Construction Insurance: A Comprehensive Guide for Contractors

Property owners, developers, and contractors are covered by a wide range of insurance policies during the course of a building project. In actuality, many projects require specific kinds of construction insurance policies. We will go over the fundamentals of construction insurance, the most popular policy types, and the situations in which those policies would be applicable in the sections that follow.

Construction Insurance: What Is It?

The kind of construction insurance coverage required for a particular project or business depends on a number of factors. These variables include the individual’s role in the project (e.g., contractor, property owner, subcontractor, etc.), the kind of buying entity (either an individual or a business), and the kind of property to be covered. It’s also crucial to remember that insurance providers frequently combine several policies into packages for particular trades, like plumbers’ and electricians’ insurance. The most popular insurance plans utilized in the construction sector are described in the sections that follow.

Different Construction Insurance Types

When starting a construction project, a property owner may want to get insurance for a variety of project-related items, such as the building and materials while they are in transit. A contractor for the same project may need different kinds of coverage, like general liability and commercial auto insurance, depending on the terms of the contract. Further details regarding the different kinds of coverage are provided below.

1. Builders Risk Insurance (Building Course)

Builders risk insurance covers buildings and other structures while they are being built. It is also referred to as course of construction (COC) insurance or occasionally construction all risk insurance. Structures that are being built are usually not covered by other insurance policies, such as commercial property insurance or homeowners insurance. The following categories of property are typically covered by options in builders risk policies:

• Structures and buildings
• Bases
• Equipment
• Temporary frameworks, like scaffolding
• Fences, paving, and outdoor fixtures
• Trees, plants, and lawns that the builder put in

Generally speaking, insurance companies cover the following kinds of construction projects:

• Newly constructed homes
• Remodeling a home or doing smaller projects
• Model residences and their furnishings
• Construction of commercial real estate

However, there might still be specialty providers who can provide insurance policies for your particular project if your construction project or kind of structure is unique.

Builders risk policies are limited in what they can cover. The most basic builders risk insurance plans typically include coverage for losses brought on by weather, theft, vandalism, and fire. Nevertheless, a lot of insurers provide “premium coverage” options, which are more expensive but can increase the policy’s coverage limits, insurable events, and/or insurable property. Flooding or earthquake damage will typically not be covered unless the policy specifically includes coverage for those kinds of occurrences. Additionally, insurance companies may include exclusions in the policy that shield them from having to pay for losses resulting from policyholder negligence or events that fall under particular circumstances.

2. Insurance for General Liability

General liability insurance is a type of insurance that protects businesses against liability in the event of property damage or bodily injury sustained while conducting business. It is also referred to as contractor general liability insurance or commercial general liability (CGL) insurance. Insurance companies develop different iterations of these policies that are accessible to construction industry professionals and for construction-related projects. Liability insurance policies are available to protect policyholders from needless risk, regardless of whether you are the property owner, contractor, or another kind of construction company. These policies are frequently marketed as “general liability insurance for contractors” or “contractor general liability insurance.”

Policies for general liability insurance typically provide coverage for a wide range of damages, such as:

• Shoddy construction
• Workplace accidents
• Defamation and injury from advertising

In certain states, contractors and developers may be legally obligated to maintain a minimum level of liability insurance, or they may be required to do so in order to be awarded contracts that call for it. Businesses that finish a lot of design-build projects will most likely want liability insurance in case they are held legally liable for errors. Furthermore, some general contractors often require subcontractors to have liability insurance in order for them to work for them.

Various providers offer general liability insurance policies for the following categories of construction businesses:

• Creators
• Overall contractors
• Firms that specialize in architecture and engineering
• Contractors with specialization
• Handyman companies

Certain exclusions, which shield the insurance company from having to pay for particular kinds of damages or incidents, are probably defined in the policy, just like in builders risk and other insurance coverage types.

3. Professional liability insurance and errors and omissions insurance

Errors and omissions insurance, commonly referred to as professional liability insurance, is a kind of insurance that shields companies against lawsuits brought about by mistakes or errors in their work. For instance, the owner may file a lawsuit against the engineer to recoup expenses if the engineer makes a mistake in determining the building’s structural requirements and the owner is later forced to make expensive repairs. In that instance, the claim may be covered by the engineer’s E&O policy.

In addition, there are specific contractor E&O policies that provide coverage for work-related claims, much like contractor general liability insurance. However, the scope of coverage for these policies is typically more constrained. Generally speaking, a contractor’s errors and omissions policy will pay for monetary losses but exclude claims for bodily harm or property damage.

4. Insurance for Commercial Vehicles and Trucks

There are other uses for commercial vehicle insurance, commonly known as commercial auto insurance, besides building sites. It is insurance designed to give business vehicles auto insurance. The goal of commercial auto insurance coverage is to shield policyholders from high auto repair costs, unfavorable medical bills, and lawsuits brought on by collisions.

Similar to regular auto insurance policies, commercial auto insurance policies offer a variety of coverage options. Among the options for standard coverage are:

• Liability coverage shields the business and its workers from costs related to employee-caused accidents.
• Physical Damage Coverage: This insurance pays for repairs made to business vehicles following an approved collision. Comprehensive coverage, which guards against auto theft, vandalism, and natural disaster destruction, may also be included in this.
• Medical Payments Coverage: This type of coverage assists in covering costs associated with an injury sustained during a covered incident, such as hospital stays, ambulance rides, and burial expenses.
• Uninsured Motorist Coverage: This kind of insurance protects against losses and injuries brought on by drivers without insurance. This is required because the harm and losses you cause to other people are covered by your personal liability insurance. You still want to be protected against expensive medical bills or repairs in the event that you are involved in an accident with someone who does not have this coverage.

Insurance companies such as Progressive cover a wide range of commercial vehicles, including those frequently utilized in construction projects. Commercial auto insurance providers typically cover the following kinds of vehicles and trailers:

Types of Vehicles

• Vehicles
• Pickup vehicles
• Dumping trucks
• Trucks with flatbeds
• Mixers for cement
• Pump vehicles
• Trucks with buckets
• Trucks that are straight

Types of Trailers

• Trailers for auto haulers
• Trailers for dry freight
• Trailers with flatbeds
• Trailers for utilities
• Trailers for bulk commodities
• Trailers for concessions
• Trailers for dry freight
• Trailers with dump bodies or transfer boxes
• Trailers with poles
• Dry freight trailers with refrigeration
• Trailers for tanks

It is important to remember that commercial auto insurance also includes commercial truck insurance, a more specialized policy type. Commercial truck insurance is especially meant for big vehicles (like cement mixers, dump trucks, semi-trucks, and other business vehicles) and the companies that operate them. Commercial auto insurance, on the other hand, is a general term that covers a wide variety of vehicles used for business purposes. Commercial truck insurance offers additional coverage options such as cargo coverage, general liability coverage, and downtime coverage, in addition to all the coverage options offered by a standard commercial auto policy.

Driving a car for work requires having some sort of commercial auto insurance, regardless of the kind of vehicle you drive. Remember that most personal auto insurance policies won’t cover accidents that occur when you use your car for work-related activities.

See our comprehensive guides on commercial trucking insurance and commercial auto insurance for additional information about policies for construction workers.

5. Insurance for Inland Marine

Another extensive category of insurance that applies far beyond the construction sector is inland marine insurance. Although the name originates from a time when this type of insurance mainly covered goods and ships that were bound for the ocean, that is no longer the case. Over time, inland marine insurance coverage has expanded to include a wide range of property types, such as digital information and computer equipment, mobile equipment, property in the care of a repairman or storage facility, and property that is frequently used in multiple locations.

Inland marine insurance for the construction sector mainly covers the tools and machinery that developers and contractors use. It’s also known as “tool and equipment insurance” or “contractor equipment insurance” for this reason.

Numerous property kinds utilized by builders, contractors, and developers are covered by these insurance policies, including:

• Tools, gear, apparel, and supplies used by contractors (e.g., hammers, drills, generators, electric saws, wood, drywall, etc.)
• Mobile machinery, such as cranes, loaders, forklifts, and excavators
• Equipment that has been rented or borrowed (such as electric generators and forklifts)
• Computer hardware and data (tablets, laptops, and data from individual projects)

Items will be covered by policies either at replacement cost or at the fair market value of lost or stolen property. Examples of covered events under this kind of insurance are:

• Tools taken from a construction site
• Equipment or tools broken during delivery to a job site
• On a job site, equipment damaged by a fire or natural disaster

Other expenses that might be related to the theft or damage of contractor tools and equipment are also covered by this type of insurance, such as:

• After a reported incident, cleanup of pollutants and debris
• Expenses associated with delays brought on by a covered incident

6. Bonds for Contractor Licenses

Like insurance policies, contractor license bonds are contracts that ensure a contractor will abide by the rules relevant to their specific contractor license. The primary distinction between this and an insurance policy is that, even though the contractor purchases the bond, its purpose is to safeguard the public and all parties with whom the contractor transacts business. Though they differ slightly from insurance policies, bonds are typically offered by insurance companies.

The cost of the bond to the contractor is typically determined by their credit score and past income history. Additionally, a construction specialist’s bond will cost less the better their track record.

It is mandatory for contractors to carry a contractor license bond in certain states, industries, and types of construction contracts. In certain cases, additional bonds will be needed.

See this comprehensive guide on contractor license bonds and their operation for additional information regarding license bonds for the construction industry.

7. Bonds for construction

Essentially, the purpose of construction bonds, also referred to as contract bonds, is to “guarantee” that a construction project or contract will be completed if it is accepted. There are various kinds of contract bonds, including:

• Bid bonds serve as a guarantee for the seriousness of project bid proposals and the contractors’ ability to fund the project should their bid be selected.
• Performance bonds are used to make sure contractors follow the guidelines and complete the tasks outlined in the project contract.
• Payment bonds are used as insurance against the contractor’s inability to pay suppliers, laborers, and subcontractors.
• Maintenance bonds, also called warranty bonds, are used to safeguard the project owner against subpar materials or work performed by the contractor for a certain period of time after the latter’s work is finished.
• Subdivision bonds are used to promise a city, county, or other local government that the property will be developed in compliance with the rules and regulations in the area.
• Bonds for site improvements offer the same assurances as those for subdivisions, but they are limited to newly constructed properties.
• Supply bonds serve as a guarantee that suppliers will deliver goods, materials, etc. in accordance with the terms of the contract.

8. Insurance for Workers’ Compensation

The purpose of workers’ compensation insurance, commonly referred to as workers’ comp or workman’s compensation, is to safeguard contractors and businesses in the event that one of their employees is hurt at work. It accomplishes this by paying for the following expenses following a covered incident:

• Medical costs
• Lost pay
• Ongoing medical expenses associated with an injury
• Legal costs if an injured party brings a lawsuit against the policyholder
• Funeral expenses and benefits upon death

Like other insurance on this list, workers’ compensation covers more than just the construction sector, but it is a crucial component of coverage for construction companies that intend to hire staff. In actuality, almost every state has legislation requiring workers’ compensation insurance.

Workers’ compensation coverage is provided by insurance companies such as Progressive, Nationwide, and The Hartford to a variety of business types, such as electricians, plumbers, general contractors, and HVAC technicians.

Requirements for Construction Insurance

Is construction insurance required, one may wonder?Actually, it’s not just necessary, but required in a lot of situations.

Legally, commercial auto insurance is mandated. Laws governing the minimum requirements for auto liability insurance are in place in every state and at the federal level. The majority of states also have legal requirements for workers’ compensation; however, the specifics differ depending on the state and the size of the company.

Although many construction contracts require the contractors to purchase insurance for the projects they describe, state and federal laws will not require the other types of construction insurance. It is not usually necessary for smaller contractors to carry insurance for the projects they take on, and in most cases, they won’t when they work directly with homeowners. However, when big organizations—such as universities, local governments, and large corporations—assign large construction projects, they nearly always demand that commercial developers and contractors maintain insurance that covers the project’s various insurable aspects. Even though the project sponsor is almost always responsible for covering these costs, the contractor still needs to locate and obtain a policy.

These project contracts usually stipulate that the contractors must have builders risk, workers’ compensation, and general liability insurance at the very least. Much less frequently, surety bonds and inland marine insurance will also be needed.

The project sponsor or the project contract will typically not require the higher limits and protection offered by professional liability coverage, excess liability, or umbrella policies. However, for contractors and companies involved in lawsuits following covered incidents, this coverage can be quite helpful.

Costs of Construction Insurance

Because construction insurance covers a wide range of policies for a wide range of scenarios and can be purchased by a wide range of policyholders, there isn’t a clear-cut answer to this question. Furthermore, the policies’ potential buyers—developers, contractors, and property owners—have choices regarding the extent of coverage they desire.

Factors Influencing Construction Insurance Prices

The price of construction insurance plans will vary depending on a number of variables. Despite the fact that construction insurance policies are all offered separately and have different coverage options, they are typically impacted by the same set of variables, which include:

• Credit history of named insureds, policyholders, and businesses
• Contractors’ and businesses’ experience
• The project or business’s size
• Where the project, company, or contractor is located
• Limits on coverage and deductibles

The cost of the construction insurance policies required for your project may vary depending on additional factors. Generally speaking, the underwriter uses these variables to calculate the risk of a covered loss or the likelihood of an insured project, contractor, or company.

The mean expense of building insurance

Even with differences in precise expenses, an approximation of the total cost of insurance coverage for different projects can be obtained. The approximate yearly rates for the different types of construction insurance policies are displayed in the following table:

The prices listed in this table only represent the average cost of these insurance policies across the country. Observe the wide range of these estimates. Various payment amounts may be paid by contractors, development firms, or homeowners, depending on the specifics of their projects as well as their individual safety and experience histories. In general, the cost of insurance is higher for contractors who take on greater risk.

For instance, the kind of projects undertaken and the claims history of development companies and construction contractors affect the cost of general liability insurance for them. In fact, construction contractors pay some of the highest rates for general liability of any profession due to the risk associated with construction projects. Excess liability and professional insurance policies are comparable. Lower risk contractors are less expensive to insure, even though the cost of policies can vary greatly.

How to Locate the Best Providers of Construction Insurance

Numerous insurance providers provide specific policies for the construction sector. In a perfect world, companies, builders, and homeowners could purchase all of their insurance plans from a single supplier, saving them money, time, and effort. When selecting an insurer, buyers should also take into account the following factors:

• Financial stability: Contractors and business developers should think about the insurer’s level of financial stability. The insurer might be faced with a significant financial burden in the event of a significant disaster. The insurer you select should ideally be among the more reputable businesses with a solid financial future.
• Customer service and reputation: When a claim is made, a policy is updated, or an inquiry regarding the policy needs to be addressed, policyholders will frequently need to communicate with their insurance provider.
• Coverage: It’s also crucial to confirm that the policy offers the full range of coverage. The policy’s protection should, at the very least, satisfy the bare minimum set forth by the state and the contract, if not more.
• Cost: Until you’ve given the insurer access to a large number of personal and project-related details, the cost of the policy will typically remain hidden. Therefore, it’s wise to get several quotes before choosing a provider. Insurers should be questioned by buyers regarding the discounts they provide, as it is common for contractors and project sponsors to reduce the total cost of the policy by simply applying discounts for which they are already eligible.

If you want to handle all of your construction insurance needs from one provider, the businesses on the following list fit that description and are worth considering.

The Top Commercial Developers and Contractors with Construction Insurance Providers

It’s common for contractors and commercial developers—particularly those who submit bids for big construction projects—to have to buy a lot of insurance. Insurance policy costs are often transferable to the project sponsor; that being said, contractors should still keep cost in mind as well, as any savings can be transferred to the project sponsor and used to bolster their bids for contracts.

Additionally, contractors might want to think about the construction experience of their possible insurance providers more than homeowners do. The buyer will find it easier to design the policy and file a claim with an insurer who has more experience with construction projects.

Top Construction Insurance Providers for Residential Owners

In most cases, homeowners and owner-builders are not the best candidates for the policies that are most effective for commercial developers and construction contractors. Generally speaking, these owners, who will also be the project sponsors, have the authority to demand that their contractors obtain insurance. However, they stand to gain if they insure the project themselves. The project sponsor may find it advantageous to investigate options and obtain the best rates and coverage available, as they will be responsible for paying for coverage in the end.

Homeowners want insurance companies that are not only very strong in customer service and pricing, but also have a lot of experience in construction. Ideally, the insurer should offer homeowners-focused coverage options. The best insurance companies for homeowners and owner-builders who offer construction insurance are those that we have listed below.

• Zurich
• The State Farm
• AIG