen tools, a mistake that has to be redone.
• For each, ask whether you could pay for it out of savings without closing the business.
• Check which coverage your state, board and main customers already require.
• Bring the list to two or three licensed agents and compare what each policy covers and excludes, not just the price.

An LLC is not a substitute for insurance. The SBA notes that an LLC or corporation can protect personal property from lawsuits but that the protection has limits. See our LLC vs. sole proprietor guide.

How do you check an agent or insurer?

The SBA suggests finding a reputable licensed agent, noting that commercial agents receive commissions from insurance companies, and comparing rates, terms and benefits from several agents. Every state’s insurance department licenses agents and insurers, and the National Association of Insurance Commissioners (NAIC) lists each state insurance department, where you can look up a license or file a complaint.

California: CSLB says only insurers licensed to write workers’ comp in California may file workers’ comp certificates with it.

What is a certificate of insurance?

A certificate of insurance is a one-page summary your insurer or agent issues to show a customer that you have coverage. Customers and general contractors commonly ask for one before work starts, and licensing boards may require their own version. California: CSLB requires workers’ comp certificates to show your license number (or application number) and to list CSLB as the certificate holder. Collect certificates from your own subcontractors, too.

What should you do next?

Finish the licensing steps first (license requirements by state), since the board may tell you exactly which bond and insurance it needs. Then work through the rest of our start-a-contractor-business checklist.