Construction projects by their very nature are risky endeavours, as accidents or other unforeseen events can result in significant losses and liabilities. Prudent businesses routinely turn to insurance policies to protect themselves against risks.
While most businesses in the construction industry know they should acquire insurance, it may be unclear what risks are covered by the various types of insurance. This Coverage Insights article examines the most common insurance policies available to businesses in the construction industry and the coverage provided by those policies.
Commercial General Liability Insurance
Nearly all construction contracts require businesses participating in a job to carry commercial general liability (CGL) insurance. The primary purpose of CGL insurance is to protect the insured party if a job site accident causes property damage, bodily injury or personal injury to a third party. In the event of a claim, CGL insurance covers the insured party’s legal obligation to pay compensatory damages to third parties.
For example, if a worker drops a piece of equipment and injures a bystander or damages a bystander’s property, any claim from the bystander against the business would be covered by the business’s CGL policy. It should be noted that, as a liability policy, CGL insurance will not cover damage to the insured’s own products, property and work.
Builders Risk Insurance
The majority of construction contracts also require parties to purchase and maintain property insurance that protects their work in progress and certain materials for the duration of the project. This type of property insurance is referred to as builders risk insurance.
Under a typical builders risk insurance policy, the insurer agrees to pay for direct physical loss or damage to the covered property during the course of construction unless the loss is subject to an exclusion. Covered property usually includes the building or structure under construction, as well as machinery, equipment, materials and supplies that will become a part of the improvement.
Builders risk insurance policies generally stay in effect while a project or structure is being built and expire when construction is completed or when the project is first used or occupied. In contrast to CGL insurance, builders risk insurance offers first-party coverage. First-party coverage protects the insured against damage to its own property, not for the claims of a third party.
Wrap-up Liability Insurance Programs
As an alternative to having each party obtain separate liability policies, project owners and general contractors can turn to a wrap-up insurance program to manage risks.
Sometimes referred to as controlled insurance programs, wrap-up insurance programs are centralized insurance and loss control programs intended to protect the project owner, general contractor and subcontractors under a single insurance policy or set of policies for the construction project.
Wrap-up policies are typically placed for a term encompassing the period of construction of a project, plus an additional number of years after completion to deal with any issues arising during the warranty period.
Professional Liability Insurance
In many ways, the probability for a loss arising from poor design work is greater than any other risk on a construction project. In the event of a design flaw, the project owner, contractors and subcontractors can all suffer from substantial delays, bodily injury or property damage. Accordingly, it is critical that design professionals have tailored professional liability insurance.
Professional liability insurance protects policyholders against claims that arise from an error, act or omission in their performance of a professional service. This form of insurance, commonly referred to as errors and omissions (E&O) insurance, is highly specialized and tailored to the policyholder’s profession. In the context of the construction industry, architects and engineers generally obtain professional liability insurance to shield themselves from liability related to wrongful acts or professional negligence arising out of their work.
Professional liability coverage differs from CGL and builders risk insurance in a number of ways. Professional liability policies do not require bodily injury or property damage to trigger coverage. While those damages are covered, professional liability insurance may also cover some nonphysical and economic damages caused by design errors and any resulting delays.
What’s more, professional liability insurance is typically written on a claims-made basis, meaning that the claim must be made during the policy term. CGL policies are most commonly occurrence-based, meaning coverage depends on the date of occurrence, not the date of the claim.
Other Forms of Construction Insurance
Depending on the type of construction project and the responsibilities of the various parties involved, businesses
may face additional exposures. Businesses should also consider the following types of insurance:
Pollution Liability Insurance
Many businesses in the construction industry wrongly assume that unless they are engaging in environmental remediation work, they have no pollution liability exposures. Virtually every CGL policy contains a pollution liability exclusion, which is almost an absolute pollution exclusion. Therefore, it is imperative that a business understands the scope of pollution liability coverage under its CGL policy, the availability of limited pollution liability endorsements and the existence of broad form pollution liability policies, if needed.
Commercial Crime Coverage
Commercial crime policies are designed to insure against certain types of losses that are not covered by a standard commercial property policy, such as employee dishonesty, theft and forgery.
Equipment Breakdown Insurance
Businesses also face the risk of equipment breaking down or becoming damaged during construction. Equipment breakdown insurance, traditionally called boiler and machinery insurance, covers loss resulting from the accidental breakdown of almost any type of equipment.
Some common examples of such equipment include steam boilers and other pressure vessels; electrical generating and transmitting equipment; pumps, compressors, turbines and engines; air conditioning and refrigeration systems; production machinery used in manufacturing operations; and all types of electrically powered office equipment, such as copiers, computers and telephone systems.
Contractors Equipment Insurance
Contractors equipment insurance, sometimes referred to as equipment floater insurance, is a form of inland marine insurance that protects equipment and tools that are easily transported from one location to the next. Such policies provide coverage for the direct physical damage and loss to mobile machinery and equipment that is used to complete projects.
Given the complex and specialized nature of modern-day construction projects, it is imperative that businesses involved with such projects speak with their insurance broker to make sure that they have the proper insurance coverages in place. Doing so will help protect their bottom lines and provide peace of mind.
Contact Access Insurance Group Ltd today to review your insurance options before you start your project.