Construction Insurance: Everything You Need To Know
Construction companies have significant risk, from being one of the most
accident-prone fields for employees to work in, to having significant liability on the construction site to the risk of a construction defect lawsuit; Construction insurance can be harder to find and more complex than other, less risky, businesses.
Here are the construction insurance basics that you should know to help lower your cost of insurance, but also to best protect your business.
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Why Do Construction Companies Purchase Insurance?
To Protect The Business
It takes a lot of time and effort to build a successful construction company. Not surprisingly, construction company owners are looking for security so that an accident won't lead to bankruptcy.
Construction companies can take out commercial insurance to cover their risks at the limits they feel adequately protect their businesses.
To Meet Contractual Requirements
Construction work often requires compliance with a project owner or general contractor requirements. In most cases, construction companies must provide a certificate of insurance before starting a job or getting paid for a project. This makes insurance a necessity in most construction trades.
To Comply With State Or Federal Laws
Specialized construction companies must carry specific insurance policies to maintain their trade license. Additionally, specific insurance coverages are regularly required in construction work.
One example of required coverage in the construction industry is workers compensation insurance. This is required if the construction company has employees and is not an individually run operation. Another example of required coverage is auto insurance, which you need if your company has work vehicles.
What types of construction insurance should I purchase?
Construction general liability insurance covers bodily injury and property damage that your business causes others as a result of your operations.
Many construction liability policies won't stop at covering claims for bodily injury or property damage that occur at the time of construction. Most include coverage liability for projects you are currently working on and projects you have completed in the past.
The portion of the commercial general liability policy covering the liability arising out of your previous projects is called completed operations liability. It will cover your liability after a project is completed and possibly even years down the road.
This is usually the most important coverage on the liability policies of most construction companies.
For example, if an electrical contractor did the electrical work on a house, and that electrical work later resulted in a fire, the completed operations coverage in the general liability policy would cover the damage to the house. It is important to have completed operations coverage as a construction worker, because most defects that lead to claims occur after the work has been completed.
A commercial auto policy covers the liability arising out of the use of your business automobiles. It protects you if you are deemed liable for an at-fault accident that resulted in bodily injury or property damage.
While the commercial auto policy covers liability arising out of at-fault accidents, it can also cover physical damage to the car in the event of a wreck or another accident. This policy can insure your permanently installed truck equipment for physical damage in addition to the vehicle itself, providing extra coverage for the items necessary to complete your work.
Workers compensation insurance is often required by law if you have any employees. It covers costs associated with employee injuries incurred while they are working for your company. These costs can include medical bills, lost wages, and other financial losses that may result from an on-the-job injury.
Contractors Equipment/Installation Floater
Contractors have tools they take from project to project. These can range from small hand tools to large pieces of machinery. Unfortunately, it is common for this equipment to be stolen or damaged.
A contractors equipment policy will cover your equipment as you go to different job sites. Some policies even include installation coverage for materials you have not yet installed on a project.
This policy is for contractors who are looking for increased limits of liability on their general liability, workers compensation, or commercial auto insurance policies.
Primary insurance policies most commonly have a $1,000,000 limit. Therefore, if you want additional coverage, you must purchase an excess liability policy. You can customize these policies to meet your limit requirements and provide what you need, whether that’s $1,000,000 in additional coverage or much more.
Contractors Pollution (For Larger Operations)
During a construction project, your company might be responsible for a pollution incident, which usually means:
"Discharge, dispersal, seepage, migration, release or escape of pollutants into or upon land, the atmosphere, or any watercourse or body of water."
If you are working on larger projects (or are a larger contractor), you will probably run into a contractors pollution insurance requirement. This is because a pollution incident can run up huge losses for the construction project, especially if the EPA gets involved.
This policy is a way to transfer the risk of pollution cleanup costs, fines, and liability to an insurance company to keep projects on budget and keep incidents from harming the company's balance sheet.
For our in-depth review of contractor's pollution liability, check out our article, "Contractors Pollution Liability (CPL) - What To Know."
Contractors E&O (For Larger Operations)
Contractors E&O insurance is another typical requirement when you’re working on larger projects or for large general contractors. This policy protects contractors from damages arising out of faulty workmanship, design services, and use of defective materials.
Unlike many other policies, there doesn't necessarily have to be an incident like a fire or water damage to trigger this policy. Failure to function properly can be a covered incident, which makes this policy desirable for property owners or general contractors wanting to hire your company.
Interested in learning more about contractors E&O insurance? Check out our article, "Understanding Contractors Errors & Omissions
(Larger Contractors) Surety Bonding
Depending on what type of work you are completing and who the work is for, you might be required to carry a surety bond to financially back your obligations and contracts.
A surety bond is a financial guarantee that you will follow through on an agreement with your project owners, subcontractors, or general contractors.
For example, a performance bond guarantees that the work you are contractually required to complete will be completed, even if your company is unable to finish the project (usually due to bankruptcy).
In situations like this, the bonding company will fulfill your obligations (finish the project) so the project owner doesn't have to pay someone to finish the job due to a company's insolvency.
A performance bond is just one example of a bond; there are many others. You can find most required bonds on our online bonding portal, but for larger construction bonds, you will need to speak with one of our bonding experts.
What additional coverages or endorsements do construction companies need?
Additional Insured Endorsements
Most construction contracts require contractors to carry liability insurance with the primary contractor and the project owner added as an additional insured on the policy.
This endorsement adds the required parties to your insurance policy, ensuring it will cover them if a claim arises out of your work (i.e. if you are responsible for causing a claim, but the additional insured entity get listed on a lawsuit as a result of it).
Waiver Of Subrogation Endorsement
Subrogation is when an insurance carrier pursues reimbursement from the responsible party after the initial claim has been paid. Usually, this is because someone else was ultimately responsible for the claim, but your insurer had to pay for the claim first.
The waiver of subrogation means that after your insurer pays for the claim, they cannot recover any money from the entity listed on the waiver of subrogation.
If you own a construction company, you will often be asked that your insurance company waive their right to subrogate against the project owner or the general contractor. When this happens, your insurance company must pay for the claim and cannot sue your general contractor to recover any of their costs.
Primary & Non-Contributory Endorsement
Adding this endorsement to your policy states that your insurance policy will not seek contribution from the project owners insurance, even if they are part of the reason the claim occurred.
This is for situations where it appears that you were only partially at fault for an accident. This endorsement means that even if your CG has some contributory negligence (where they are also partially at fault), your insurance will cover it as if you were 100% responsible. It will not seek contribution from their policy, even if they contributed toward the claim.
Per-Project Aggregate Limits
On larger projects, owners want to be certain that all contractors have adequate insurance to pay out any potential lawsuits. This is because when a contractor experiences a large claim or a large series of claims, the liability limits may be exhausted, leaving nothing to cover a claim that happened on the project owner's job site.
A per-project aggregate limit creates a separate limit dedicated to a specific project so the project owner can be guaranteed that there will be insurance to cover any losses.
Challenges Construction Companies Face When Purchasing Insurance.
1) Heavy construction operations can be expensive to insure.
One of the problems with insuring heavy construction (commercial general contracting, utility contractors, road and bridge construction, crane operation, and so on) is the increased exposure to both liability risk and worker injuries. Since the claims are usually larger in these fields, your options for insurance are severely limited.
Heavy construction companies should reach out to an insurance broker with experience in heavy construction markets and expertise in excess and surplus (E&S) insurance.
2) Construction insurance is often written by non-admitted (or E&S) insurance carriers.
Purchasing poor-quality insurance policies in the non-admitted marketplace is a common challenge for construction companies. This is the reason we recommend finding a broker with experience in this area.
Unlike standard low-hazard insurance carriers, E&S insurance carriers have a much larger appetite for risk. This is because they are not regulated in the same way as standard carriers. They have a much greater ability to adjust rates however they need, and they can use certain forms/exclusions that admitted insurance companies cannot.
In fact, most E&S insurance companies are subsidiaries of standard insurance companies. They just choose to write high hazard businesses in their subsidiary so they can have more flexibility on coverage forms and pricing.
This is allowed because high-risk companies do need insurance. The rules have to be more relaxed, or else the insurance market would not provide coverage on certain types of businesses due to their risk.
You can tell if a policy is E&S by whether taxes and fees are included in the premium. Additionally, the quote provided by the insurance company should disclose their status as a non-admitted insurer.
If your insurance is with a non-admitted insurer, make sure you know what exclusions or limitations are included in your insurance policy, since there will be some differences between an admitted and non-admitted policy.
3) Smaller construction companies might run up against "minimum premiums," meaning they might have to pay more than their actual risk.
Certain types of construction companies will find out that there are minimum premium requirements for certain trades. For example, some insurance companies have a minimum premium of $2,500 for residential remodeling contractor liability. Additionally, we have heard of some insurance companies having a $25,000 minimum premium on the general liability for roofing companies.
If you are a larger contractor, this will not be an issue, but smaller contractors will most likely require expertise from an insurance broker. Your broker can help you find an insurance company with a low minimum premium, so you aren't paying more due to this requirement.
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Exclusions Construction Companies Should Look Out For When Purchasing Insurance
1) "Your Work" Exclusion
This exclusion is included on every commercial general liability policy. You can’t really avoid it, as it can greatly impact how much you are liable for in a claim.
When you cause property damage on a construction site, the policy will pay for the resulting damage, but not damage to your work.
For example, if you were an electrical contractor and improperly wired up a $500,000 job that—due to a mistake—burned down the building it was installed in, the insurance company would pay for the damage you caused. It would not, however, replace the $500,000 in electrical work that was improperly installed.
2) Premises Limitations
This limitation can be very dangerous on construction general liability policies, as it restricts coverage to only the locations listed on the limitation page.
We have seen this limitation arise on some general contractor policies where the insurance companies want you to list all the projects you are working on at any given time.
This means if you do a small project and forget to call your insurance broker, any claim that happens will not be covered. We suggest avoiding this limitation if possible.
That being said, sometimes insurance companies will include this form and list certain states (usually New York, Florida, and Colorado) that they will not provide coverage in due to legal challenges or construction defect laws.
We are usually fine with this version of the limitation if the construction company has no intention of going into that state to perform work.
3) Operations Limitations
Another limitation we see on construction policies restricts the work you perform to only the type of work listed on the limitations page. For example, if you have "plumbing contractor" listed as the covered trade on this endorsement, anything you do other than plumbing won’t be covered.
Another common form of this endorsement is to have a list of work the insurance company excludes. For example, roofing work is almost always listed on these limitations as an excluded activity.
Many insurance companies do this so that they aren't on the hook for contractors who misrepresent the type of work they are doing. We see this as an unnecessary exposure for many contractors.
Many tasks that a contractor does often overlap with tasks that don't necessarily fall within their trade. For example, an electrical contractor might provide cleanup services after a job is complete. Additionally, if you need to take a job a little out of your normal operations, you can have some issues if a claim were to happen.
Some insurance companies will include a version of this form that excludes all work before a certain date. We usually see this when new ventures are being quoted, or an individual is being quoted. Since an individual doesn't have a "creation date" like an LLC, the insurance company doesn't want to cover all the work they have performed in their lifetime.
4) Subcontractor Exclusions & Warranties
Many policies will include limitations on what coverage is provided to claims arising out of subcontractor's work. There are usually two ways that this coverage is limited:
- The subcontractor exclusion: Excludes coverage for work completed by subcontractors. In addition to no coverage being provided, this also excludes any defense costs to get you out of the claim once a lawsuit is brought against you.
- The subcontractor warranty endorsement: Specifies a list of requirements that the subcontractor must comply with before the policy will provide any coverage. Usually this involves certain limits and coverages that the subcontractor must carry for your policy to give you any coverage. We would list the requirements for this endorsement, but each insurance company uses a different version. If you see this included on your insurance policy, make sure to read it carefully!
1) Put all your common endorsement requests on a blanket endorsement to save you time and money.
As a construction company, you are going to run into projects that require the typical additional insured, waiver of subrogation, and primary and non-contributory endorsements.
If you are required to have these endorsements, a blanket endorsement will give them to you automatically. With this blanket endorsement, you can issue certificates almost instantly; you aren't billed for each one individually.
Without the blanket endorsement, adding all those endorsements can cost you up to $200 (or more) per certificate in addition to sometimes taking over a week to get underwriting approval. That time period can lose you more than $200; if a job needs to be completed immediately, the customer might not wait around for the certificate to get processed.
2) Make sure your subcontractors are insured.
Every company that subcontracts for you should be insured. This is because, as the primary contractor, any claims or lawsuits that happen because of their work will start with you.
Having all your subcontractors purchase insurance and add you as an additional insured means that their insurance policy will pay for claims that they caused, even if you are sued for it.
If you have the subcontractor exclusion or the subcontractor warranty on your liability policy, insuring your subcontractors is an absolute necessity.
3) Keep track of your workers compensation experience modifier and have a safety program to manage it.
As a construction company, your workers compensation premium is most likely your largest insurance expense. The single best way to keep the premiums as low as possible is to manage your experience modifier by having a culture of safety within your business.
The experience modifier is a formula developed by the NCCI to predict the number of claims you are going to experience based on your industry and your individual claims history. Avoiding claims can save you 20-30%, but if you have a severe claims history, your experience modifier can increase your workers compensation premiums by 100%+.
Having a well-managed safety program and avoiding unnecessary claims is the best way we have seen construction companies manage their experience modifier.
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About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.
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