What Is Construction Insurance? A Guide for Builders and Contractors

The construction industry is a dynamic and vital sector responsible for shaping the skylines of our cities and building the infrastructure that connects communities. However, it's also an industry that deals with risk. From unforeseen accidents and weather events to equipment malfunctions and potential lawsuits, construction projects face a multitude of risks that can lead to financial losses. That's where construction insurance comes in.

What Is Construction Insurance?

Construction insurance is a broad term encompassing a variety of insurance policies designed to help protect contractors, developers, and property owners against the unique risks associated with construction projects. It's not a single, one-size-fits-all policy but rather a tailored combination of coverage options that help address the specific needs and potential liabilities of a construction project. Understanding the different types of construction insurance and how they work is essential for anyone involved in the industry.

Why Is Construction Insurance Important?

Without adequate insurance coverage, events that cause delays and costly repairs could damage the business continuity of a construction company. Construction insurance helps provide a financial safety net, helping to protect construction businesses from the potentially devastating costs associated with accidents, property damage, and liability claims.

Insurance coverage for construction helps ensure contractors can focus on their work with peace of mind, knowing they have the right protection in place to help protect their business. Moreover, many project owners and lenders require contractors to carry specific types of insurance as a condition of the contract.

Common Types of Construction Insurance Policies

Here's a breakdown of some common types of construction insurance policies.  This list is not intended to be exhaustive and the appropriate coverage for your business will depend on your specific circumstances.  While the actual terms and conditions of each policy type will vary, the following provides a general overview of common coverage features:

Builder's Risk Insurance 

Builder's risk insurance is one of the most important types of insurance for a construction project. Builder's risk insurance, also known as “course of construction insurance”, covers the building or structure while it's under construction. It covers damage caused by a certain perils, typically including fire, wind, hail, theft, vandalism, and other common risks.

What It Covers: Builder's risk insurance typically covers the cost of materials, labor, and equipment used in the construction project. It can also cover soft costs, such as architectural fees, engineering expenses, and permit fees, in the event of a covered loss.

Who Should Have It: Generally, the party responsible for the project during construction (often the contractor or the property owner) purchases the builder's risk policy. The specific requirements are usually outlined in the construction contract.

Important Considerations: It's vital to ensure that the builder's risk policy provides adequate coverage for the full value of the completed project, including all materials and labor costs. Also, pay attention to any exclusions in the policy, such as damage caused by faulty work or design errors.

Commercial General Liability (CGL) Insurance 

CGL insurance helps protect contractors and builders against financial losses resulting from bodily injury or property damage to third parties. It covers incidents that occur at the construction site or as a result of the contractor's operations.

What It Covers: CGL insurance typically covers legal defense costs, settlements, and judgments arising from third party claims of bodily injury or property damage. For example, if a visitor to the construction site trips and falls, sustaining injuries, CGL insurance would help cover the contractor's legal expenses and any resulting settlement.

Who Should Have It: All contractors should carry CGL insurance, regardless of the size or scope of their projects. It's a fundamental type of coverage that helps protect against common liability risks.

Important Considerations: The amount of general liability coverage needed will depend on many factors, including the size and complexity of the construction projects undertaken. Contractors should also ensure that their policy includes coverage for completed operations, which helps protect them against liability for injuries or damages that occur after the project is finished.

Workers' Compensation Insurance

Workers' compensation insurance covers medical expenses and lost wages for employees who are injured or become ill on the job. It's mandatory in most states for most employers, including construction companies.

What It Covers: Workers' compensation insurance typically covers medical expenses and lost wages for employees who are injured as the result of work-related injuries, from cuts and bruises to more serious injuries. It also covers death benefits when an employee dies as a result of a work-related injury.  

Who Should Have It: Any construction company that employs a certain number of employees may be legally required to carry workers' compensation insurance. Workers’ compensation insurance requirements vary by state so always consult your state’s labor or insurance department to ensure compliance. Some states are "monopolistic," meaning workers' compensation insurance must be purchased through the state instead of private insurance companies. These states currently include Ohio, North Dakota, Washington, and Wyoming.

Important Considerations: The cost of workers' compensation insurance will depend on many factors, including the number of employees, the type of work they perform, and the company's safety record. Contractors should implement comprehensive safety programs to help minimize the risk of workplace injuries, which can help keep their workers' compensation costs down.

Commercial Auto Insurance

Commercial auto insurance covers vehicles used for business purposes, such as trucks, vans, and other equipment, including construction vehicles. It helps protect the business against financial losses resulting from accidents, theft, or vandalism. Commercial auto insurance is a broad term that can include auto liability insurance, collision insurance, comprehensive auto insurance, and more.

What It Covers: Different commercial auto insurance policy types have different coverage options.  For example, auto liability insurance covers third-party bodily injury and property damage. Collision insurance covers the repair or replacement of the business's vehicle if damaged in a collision. Comprehensive auto insurance typically covers non-collision events like theft, vandalism, fire, natural disasters and damage from falling objects or animals.

Who Should Have It: Any construction company that owns or operates vehicles for business purposes should consider commercial auto insurance.

Important Considerations: The amount of commercial auto insurance coverage needed will depend on many factors including the type of vehicles used and the distances they are driven. Contractors should also ensure that their policy includes coverage for uninsured or underinsured motorists. Generally, uninsured motorist coverage helps protects you if you're in an accident caused by a driver who doesn't have any insurance, while underinsured motorist coverage helps when the at-fault driver's insurance isn't sufficient to cover your damages.

Equipment Insurance

Equipment insurance for construction businesses is designed to cover the tools and machinery critical to construction projects. This coverage typically covers various types of equipment, whether owned, leased, or rented, though the specific details can vary. This insurance can help minimize downtime and financial loss, allowing construction projects to proceed smoothly and reducing the business's exposure to significant investment risks. Equipment breakdown coverage is also often available as an add-on or endorsement to commercial property insurance.

What It Covers: Equipment insurance typically covers physical damage to equipment caused by certain perils, such as fire, theft, vandalism, and accidents. 

Who Should Have It: Any construction company that owns or rents equipment should consider equipment insurance.

Important Considerations: The amount of equipment insurance coverage needed will depend on many factors, including the value of the equipment and the risks faced. 

Professional Liability Insurance (Errors & Omissions Insurance) 

Professional liability insurance helps protect construction businesses by covering claims related to professional errors or negligence that may occur during the design, consultation, or construction phases of a construction project. By mitigating the financial risks associated with potential professional liability lawsuits, professional liability insurance helps ensure that construction businesses can continue operating.

What It Covers: Professional liability insurance typically covers legal defense costs, settlements, and judgments related to claims of negligence, errors, or omissions.

Who Should Have It: Anyone one in the construction industry providing design, advice, consulting or project management services should consider professional liability insurance.  This includes, for example, architects, engineers, project managers, construction consultants, surveyors, and design-build contractors.

Important Considerations: The amount of professional liability insurance coverage needed will depend on many factors including the scope and complexity of the projects undertaken.

Environmental and Pollution Liability Insurance 

Construction projects can sometimes involve environmental risks, such as spills of hazardous materials or the disturbance of contaminated soil. Environmental and pollution liability insurance helps cover the costs associated with cleaning up pollution and defending against environmental claims.

What It Covers: Environmental and pollution liability insurance typically covers cleanup costs, legal defense expenses, and damages arising from pollution and environmental damage incidents.

Who Should Have It: Contractors working on projects that involve environmental risks should consider environmental and pollution liability insurance.

Important Considerations: The specific coverage provided by pollution liability insurance can vary widely. Contractors and builders should carefully review the policy terms and conditions to ensure that it meets their specific needs.

Umbrella Liability Insurance

Umbrella liability insurance helps provide an extra layer of coverage above and beyond the limits of other liability policies, such as CGL and commercial auto insurance. It can help protect contractors from catastrophic losses that exceed the limits of their primary policies.

What It Covers: Umbrella liability insurance covers the same types of claims as the underlying liability policies, but it provides additional coverage in the event that the underlying limits are exhausted.

Who Should Consider It: Contractors who face significant liability risks should consider carrying umbrella liability insurance.

Important Considerations: The amount of umbrella liability insurance coverage needed will depend on many factors including the contractor's risk profile and the potential for large losses.

Tips for Obtaining the Right Construction Insurance

Work with an Experienced Insurance Professional: An experienced insurance professional who specializes in construction insurance can help you assess your risks and find the right coverage at the right price.

Shop Around and Compare Quotes: Don't settle for the first quote you receive. Get quotes from multiple insurance companies and compare the coverage and pricing carefully.

Review Your Policies Regularly: As your business grows and your projects change, it's important to review your insurance policies regularly to ensure that they continue to meet your needs.

Implement a Comprehensive Safety Program: A strong safety program can help you reduce the risk of accidents and injuries, which can lead to lower insurance premiums.

Maintain Accurate Records: Accurate records of your projects, equipment, and employees can help you demonstrate your risk management capabilities to insurance companies.

In Conclusion

Construction insurance can be an essential investment for anyone involved in the construction industry. By understanding the different types of coverages available and working with an experienced insurance professional, contractors can help protect their businesses against the potentially devastating financial consequences of accidents, property damage, and liability claims. Don't wait until disaster strikes—take the time to assess your risks and secure the right construction insurance coverage today.

Acrisure can help! We have the construction industry expertise to help you build a strong foundation for your business. From safety programs and risk management to the right construction insurance coverages for your unique needs, explore Acrisure's construction business and insurance solutions today.