6.4 Insurance Requirements

Insurance vs. Bonds: The ROC Distinction

Quick Answer: Arizona contractors must carry general liability insurance (and workers' compensation if they have employees), and must post a license bond to the AZ ROC. Insurance transfers risk to an insurer that absorbs covered losses; a license bond is a credit instrument where the contractor must reimburse the surety if a claim is paid. They are not interchangeable.

Insurance is a risk-transfer mechanism distinct from the license bond. The Arizona Registrar of Contractors (AZ ROC) requires licensees to maintain certain insurance, and project owners and general contractors typically impose additional coverage requirements through the construction contract.

Coverage Types

General Liability Insurance

Commercial general liability (CGL) insurance is the baseline coverage a contractor carries. It covers third-party bodily injury and property damage arising out of the contractor's operations. A typical CGL policy covers premises operations, products-completed operations, and independent contractors. The AZ ROC requires licensees to maintain general liability insurance as a condition of licensure; contractors should verify current minimum limits with the ROC.

Workers' Compensation

Workers' compensation insurance covers medical expenses, disability, and lost wages for employees injured in the course of employment. In Arizona, an employer with one or more employees is generally required to carry workers' compensation coverage or qualify as a self-insured employer under the Arizona Workers' Compensation Act. Sole proprietors and partners without employees may be exempt from the requirement but should confirm exemption status with the Industrial Commission of Arizona.

Key distinction: workers' compensation is required by law when the contractor has employees; general liability is required by the AZ ROC as a condition of licensure. A contractor with no employees still needs CGL; a contractor with employees needs both.

Commercial Auto

Commercial auto liability covers bodily injury and property damage caused by vehicles owned, hired, or non-owned and used in the contractor's business. If the contractor uses personal vehicles for business, the personal auto policy may need a business-use endorsement or may be insufficient. Project owners and general contractors frequently require listed coverage limits on certificates of insurance.

Additional Insureds and Certificates of Insurance

An additional insured is a party other than the named insured that is afforded coverage under another's policy for certain covered claims. Project owners and general contractors routinely require subcontractors to name them as additional insureds on the subcontractor's CGL and auto policies. This shifts risk so that an injury or damage claim arising from the subcontractor's work is covered under the subcontractor's policy, not just the GC's or owner's.

A certificate of insurance (COI) is a standardized document (typically the ACORD 25 form) that summarizes the contractor's coverage: policy types, limits, effective and expiration dates, and additional insured status. The COI is evidence of coverage — it is not the policy itself and does not amend the policy. Project owners and GCs require a COI before allowing a subcontractor to begin work, and often require the contractor's insurer to send notices of cancellation or non-renewal to the certificate holder.

Typical Project Coverage Requirements

A typical commercial or public project may require the contractor to provide:

• CGL with limits of $1,000,000 per occurrence and $2,000,000 general aggregate (or higher on large projects).
• Workers' compensation with statutory limits and employers' liability of $1,000,000.
• Commercial auto liability of $1,000,000 combined single limit.
• Additional insured endorsement naming the owner and GC on the CGL and auto policies.
• Waiver of subrogation in favor of the owner and GC.
• 30- to 60-day notice of cancellation or non-renewal to the certificate holder.

Actual limits and requirements vary by project, owner, and lender. Contractors should read the insurance requirements in each contract carefully and confirm with a licensed Arizona insurance producer that the required coverage can be placed before signing the contract.

Bond vs. Insurance: Why the Exam Tests Both

The AZ ROC exam tests the distinction between the license bond and insurance because they protect different interests:

Exam tip: the license bond and the CGL policy are both required for an AZ ROC license. They are not substitutes. A contractor who lets either lapse risks license suspension.