CSLB Contractor's Law & Business Practice Exam

Why is it important for a contractor to have general liability insurance?

1. It covers advertising costs

2. It protects against work-related damages

3. It is required by law

4. It can be used for payroll expenses

The correct answer is: It protects against work-related damages

It is vital for a contractor to have general liability insurance primarily because it protects against work-related damages. This type of insurance is designed to safeguard contractors from claims arising from injuries to third parties or damages to their property that occur during the course of their work. For example, if a contractor accidentally damages a client's property or if someone gets injured as a result of the contractor's operations, general liability insurance helps cover the costs associated with those claims, including legal fees, medical expenses, and repair costs. This protection is crucial for maintaining financial stability and managing risks inherent in construction projects. Other options do not provide the same level of protection in the context of construction work. Advertising costs are related to marketing efforts, which aren't typically covered by general liability. While some forms of insurance might be required by law, general liability insurance is not universally mandated, though many clients or project owners require contractors to carry it. Finally, payroll expenses are associated with employment costs and are not something that general liability insurance would cover, as it specifically addresses liabilities connected to third parties.