Who Needs Construction Insurance?Insurance Explained
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Insuring your construction company is all about managing the risk involved in your profession and transferring that risk to other entities, ie. your insurers.
But more than that, it’s about protecting yourself and the people and things that make it possible for you to make a living effectively.
Construction insurance also provides protection for your clients and your staff. Remember, mistakes made on the job can be as costly for your clients as they can be for you and your team.
Giving your clients bad advice, being unable to complete construction projects by the deadline; these types of issues can cost your clients money, which will inevitably lead to claims being filed against you.
Furthermore, having construction insurance in place that mitigates these risks can help you land more clients since many will not work with contractors who lack this type of coverage.
Of course, workers compensation insurance is mandatory in just about every state and is certainly something that no construction company can exist without. Construction is a high-risk industry and your workers need to be protected and given assurances that you will be able to help them financially recover from workplace-related injuries.
Insurance can also protect the public, especially if your construction projects take place in areas that are heavily populated. Accidents can happen when there are people constantly located in the vicinity of your construction insurance and site insurance can help cover any financial losses sustained from accidents related to third-parties.
What Insurance Policies Do Construction Companies Need?
While every construction company potentially has a specific set of construction insurance needs, depending on its size and a variety of other factors, there are certain construction insurance policies that most should consider mandatory parts of their business insurance coverage:
Workers Compensation Insurance:
As already mentioned, workers compensation is state-mandated, which says a lot about its importance. In fact, even Texas – a state in which most businesses are permitted to opt-out of workers compensation insurance – having this insurance is mandatory for all construction companies.
This policy will pay for medical bills, rehabilitation, and wage losses to any of your employees that are injured on the job. If an employee is fatally injured on the job site, workers’ compensation will pay benefits to the employee’s family.
If your injured employee sues you for negligence, a workers compensation policy will cover these legal costs as well.
General Liability Insurance:
All construction companies and contractors should have this basic insurance policy. A general liability policy will pay all expenses related to a third-party injury or third-party property damage.
For example, if someone visits your construction site and is injured there, they could file a claim against you. Also, it’s not uncommon for construction companies to damage property that they are renovating, for example. In these types of cases, general liability insurance would cover medical and legal costs related to bodily injuries and the costs of repairing or replacing property in the case of damaged property.
Commercial Property Insurance:
All of your property that is necessary for performing your job will be covered by a good commercial property insurance policy. That includes offices you may have, workrooms on site, tools, furnishings, and more.
If any of your covered items are damaged by any event that’s covered in the policy, the insurer will pay the insured value of the items so that you can replace or repair them. A good commercial property policy will also cover items that your business is renting.
Business Owners Policy (BOP):
Since just about every construction company or contractor needs to purchase both general liability and property insurance, the best solution is usually to purchase what is called a Business Owners Policy (BOP).
This is a policy that packages general liability and commercial property insurance together. What makes it attractive is that it’s cheaper to buy a BOP than to buy the policies separately. Unless your construction company has very specific risks, you should be able to qualify for a BOP, which usually also includes business interruption insurance within the coverage bundle.
This policy will cover wages and other expenses if your business is forced to temporarily shut down.
Professional Liability Insurance:
Often referred to as “contractors errors and omissions,” professional liability insurance covers you in lawsuits that could potentially result from mistakes that you or your employees may have made on a project.
All of your defense costs resulting from a client claim related to potential professional negligence on your part would be covered. If you not only build but also design your construction projects, your business absolutely needs this type of insurance, since taking part in the creation process right from the start of the design phase increases your risk of being sued.
We’ve already mentioned the need for construction companies and contractors to protect their clients; this is exactly what surety bonds do. If your company doesn’t deliver what was promised in the contract, then your insurer will be able to reimburse the client through surety bonds, of which there are four specific types.
Contractor License Bond:
This bond is required by state. Without it, you cannot get licensed to work as a contractor and you will be fined if you try to work without it.
- Bid Bonds: These bonds guarantee compensation to your client if you fail to meet the terms of your contract.
- Payment Bonds: These bonds guarantee payments for your subcontractors and suppliers. They also protect your clients from having to pay these costs if you are not able to do so. All contracts that exceed $100,000 require contractors to get payment bonds.
- Performance Bonds: These bonds make sure that you complete construction projects as your contracts specify. If you don’t meet a deadline or the quality is subpar, your client will be able to make a claim on a performance bond.
Builders Risk Insurance:
This is a type of inland marine policy that insures the structures that your company is building, along with all of the materials that are onsite.
Contractors are able to buy these types of policies on a per-project basis and they will usually cover damage caused to the site and all materials on site caused by inclement weather, natural disasters, fire, and vandalism.
Flood insurance will sometimes be included in a builders risk policy, but if it’s not and you are working in a part of the country where floods are common, it would be a good idea to take out a separate flood insurance policy.
There is a bit of a debate in the construction industry over whether the contractor or the client should be taking out this policy. Regardless of who takes it out in the end, the policy will be able to cover both the builders and the developers, and even subcontractors.
Commercial Auto Insurance:
Vehicles are usually very important to the work of contractors, which means that all of the cars, trucks, and vans that you use in your construction work should absolutely be covered in your insurance coverage.
A commercial auto insurance policy provides liability coverage that will pay for damages to third-party property or injuries resulting from accidents involving your business vehicles. You’ll also be able to get coverage for any medical bills of your own and damages that your vehicles may incur.
While builders risk insurance will cover the actual building site and the building materials, you still need to insure the equipment that you are using to build your projects.
Also, it’s important to note that commercial property insurance will only cover equipment that is always being used at one particular site. Specialized equipment insurance is needed for the equipment that you are taking with you and using at multiple construction sites, such as forklifts, trailers, and other machinery that is mobile in nature.
A good equipment insurance policy should also cover tools and equipment that you are renting.
Pollution Liability Insurance:
This policy will provide third-party coverage for claims related to pollution. Pollution conditions, whether sudden or gradual or accidental, can lead to property damage and bodily injury.
A pollution insurance policy for construction companies and contractors would pay the legal costs, medical costs, clean-up costs, and pay for damaged property to be repaired or replaced.
What Is Wrap-Up Insurance Coverage?
Wrap-up insurance is a little bit like a BOP. It’s a policy that is purchased to cover either incredibly large construction projects that are worth millions of dollars or a string of smaller projects that, combined, are just as expensive.
There are two different types of wrap-up insurance policies; Owner Controlled Insurance packages (OCIPs) and Contractor Controlled Insurance packages (CCIPs). Obviously, the main difference is who is sponsoring, or buying, the package.
OCIPs are sponsored by the owners of the project while CCIPs are sponsored by the main general contractor that was hired to work on the project. Similar to a BOP, a wrap-up package includes traditional insurance policies that construction companies need, bundled into a policy package.
Most wrap-up packages will include general liability insurance, workers compensation insurance, and builders risk insurance.
Of course, construction companies and contractors or construction project and property owners who buy wrap-up packages can customize their bundles and add many other policies to the package if need be via endorsements.
Construction Insurance Requirements
A common question about the construction industry is whether or not there is an insurance type that is required? Usually, that will depend on the state in which you operate as a construction company or contractor.
Typically, there are both state and federal laws in place that will require all construction companies to purchase auto insurance for their business vehicles, for example.
Also, there are states in which contractors will need to purchase workers compensation insurance, however, that really does depend a lot on the state in which you’re in and the number of employees that you have, so it definitely can’t be said that workers comp is mandatory coverage that is required by all contractors.
For the most part, a construction company will usually be asked to buy construction insurance on a project-to-project basis. If you are working on a small home repair, you probably won’t need to purchase insurance.
However, if you are working on a larger project or are being hired by the local government, public institutions, or larger companies, you’re probably going to need to purchase a number of policies.
Large companies and governmental agencies will almost always require contractors and construction companies to carry a number of construction insurance policies that will protect the many insurable aspects of the project they were hired to work on.
The good news is that most of the time, the project sponsor will pay for the cost of the insurance. However, it is usually the contractor’s responsibility to procure the right coverage.
Most larger projects will require you to purchase many of the policies that we have already discussed, including general liability, workers compensation, and builders risk. Surety bonds and inland marine can be required by companies and government agencies for specific projects, but usually, they are not.
When purchasing insurance, it’s important to always know the rules and regulations mandated by the state in which you are working, especially when it comes to commercial auto and workers compensation insurance.
For all other policies that your employer might require you to purchase for a particular project, the best way to make sure that you are meeting every insurance requirement of the project is by teaming with an expert broker who will be able to recommend the proper coverage.
Verifying Your Subcontractors Are Insured
If your construction company is leading the project and will have to hire subcontractors, make sure that they all have their own insurance as well.
Every type of subcontractor working on the project should be carrying their own insurance, which includes, among other types of contractors:
- HVAC contractors
You can verify that they are insured by requesting a certificate of insurance from them. The COI is proof that they have obtained the insurance coverage that you have required them to obtain in the contract that you drew up for your subcontractors. Your insurance carriers will want to have these COIs on file as well.
There are two construction insurance policies in particular that you should get COIs for from your subcontractors; general liability and workers compensation.
If a claim arises on a project that’s related to work that was performed by one of your subcontractors, you want to make sure that their general liability insurance policies will cover the damages.
By making sure that your subcontractor’s insurance handles the claim, you are keeping your company’s record clean, which will be good news for your future premiums.
Furthermore, it’s the right thing to do, because no company should be held responsible for a claim that is related to work that they didn’t perform. However, that’s exactly what could happen if you don’t make sure that your subcontractor is insured properly.
It’s also recommended to have your subcontractor list your company as an additional insured on their general liability policy. Even if you aren’t responsible for the damage, the claim could trickle up to your company, since you are the main contractor that is leading the project.
Getting an additional insured endorsement on your subcontractor’s policy for yourself will let you use their coverage to cover damages instead of having to rely on yours in such a situation.
What Does It Cost?
As is the case with most types of insurance, there are many different factors that need to be considered before determining how much your construction insurance is going to cost.
Premiums will be determined by standard factors such as the size of your company, including:
- The number of employees working for you
- Whether there are subcontractors involved
- The size of your projects
- Your claims history
- The locations of your projects
Here are some other factors that can affect the cost of your construction insurance:
- The duration of your policy: If you have builders risk coverage for a project that is going to take you more than a year to complete, for example, then you will have to pay more for it. If you decide to buy construction insurance for a project that you have already started prior to getting the insurance, you might see higher premiums in this case as well.
- Credit history: Insurers will not only look at the contractor’s credit history but at the credit history of everyone involved in the insurance contract (the policyholder and the named insured).
- Your company’s level of experience: The longer you have been working in the construction industry, the less your premium will cost. This is especially true if you have a track record of working as a contractor for many years without experiencing many claims over the course of that time.
Of course, your coverage limits and deductibles will affect policy prices as well.
Average Construction Insurance Costs
As we’ve said, the cost of a policy depends on many factors surrounding both your construction company and the project that you are working on.
However, these are some industry averages that most small construction companies can expect to pay for the most commonly purchased policies:
- Commercial General Liability: $1,000
- Builders Risk: 3% of the project cost
- Workers Compensation: $6,000 per employee
- Commercial Auto: $2,000 per vehicle
- Inland Marine: $2,500
Typically, workers compensation costs will be fairly high for contractors since construction is considered a high-risk injury in which employees are more likely to get injured more often and also suffer potentially serious injuries.