No one ever expects accidents or emergencies but we all know they happen. The good news though, is that construction insurance can make sure you and your business are protected – even against the unexpected. A critical aspect of any construction company and individual construction projects, construction insurance offers you and other project stakeholders financial protection when accidents, damages, or other unforeseen events happen on the job site.
Construction insurance policies typically cover a wide range of risks, including property damage, bodily injury, and legal liability. And with many different insurance policies to choose from, it can be difficult to know what policies are right for your unique business. Here, we’ll explore construction insurance from all angles, so you can make the right decision to protect you and your team.
Key Takeaways
- Construction insurance can protect you and your business from the industry’s most common risks, including injury, property damage, design defects, vandalism, and more.
- General liability insurance is one of the most common types of coverage contractors choose. These policies cover legal costs and damages from personal/bodily injury, and property damage.
- No matter how good the policy is, insurance can never replace good risk management practices.
Why Do You Need Construction Insurance?
Our industry is full of risks, and one accident can cause ripple effects that affect your business for years to come. That’s why construction insurance is essential for anyone involved in the industry. With coverage against a variety of risks and liabilities that can happen both on and off the jobsite, you’ll rest easier knowing you’re protected.
What Construction Insurance Protects You From
Construction insurance can protect you from some of the most common liabilities that can happen during the construction process, including:
- Property damage: Construction insurance can protect you against damage to the property you are working on, as well as any damage to nearby buildings or structures.
- Bodily injury: If someone is injured on the construction site, construction insurance can provide coverage for medical expenses, lost wages, and other damages. This does not cover your employees, which is covered by worker’s compensation insurance.
- Equipment damage: Protect your equipment from damage or theft while it’s on the job site.
- Professional liability: If you are a contractor or architect, insurance can protect you from false claims of professional negligence or errors.
- Business income loss or interruption: If you experienced a loss that causes you to not be able to operate your company, there are policies that help you get your business back up and running (while paying you what you would typically earn during this time).
What Insurance Won’t Protect You From
While construction insurance provides essential coverage in many challenging situations, there are some things it won’t protect you from, including:
- Intentional acts: If you intentionally cause damage or injury, construction insurance will not provide coverage.
- Employee injuries: Insurance typically does not cover injuries to your employees. You will need workers’ compensation insurance for that.
- Pollution: If your construction activities cause pollution, you will need a separate pollution liability policy.
- Losses: Insurance won’t help you recover losses from operating your business poorly.
Now let’s take a closer look into the most common types of construction insurance policies you can elect to purchase.
7 Types of Construction Insurance
There are several types of construction insurance policies available, each designed to cover specific risks. Here’s a quick overview of the most common policies you’ll see:
Builders Risk Insurance
Builders risk insurance is a type of property insurance that covers damage or loss to a building during construction. It typically covers damages caused by fire, theft, vandalism, and weather-related events. These policies are usually purchased by the property owner or contractor and can be tailored to fit the specific needs of the project. However, you as a contractor do not need to have this type of policy to do a job. This is just one type of insurance that can help ensure that any risks outside of the project’s control don’t cause financial loss to those involved.
General Liability Insurance
General liability insurance is a type of insurance that provides coverage for bodily injury, property damage, and personal injury caused by the construction project. It also covers legal costs and damages that may arise from third-party claims against the contractor, subcontractors, or any other parties involved on a job.
Especially if you’re a contractor who uses subcontractors, general liability insurance is always a good idea. If you’re ever in a position where a sub doesn’t maintain their policy, you’ll be protected. Without general liability insurance, you’d be liable for the sub’s claim if an accident were to happen.
Professional Liability Insurance
Also known as errors and omissions insurance, professional liability insurance provides legal fee and damages coverage for claims of negligence or mistakes made by professionals involved in the construction project, such as architects, engineers, and consultants.
Workers’ Compensation Insurance
This type of insurance provides coverage for medical expenses, lost wages, and other costs associated with workplace injuries or illnesses. Workers’ compensation insurance is mandatory in most states and covers employees who are injured or become ill while working.
If you are an owner, keep in mind that this type of insurance will not cover you unless you specifically purchase a policy with owner coverage. This can be an important consideration if you are a tradesperson working alongside your crews.
Umbrella/Excess Insurance
Umbrella or excess insurance provides additional coverage beyond the limits of other insurance policies. It is designed to protect contractors and builders from catastrophic losses that may exceed the limits of their primary insurance policies. Owners require much higher levels of umbrella insurance for general contractors to ensure there could still be adequate coverage for their job if more than one catastrophic loss occurs in short succession.
Controlled Insurance Programs
Controlled insurance programs, also known as wrap-up insurance, are policies that cover all parties involved in a construction project, including the property owner, contractor, subcontractors, and other parties. These policies offer a single insurance policy for the entire project, simplifying the insurance process and reducing costs. Usually used on larger projects, these policies ensure all levels of contractors are covered. Any cost savings are normally used by the owner to reduce the overall cost of the project.
Subcontractor Default Insurance
General contractors can work alongside insurance companies to provide a product called subcontractor default insurance. This is a product that is sold as part of a contract price to help a general contractor protect themselves across all the work they do in case a subcontractor they have goes out of business and cannot finish a scope of work on a job.
4 Key Coverage Elements You’ll Want to Consider
When it comes to construction insurance, there are several key coverage elements you’ll want to be aware of. Below are some of the most important coverage elements to consider when choosing a policy:
Property damage: Property damage coverage is essential for any job. It covers damage to the property that is being built, along with any tools, equipment, or materials that are on the job site. This coverage can protect you from financial losses due to damage caused by accidents or unforeseen events.
Personal injury or worker’s compensation: Personal injury coverage is another important aspect of construction insurance. It provides protection against claims made by workers or third parties who are injured on the job site. This coverage can help cover medical expenses, lost wages, and other costs associated with injuries.
Theft and vandalism: Construction sites are often vulnerable to theft and vandalism, which can cause significant financial losses for contractors. Theft and vandalism coverage can help protect against losses due to theft of equipment or materials, as well as damage caused by vandalism.
Natural disasters: Hurricanes, earthquakes, and floods can cause significant damage to construction sites. Natural disaster coverage can help protect contractors against losses caused by these events.
Having comprehensive construction insurance coverage isn’t a nice-to-have but a necessity for contractors looking to cover all their bases.
Insurance Policy Considerations
When it comes to construction insurance, there are several policy considerations you’ll need to take into account. These considerations can have a significant impact on the coverage provided and the cost of your policy.
Coverage Limits
One of the most important considerations when selecting a construction insurance policy is the coverage limit. This is the maximum amount that the insurance company will pay out in the event of a claim. It is important to ensure that your coverage limit is enough to cover any potential losses included in a claim.
Deductibles
Another important consideration is the deductible. The deductible is the amount that you as the policyholder must pay out of pocket before the insurance company will begin to pay for any losses. A higher deductible can help to lower the cost of the policy, but it also means that you’ll be responsible for a larger portion of any losses.
Exclusions
It’s also important to carefully review any policy exclusions. Exclusions are specific situations or types of losses that are not covered by the policy. You’ll want to make sure the policy you choose doesn’t have any exclusions that could leave you vulnerable to significant losses.
Policy Endorsements
These are additional provisions that can be added to the policy to provide additional coverage. Endorsements can vary widely depending on the specific needs of the policyholder. Before choosing a policy, make sure to review any potential endorsements to ensure that they not only provide the necessary coverage, but don’t duplicate any coverage already provided by the policy.
While it can seem like an overwhelming number of things to consider, taking your time here can help ensure you walk away with the best policy for you and your business.
4 Cost Factors for Construction Insurance
Construction insurance costs can vary greatly depending on a number of factors, including:
1. Project size and complexity: These are two of the most important factors that can impact the cost of insurance. Naturally, larger and more complex projects often require more insurance coverage, which can drive up the cost of premiums on that job and for your company in general.
2. Location: The location of a job can also impact the cost of insurance. Projects located in areas with high crime rates or high levels of natural disasters may be considered higher risk by insurance companies, which can lead to higher premiums. Similarly, projects located in areas with strict building codes and regulations may require more insurance coverage, which can also drive up costs.
3. Contractor experience: The experience of the contractor working on a construction project can also influence cost. If you’ve got a proven track record of success and safety, you may be considered lower risk by insurance companies, which can lead to lower premiums. On the other hand, contractors with a history of accidents or other incidents may be considered higher risk, which can lead to higher premiums.
4. Experience modification rating: This rating is based on the amount of injuries or accidents your company experiences. For insurance companies, this rating translates to a number which directly affects your premiums for worker’s compensation and potentially other policies as well.
When it comes to managing insurance costs, it’s all a balancing act. You have to make sure you and your business has the coverage it needs, while reducing costs wherever possible. This is where good risk management comes into play. The more you can build good practices here, the more favorable construction insurance policies you’ll potentially be able to enjoy.
Why Construction Insurance Can’t Replace Good Risk Management
Construction is inherently a high-risk industry, which means some accidents are bound to happen. But even the best insurance policies can’t replace good risk management, which should be a foundational part of your company culture.
While we have a more in-depth resource on good risk management, here’s a short introduction.
Risk Assessment
Risk assessment is the first step in effective risk management in construction. It’s a process that involves identifying potential risks and evaluating their likelihood and impact. To assess risks, construction companies can use a range of tools and techniques, including risk registers, checklists, and risk matrices. These tools can identify and prioritize risks based on their likelihood and impact, allowing you to focus your risk management efforts on the most significant risks. It’s all about understanding what you control and what you can mitigate.
Mitigation Strategies
Once any risks have been identified and assessed, you can start implementing strategies to mitigate or avoid them. These strategies can include measures to reduce the likelihood of risks occurring, such as implementing safety procedures and training programs, or measures to reduce the impact of risks if they do occur, like having contingency plans in place.
With these mitigation strategies in place, you can ultimately reduce expenses and maximize profit, all while ensuring the safety of your team and the public.
Safety Programs
Another critical component of risk management is safety programming. Building safety programs involve implementing policies and procedures to ensure both workers and the public are protected. These can include measures like regular safety training, hazard assessments, and the use of personal protective equipment.
A Note on the Legal and Regulatory Environment
Before making any final decisions on your insurance policy, make sure you understand both federal and state requirements, along with any contractual obligations you may be subject to.
Contractual Requirements
In our industry, insurance requirements are typically outlined in contracts between parties. These contracts may require you to obtain certain types of insurance coverage, such as general liability or workers’ compensation, and may also specify minimum coverage limits. Failure to comply with these contractual requirements can result in legal and financial consequences, or the inability to get contracted on a job.
State Regulations
Each state has its own set of regulations regarding construction insurance. These regulations may include requirements for specific types of coverage, minimum coverage limits, and licensing requirements for insurance providers. If you operate in multiple states, make sure you’re aware of and comply with the regulations in each state in which you work.
Federal Involvement
The federal government also plays a role in regulating construction insurance. The Occupational Safety and Health Administration (OSHA) requires certain types of insurance coverage, such as workers’ compensation, for businesses with employees. Additionally, federal projects may have their own insurance requirements outlined in contracts.
While navigating the world of construction insurance can be difficult at times, we hope this guide makes it easier to find the right policy for you. Don’t forget to bookmark this page and check out the rest of the CrewCost blog for guides on construction accounting and management.