Arizona Contractors License Practice Exam

Why is it essential for a contractor to have liability insurance?

1. To reduce tax liabilities

2. To protect against client lawsuits

3. To cover project delays

4. To finance new equipment

The correct answer is: To protect against client lawsuits

Liability insurance is crucial for contractors primarily because it provides protection against legal claims that may arise from accidents, injuries, or damages that occur during the course of business operations. If a client suffers a loss or sustains an injury due to the contractor's work, that client may decide to file a lawsuit to seek compensation. Without liability insurance, the contractor would be personally responsible for paying legal fees, settlements, or judgments, which can be financially devastating. Having liability insurance ensures that the contractor can handle these situations without severe detriment to their business finances, safeguarding their assets and allowing them to continue operations with peace of mind. The other options, while relevant to a contractor's financial management and operations, do not directly address the primary purpose of liability insurance. Reducing tax liabilities pertains more to financial strategy rather than risk management. Covering project delays does not fall under the purview of liability insurance, which focuses on liability for damages. Financing new equipment is a separate financial matter and not related to the risks covered by liability insurance.