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Protect yourself: Make sure the businesses you deal with are properly insured

We often assume that the professionals we hire to perform various services have adequate business insurance, but what happens if they don't?

How can you protect yourself if your child goes to a local day care provider and gets hurt due to that person's negligence?

And what about contractors who come to your house, such as roofers and gardeners? If they are injured using their own tools or machinery, is it your responsibility or theirs?

contractorsTo limit your financial exposure and prevent major hassles, it's important to make sure the individuals with whom you do business have the right type and amount of business insurance.

Exactly how much insurance they need differs, based on the service in question. There are a few rules of thumb you can follow to make sure you don't wind up with financial headaches due to someone else's lack of coverage.

Always verify insurance upfront

At a minimum, all companies and individuals you hire to complete work at or in your home should carry the insurance required by your state. Typically, this includes general liability insurance, as well as worker's compensation insurance, says Gary Buchanan, a vice president in the New York office at AmWINS, a wholesale insurance brokerage.

General liability insurance protects a business from lawsuits filed by customers or others. Workers compensation insurance covers hospital bills and lost wages if an employee is injured on the job.

As extra protection, or to meet industry standards, some professionals also carry errors and omissions insurance and an umbrella liability policy.

Errors and omissions insurance pays out when there is an error or omission in the product or service that was sold. Meanwhile, an umbrella policy provides an extra layer of liability insurance coverage that kicks in once other insurance limits have been reached.

So how and when should you ask about someone’s insurance?

Buchanan suggests you ask a professional about his or her insurance prior to accepting that contractor's services. The existence of proper insurance coverage should factor heavily in your hiring decision.

"It's important to always ask about insurance on the front end," to avoid potential problems and surprises, says Buchanan.

Ask about insurance upfront during the interview phase by posing this direct question: "Would you mind showing me a copy of your insurance certificate?"

The person's response will be very telling. If he or she doesn’t know where the certificate is or needs extra time to produce it, the contractor may be trying to dodge the subject.

"Anyone in business can get a copy of their insurance certificate," says Buchanan. "It will show all of the insurances they have and what the policy limits are."

Once the contractor supplies proof of insurance, record the policy number, the name of the insurer and the limits of the policy. Keep this information in a safe place.

How much insurance is sufficient?

It's also important to know how much insurance is adequate. Buchanan, who often writes insurance policies for contractors -- including small business owners who perform lawn care and home services -- says most contractors have a minimum of $1 million in general liability coverage.

That $1 million figure is a good benchmark to expect in terms of contractor coverage, Buchanan says. That's also true for umbrella insurance. Some contractors carry $2 million to $5 million in umbrella insurance, depending on the size of their business and the risk associated with their operations.

Realistically, though, some professionals won't have anywhere near that type of coverage.

For example, an independent worker who comes to your home to care for your child may not have general liability coverage or other forms of insurance. However, if you take your son or daughter to a day care facility, or a large recreational facility such as the YMCA, those types of organizations should have insurance, and their workers should be bonded too, Buchanan says.

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