Contractor Insurance Requirements Explained: What You Need Before You Start Working

Insurance isn’t just a checkbox on your contractor license application — it’s the financial foundation of your business. Without the right coverage, a single accident, lawsuit, or unfinished project could wipe out everything you’ve built. Yet insurance requirements are one of the most confusing parts of the licensing process, with rules that vary dramatically from state to state.

This guide breaks down the three main types of coverage contractors need, explains how requirements differ across states, and helps you understand what you’ll actually pay.

The Three Pillars of Contractor Insurance

Most states require some combination of three types of financial protection: general liability insurance, workers’ compensation insurance, and surety bonds. Let’s look at each one.

General Liability Insurance

General liability insurance is the most fundamental coverage a contractor can carry. It protects you against claims of property damage and bodily injury caused by your work.

What it covers:

Damage to a client’s property during construction (e.g., you accidentally damage existing plumbing while renovating a bathroom)
Injuries to third parties at your job site (e.g., a visitor trips over materials and breaks an arm)
Completed operations claims (e.g., a deck you built collapses months later and injures someone)
Legal defense costs if you’re sued

What it doesn’t cover:

Injuries to your own employees (that’s workers’ comp)
Damage to your own tools and equipment (that’s inland marine insurance)
Professional errors in design or planning (that’s professional liability/E&O insurance)
Intentional damage or criminal acts

State requirements: The majority of states that license contractors require general liability insurance as a condition of licensure. Minimum coverage typically ranges from $300,000 to $1,000,000 per occurrence, with aggregate limits of $500,000 to $2,000,000.

Typical cost: For a small contracting business, expect to pay $500–$3,000 per year for general liability coverage. Your actual premium depends on your trade (roofers pay more than painters), annual revenue, claims history, and coverage limits.

Workers’ Compensation Insurance

Workers’ compensation insurance covers medical expenses and lost wages for employees who are injured on the job. In nearly every state, it’s legally required the moment you hire your first employee.

Key facts:

Required in 49 states: Texas is the only state where workers’ compensation is technically optional for private employers, though even there, going without it carries significant legal risk.
Sole proprietors and partners: Some states require sole proprietors and partners to carry workers’ comp even if they have no employees. Other states allow them to exempt themselves.
Subcontractors: If your subcontractors don’t carry their own workers’ comp, you may be legally responsible for covering them under your policy. This is one of the most common surprises for new contractors.
Penalties for non-compliance: Operating without required workers’ comp can result in stop-work orders, fines of $1,000–$100,000 or more, and even criminal charges in some states.

Typical cost: Workers’ comp premiums are calculated as a rate per $100 of payroll. Rates vary by trade — office workers might cost $0.20 per $100, while roofers could cost $20 or more per $100. A small contracting company with $200,000 in payroll might pay $4,000–$30,000 per year depending on the trade and state.

Surety Bonds

A surety bond is not insurance in the traditional sense — it’s a three-party agreement between you (the contractor), the state (the obligee), and a bonding company (the surety). The bond guarantees that you will comply with state laws and fulfill your contractual obligations.

How it works:

You purchase a bond from a surety company.
If you violate state contracting laws or fail to complete a project, a consumer can file a claim against your bond.
The surety company pays the claim (up to the bond amount).
You are then legally obligated to repay the surety company in full.

Unlike insurance, where the insurer absorbs the loss, a surety bond is essentially a line of credit. If a claim is paid, you owe the money back.

State requirements: Around half of U.S. states require a surety bond for contractor licensure. Bond amounts vary significantly:

Low end: $5,000–$10,000 (common for specialty trades in states with modest requirements)
Mid range: $15,000–$25,000 (typical for general contractors in many states)
High end: $50,000–$150,000+ (California, for example, requires a $25,000 contractor license bond, but performance bonds for individual projects can be much higher)

Typical cost: You don’t pay the full bond amount — you pay an annual premium, typically 1–15% of the bond amount. A contractor with good credit might pay 1–3%, while those with poor credit or limited history might pay 5–15%. For a $25,000 bond, that means an annual cost of $250–$3,750.

State-by-State Variation

One of the biggest challenges in understanding contractor insurance requirements is that no two states are exactly alike. Here are some patterns:

Strictest states

States like California, Florida, and Arizona have comprehensive insurance and bonding requirements for most licensed trades. In these states, you’ll typically need all three — general liability, workers’ comp, and a surety bond — before your license is issued.

Moderate states

Many states require insurance and bonds for general contractors but have lighter requirements for specialty trades. Oregon, Georgia, and Virginia fall into this category, with requirements that vary significantly by license class.

Minimal state-level requirements

States that handle contractor licensing at the local level — such as Texas, Kansas, and Missouri — may not have state-level insurance requirements for contractors. However, individual cities and counties within these states often impose their own insurance requirements.

Important: Even in states with no formal insurance requirement for licensure, operating without insurance is extremely risky. A single liability claim can result in personal financial devastation. Most experienced contractors carry insurance regardless of whether the state mandates it.

Beyond the Minimums: Additional Coverage to Consider

State licensing requirements establish the floor, not the ceiling. As your business grows, consider these additional types of coverage:

Commercial auto insurance

If you use vehicles for business purposes (and almost every contractor does), your personal auto policy won’t cover accidents that occur during work. Commercial auto insurance fills this gap.

Inland marine insurance (tools and equipment)

This covers your tools, equipment, and materials while they’re in transit or at a job site. If your truck full of tools is stolen or your equipment is damaged on-site, this policy pays for replacements.

Builder’s risk insurance

Builder’s risk covers structures under construction against damage from fire, wind, vandalism, and other hazards. It’s often required by project owners on larger jobs.

Umbrella insurance

An umbrella policy provides additional liability coverage above the limits of your general liability, auto, and workers’ comp policies. It kicks in when a claim exceeds your primary policy limits.

Professional liability (Errors & Omissions)

If your work involves any design, engineering, or consulting, E&O insurance protects you against claims of negligent advice or design errors.

How to Get the Best Rates

Insurance is a significant business expense, but there are ways to manage costs without sacrificing coverage:

Shop multiple carriers. Premiums can vary by 30–50% between insurers for the same coverage. Get at least three quotes.
Bundle policies. Many insurers offer discounts when you package general liability, commercial auto, and property coverage together (known as a Business Owner’s Policy or BOP).
Maintain a clean claims history. Your loss history is the single biggest factor in your premiums. Invest in safety training and job site protocols to prevent claims.
Improve your credit score. Both insurance and bond premiums are influenced by your credit. Good credit can save you thousands annually.
Raise your deductible. A higher deductible lowers your premium. Just make sure you can actually afford the deductible if you need to file a claim.
Work with a contractor-specialist agent. Insurance agents who specialize in construction understand the industry’s nuances and can often find better coverage at better rates than generalist agents.

The True Cost of Being Uninsured

Some contractors — especially those just starting out — are tempted to skip insurance to save money. This is a dangerous gamble.

Legal penalties: Operating without required insurance can result in license suspension or revocation, fines, and criminal charges.
Personal liability: Without insurance, you’re personally liable for any damages or injuries. A single serious incident can lead to a judgment that follows you for years.
Lost opportunities: Many general contractors, property managers, and commercial clients will not hire uninsured subcontractors. Being properly insured opens doors to better, higher-paying work.
No license renewal: If your insurance lapses, most states will not renew your contractor license.

Getting Started

Here’s a practical checklist for getting your contractor insurance in order:

Look up your state’s requirements. Use ContractorLicenses.org to find the specific insurance and bonding requirements for your trade and state.
Contact an insurance agent who specializes in contractor coverage. Ask for quotes on general liability and workers’ comp (if you have or plan to have employees).
Apply for your surety bond if your state requires one. Your bond agent will review your credit and financials to determine your premium rate.
Verify all coverage is in place before submitting your license application. Most states require certificates of insurance as part of the application.
Set calendar reminders for policy renewal dates. A lapse in coverage — even for a day — can jeopardize your license.

Insurance and bonding are not glamorous, but they’re essential. They protect your customers, your employees, and ultimately your business. Getting the right coverage in place is one of the smartest investments you’ll make as a contractor.