A Primer on Insurance for Construction Projects

People who live in glass houses should have insurance (in addition to not throwing stones). So too should your construction project.

The risks inherent on a construction project are many and varied, ranging from property damage to personal injury to pollution remediation costs, and wise contractors and project owners know that one of the best ways to mitigate these risks is through insurance. So, here’s a primer on what you need to know about insurance on construction projects.

Commercial General Liability Insurance (CGL)

What it Covers:

  • Property damage.
  • Bodily injury.
  • Personal and advertising injury (e.g., libel and slander).

Types of Claims Covered:

  • Third-party claims only.

Common Exclusions:

  • Defects in your work.
  • Expected or intended injury (e.g., intentional conduct).
  • Damages covered by other insurance such as pollution liability, automobile liability insurance and workers’ compensation insurance.

Pro Tips:

  • Ensure your CGL policy covers both “ongoing operations” as well as “completed operations.”
  • Upstream parties will often require that you name them and possibly others as additional insureds (AIs).
  • AIs will often require that they be named on a primary and non-contributory basis (i.e., your CGL applies to claims, not theirs).
  • AIs will often require a waiver a subrogation (i.e., your CGL carrier cannot sue the AI’s CLG carrier for reimbursement).

Builder’s Risk Insurance

What it Covers:

  • Damage during construction (e.g., fire, lightning, hail, explosions, theft, vandalism, etc.).
  • May be written on an “all risk” or “all perils” basis which provides coverage for all risks or all perils unless excluded. Alternatively, may be written on a “named peril” basis which provides coverage only for named perils.
  • Typically written on a project-by-project basis although, for smaller projects, may be written on a project-wide basis.
  • May include business interruption coverage.

Claims Covered:

  • First-party claims.

Common Exclusions:

  • Faulty design, materials and workmanship.
  • Damage caused by flood, earthquake, war.
  • Contractor tools and equipment.
  • Existing property.

Pro Tips:

  • Builder’s risk insurance, because it is often written on a project-by-project basis, varies widely. As such, special attention should be taken to review the terms of such policies and their exclusions in light of the specific project being constructed.
  • Builder’s risk insurance is often replaced with commercial property insurance upon completion of construction.

Pollution Liability Insurance

What it Covers:

  • Damage caused by pollutants (e.g., smoke, vapors, odors, soot, fumes, acids, alkalis, toxic chemicals, hazardous substances, waste materials).

Claims Covered:

  • First-party and third-party claims.

Common Exclusions:

  • Bacteria and viruses.

Pro Tips:

Workers’ Compensation Insurance

What it Covers:

  • California, like many states, requires that you have workers’ compensation insurance if you have employees.
  • Provides medical benefits for employees suffering from job-related illnesses or injury.
  • Provides death benefits to surviving spouses and dependents.
  • Pays for work-related accidents regardless of fault.

Claims Covered:

  • Claims by employees and surviving spouses and dependents.

Common Exclusions:

  • Non-work-related injuries.

Employment Practices Liability Insurance

What it Covers:

  • Employment discrimination, harassment, retaliation and wrongful termination.
  • Breach of employment contracts.
  • May cover claims for mismanagement of employee benefit and pension plans.

Claims Covered:

  • Employee claims.

Common Exclusions:

  • Violations of the National Labor Relations Act, Workers Adjustment and Retraining Notification Act, Occupational Safety and Health Act (OSHA), and Employee Retirement Income Security Act (ERISA).
  • Injuries covered by workers’ compensation insurance.

Pro Tips:

  • Employment practices liability insurance is typically claims-based (e.g., claim must be made against the policy in place at the time of the claim) although it can also be occurrence-based (e.g., claims made against the policy in place when the event giving rise to the claim occurred).

Commercial Automobile Liability Insurance

What it Covers:

  • Bodily injury and property damage caused during the operation of automobiles.
  • May cover owned, non-owned and leased vehicles.

Claims Covered:

  • Third-party claims.

Common Exclusions:

  • Expected or intended injury (e.g., intentional conduct).
  • Contractual liability other than breaches of contract otherwise covered by a commercial automobile liability policy.
  • Injuries covered by workers’ compensation insurance.

Pro Tips:

  • Ensure that the commercial automobile liability insurance covers owned, non-owned and leased vehicles or “any auto.”
  • Typically covers property while property is being loaded or unloaded from a covered vehicle but not while in transport in a covered vehicle.

Professional Liability Insurance

What it Covers:

  • Errors and omissions by architects, engineers and land surveyors.
  • Property damage
  • Bodily injury
  • Financial loss

Claims Covered:

  • Third-party claims.

Common Exclusions:

  • Contractual liability other than breaches of contract based on professional negligence.
  • repair or replacement of defective construction.
  • Intentional misconduct.
  • Damages covered by other insurance such as automobile liability insurance, workers’ compensation insurance, employer’s liability insurance.

Pro Tips:

  • Professional liability insurance should be required on hybrid project-delivery projects such as design-build projects where a contractor both designs and constructs a project.
  • Unlike CGL policies, which are occurrence-based (e.g., claims made against the policy in place when the accident occurred), professional liability insurance is claims-based (e.g., claim must be made against the policy in place at the time of the claim).
  • Unlike CGL policies, which have relatively low deductibles, professional liability insurance has higher per-claim deductibles. As such, design professionals may try to limit claims to no greater than the lesser of amounts actually paid to the design professional or the insurance available.
  • Unlike CGL policies, which allow an insured to add AIs, professional liability carriers do not allow AIs to be added to professional liability insurance since it is designed to only insure design professionals.
  • Unlike CGL policies, professional liability insurance typically requires the insured to consent to a settlement.

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