MHIC NASCLA Contractors Practice Exam

Under what circumstances may a contractor be exempt from holding a liability insurance policy?

1. If they have less than two employees

2. If their license is in inactive status

3. If they are only doing volunteer work

4. If they are working under another licensed contractor

The correct answer is: If their license is in inactive status

A contractor may be exempt from holding a liability insurance policy when their license is in inactive status. Inactive status means that the contractor is not currently engaged in any contracting work or undertaking contracts that require a license. Since they are not practicing as a contractor, the necessity for liability coverage is diminished. When a contractor is inactive, they are not subject to the risks that typically require insurance, as they are not performing any duties that could lead to claims from clients or third parties. This status effectively means that the contractor is not running a business, which also means they are not exposed to the types of legal and financial liabilities that insurance is designed to protect against. The other scenarios presented do not broadly exempt a contractor from the requirement of liability insurance. For instance, having less than two employees does not exempt one from the requirement if they are still actively working as a contractor. Similarly, working solely on volunteer projects generally doesn't provide a blanket exemption, as liability considerations can still apply. Finally, working under another licensed contractor does not remove the liability responsibilities unless expressly stated by law or contractual agreement. Thus, the most definitive exemption is when the contractor's license is inactive.