Everything You Need to Know About Insuring Your Construction Business
What is construction insurance?
The construction industry is full of risks. These risks are as diverse as the scope of construction; adequate construction insurance is essential for all projects. Commercial construction insurance is an insurance product designed to cover both the common and unique risks of the construction industry.
Construction insurance is a necessity because:
- Specialized construction equipment should be insured against damage, theft, and other liabilities.
- Contractors require general contractor insurance to protect them from public as well as professional liabilities.
- There is a high possibility of injuries and accidents due to the nature of the work, so your employees must be protected.
- Vehicles (specialized or otherwise) used in the business are liable to damages and wear-and-tear.
- Unfinished contracts can cause revenue loss.
These are just a few of the risks that the construction industry faces. Your clients expect you to create beautiful, and functional living or working spaces for them, and a construction insurance policy assures peace of mind while you focus on that work.
Who needs construction insurance?
Builders must practice proper risk management. Construction insurance is mandated by law in most states. Insurance law states that any construction business must have insurance, and the coverage must indemnify all liabilities.
Insurance gives peace of mind to construction businesses. In essence, insurance covers all possible risks, allowing them to focus on completing their projects. Insurance is a must even if you’re a small-time contractor who focuses on repairs and maintenance, or a large construction company with hundreds of employees.
What policies fall under construction insurance?
Builders risk insurance:
Business owners policy:
A business owners policy (BOP) is a combination of three essential commercial policies: commercial property, general liability, and business income.
Construction business insurance provides blanket coverage for a business against damages to third parties due to loss from business procedures (general liability), damages to the property that houses the business (commercial property), and protects the business from loss due to circumstances that hamper revenue flow (business income).
General liability policy:
A construction general liability insurance protects a business from third-party claims arising from bodily injury, personal or property damage. It also protects businesses at-fault from third-party losses arising from business operations, processes, or on-premise accidents.
Construction liability is especially crucial for construction sites that deal with multiple hazardous equipment and processes.
Commercial property insurance:
Commercial property insurance protects your business premises from damages that might arise from fire, theft, vandalism or other named causes of losses.
A commercial property does not usually cover acts of God (earthquake, flood, hurricanes), unless specific endorsements are added to the policy.
Commercial auto insurance:
Commercial auto insurance is usually bundled in a BOP. However, if you haven’t obtained a BOP and your business owns vehicles, then you will need a commercial auto policy.
The construction industry makes extensive use of a variety of vehicles, ranging from trucks to haul materials to specialized construction equipment such as trailers or mixers. A commercial auto policy indemnifies these vehicles for all covered liabilities.
Workers compensation insurance:
Any business with three or more employees requires workers compensation insurance. Worker’s compensation indemnifies your employees from injuries and deaths that might occur from work-related incidents.
All states (with the exception of Texas) mandate worker’s compensation insurance. It is especially crucial in the construction industry since employees (especially construction workers) face several high-risk exposures. According to the Insurance Information Institute, construction laborers had the 10th highest number of injuries or illnesses in 2018.
Professional liability insurance:
Unlike a CGL policy, professional liability insurance protects your business against losses and lawsuits that might arise from errors or negligent professional advice.
This policy is especially crucial for construction contractors and other professionals who provide advisory services, such as lawyers and architects. In fact, architects and engineers for the Millennium Tower in San Fransisco are still facing a lengthy legal professional liability suit. According to a report by CBS NewsInsurance Journal, the cost of repairing the tilting of the tower is around $200 million, and there is high lost property value.
Product liability insurance:
Product liability insurance protects you from loss and damages incurred when products you manufacture or supply are used.
If you manufacture or supply materials and products used in construction, you need product liability insurance.
Standard exclusions in construction insurance you need to address
Even though you can obtain a robust construction insurance plan, there are a few common exclusions that you’ll need to address to ensure you are covered against all risks. These exclusions include:
Claims-made or claims-occurrence exclusions are mutually exclusive, that is, you have the option of selecting one or the other.
A claims-made policy insures against damages whose when claims occur and are made during the policy period, whereas a claims-occurrence policy insures against damages that occur when the policy is in force, regardless of the date of claim. You should carefully review your policy and choose the exclusion that best suits your business.
A standard CGL policy might not cover contractors that oversee high-risk construction work (such as demolition, earthwork, or exterior finishes). These contractors require special policies tailored for them that cover their unique risks.
Pollution damage exclusions
Pollution damage due to construction activities has become a significant concern in recent years. As such, certain construction insurance policies might specifically exclude pollution damage coverages. Therefore, a special pollution liability insurance might be necessary in such a situation.
How much does construction insurance cost?
The cost of construction insurance depends on the kind of work you undertake, the number of workers you employ, and other factors. A generally accepted estimate is that construction insurance will cost anywhere from 1-10% of the total cost of the construction project.