Insurance policies for construction contractors
By Timothy R. Hughes
Construction contractors are used to buying lots of different insurance policies. Indeed, many contracts and subcontracts include specific requirements regarding the types and amounts of insurance coverages required. Contractors are less informed about what these policies cover and, more importantly, do not cover. Managing risk and running your business effectively requires a basic understanding of what risks you can effectively insure. The following are key insurance policies for construction contractors.
Comprehensive general liability (CGL) insurance is the basic business liability insurance that most people think of when they talk about construction insurance. Generally speaking, construction contractors need general liablilty insurance to protect their business against personal injury or property damages that are caused by defined “occurrences,” usually unexpected acts of negligence.
CGL coverage is not a blanket protection against liability for construction defects. It generally excludes coverage for breach-of-contract claims. Similarly, they often exclude damages to “the work itself,” although there may be exceptions and changes that expand coverage. There are variations amongst the insurance policies for construction contractors and their scopes of coverage.
Finally, different states apply wildly varying rules about just how far these policies go to protect against “property” damage. Do they cover a subcontractor damaging another subcontractor’s work? If, for example, a water penetration construction defect is not covered, what about resulting claims, like mold-based personal injury claims from the same water issue?
These policies are complicated, and understanding them requires a painstaking review of the policy, all exclusions from coverage, and all addenda. Contractors often wrongfully assume these policies cover far more than they actually do, so govern yourself accordingly.
Property insurance and builder’s risk
Owners often have insurance coverage of their own property, but it generally does not extend to new construction. Property damage risks to the “work itself” are often covered by builder’s risk insurance policies. The builder’s risk policies can fill the property damages gaps sometimes left by CGL policies. We see owners and contractors buying builder’s risk policies, depending on the pricing and contract obligations.
As with the CGL policies, builder’s risk does not operate as a blanket insurance against construction defects. The claims covered tend to be limited to tort-based property damage claims suffered by the project. Still, coupled with CGL coverage these policies eliminate at least some of the property damage risks posed by construction operations.
Errors & Omissions
Errors and Omissions (E&O) insurance typically protects against malpractice claims against professionals. These insurance policies for construction contractors are standard for design professionals. Contractors who perform design/build work sometimes procure this insurance as well.
E&O coverage can work a little differently than CGL and builder’s risk. First, the policies are “claims made,” rather than “occurrence based.” This means that the policy in effect at the time of the claim is the policy triggered, rather than the one in place at the time of the occurrence.
E&O coverage is often subject to extensive deductibles. This can shift some of the leverage, negotiation and risk points surrounding claims against E&O policies.
Workers’ compensation insurance
Workers’ compensation insurance covers against personal injuries to workers on construction projects. Each state mandates different levels of required workers’ compensation insurance. You should also understand how many employees, including the owner, are required to establish the threshold requirement to procure this insurance.
Workers’ compensation provides a regime where typical personal injury claims are shifted into a different legal format. Employees typically have either reduced or eliminated requirements to show negligence to establish a right recovery. In turn, the claims are processed in ways that streamline the cases and somewhat limit the types and amounts of recoverable damages in this regime. Contractors managing their finances and risks will need to understand how workers’ compensation ratings are conducted as this insurance can get quite expensive for construction contractors.
Contractors often look at insurance they have paid for and expect that all their risk is gone. This is simply not the case. What is true is that the CGL, builder’s risk, E&O, and workers’ compensation insurance coverages are key components to mitigating some of the risks your construction business faces. You need to understand the economics of those Insurance policies for construction contractors. Most important, you need to understand the risks that are not covered, so that you can fully manage those risks through your business operations.
Timothy R. Hughes, Esq., LEED AP, is the Managing Shareholder of the law firm Bean Kinney & Korman, P.C. in Arlington, Va. A construction, real estate and business attorney, he was recognized as a “Leader in the Law” in 2010 by Virginia Lawyer’s Weekly, a member of the “Legal Elite” for Construction Law by Virginia Business Magazine, and one of the “Best Lawyers in America” for Virginia Construction Law. A former chair of the Construction Law and Public Contracts Section of the Virginia State Bar, he may be reached at 703-525-4000 or by email at email@example.com.