“Acme General Contracting, LLC: Licensed and insured!”
If you’ve ever retained a home-improvement contractor, you’ve almost certainly received enthusiastic assurances that he or she is “licensed and insured.” But what exactly does that mean the context of a construction project? What varieties of insurance coverage should contractors have, and in what amounts? Do you as the homeowner have rights under your contractor’s policies, and if so, how do you exercise them? And for the contractors out there, what should be on your mind as you ponder your risk-management program? Read on to find out.
Types of Construction Insurance
Construction projects are multifaceted, and so are their insurance needs. Each type of insurance plays a role in risk management, addressing specific potential liabilities. Whichever side of the project you are on, it is important to understand the nuances of each coverage.
- Commercial General Liability: No construction professional’s insurance portfolio is complete without commercial general liability (“CGL”) coverage. In a nutshell, CGL policies cover liability arising out personal injuries and property damage on the job site. So, if someone – e.g., a subcontractor, the homeowner, etc. – gets hurt on site or the contractor’s operations damage the owner’s existing property, the contractor’s CGL carrier should cover the injury or loss. It is important to note, however, that CGL policies rarely, if ever, cover poor workmanship. Instead, the contractor typically must bear the cost of correcting its own deficient work. Likewise, CGL policies usually do not cover the fixtures, materials, and equipment to be installed on the project.[1]
- Workers’ Compensation: In most states, including Massachusetts, employers must carry workers’ compensation insurance.[2] As the name suggests, workers’ compensation policies generally cover jobsite injuries to the insured’s own employees. Thus, it often works in tandem with CGL coverage, except unlike CGL coverage – which applies to all (or nearly all) project-related injuries – workers’ compensation coverage applies only to the insured’s own employees.
[1] See the section below on builder’s risk insurance.
[2] One notable exception: Members of a limited liability company, partners of a limited liability partnership, and sole proprietors of an unincorporated business are not required to carry workers’ compensation coverage for themselves.
- Professional Liability: In the construction context, professional liability insurance usually covers losses arising out of professional malpractice claims. For example, it would cover a claim for losses caused by a structural engineer’s miscalculation of a building’s snow load. Professional liability insurance typically is available only to those engaged in professional services, as that term is defined under the policy. Usually, this means architects, engineers, and other design professionals, not general contractors and their subcontractors. But be careful. It is the nature of the work performed, not the entity performing the work, that determines whether professional liability insurance is needed. So, a general contractor that sometimes performs professional design work – either itself or under an agreement with another entity on a design-build project – can and should have professional liability coverage.
- Builder’s Risk: Builder’s risk insurance policies fill a gap left by most CGL policies. Namely, while CGL policies typically exclude damage to the materials, fixtures, and equipment the contractor has installed or plans to install, builder’s risk policies cover these losses against certain enumerated perils, including fire and vandalism. So, if an overnight fire rips through a structure and destroys boxes of hardwood flooring slated to be installed the following day, builder’s risk insurance would cover the cost of replacing the lost flooring. Note, however, that builder’s risk coverage remains in effect only while the project is ongoing. After completion, the owner’s property insurance should pick up where the builder’s risk coverage leaves off.
- Excess Liability: Excess or umbrella liability policies provide an additional layer of coverage over and above a contractor’s or design professional’s primary insurance policies. Thus, if a contractor’s CGL policy has, say, a limit of, say, $1 million, per occurrence, an excess policy may provide several million in addition coverage after the initial $1 million has been exhausted. This extra coverage can be considered critical for larger projects or for projects involving inherently dangerous activity (e.g., removing hazardous waste).
Considerations for Project Owners
Understanding the types of available insurance is only half the battle, though. Project owners also would be well advised to do the following.
- Evaluate Project-Specific Risks: No two construction projects are the same. To determine which insurance coverages are needed and in what amounts, owners should carefully evaluate projects on a case-specific basis. For larger or more complicated projects, more insurance, including excess policies, may be appropriate.
- Understand Policy Limits and Exclusions: A policy’s “limits” are the carrier’s maximum exposure for a covered event. Generally, policies include two limits: a per occurrence limit for any single event and an aggregate limit for all occurrences over a single policy period (typically one year). Thus, a CGL policy may have $1 million limit for each discrete, insurable event and a $2 million aggregate limit for all losses over the policy period.
- Insist on Contractually Mandated Coverages: All construction contracts should specify the types and limits of insurance the contractor must carry for a particular project. The contractor also should guarantee by contract that its subcontractors will carry the same or similar insurance programs.
- Factor in Additional Insured Provisions: Additional insured endorsements extend a policy’s coverage from the named insured (i.e., the contractor procuring the coverage) to other entities with an interest in the project (i.e., the owner, engineer, etc.). Generally, this provides the owner with the same rights as the contractor to report claims, demand a legal defense, and receive indemnification against covered losses.
Considerations for Contractors
From the contractor’s perspective, the following is advisable:
- Work With a Broker: Not sure what your insurance needs are on a project-specific basis? Check with an experienced insurance broker. An insurance broker will understand your business and its risks and will recommend appropriate policies and limits for the work you intend to do. Don’t rely on guesswork when it comes to risk management.
- Understand Your Contract: As discussed, a contractor’s insurance requirements generally are described in its construction contract. Although contractual insurance provisions may make your eyes glaze over, do not ignore them. If you have questions about what is required, call your broker. Or your lawyer!
- Maintain Adequate Limits: You should regularly review coverage limits to align with project risks. As your business grows and the complexity of your projects increases, consider upping your policy limits to be commensurate with the level of risk you have taken on.
- Implement Safety Protocols: Stringent safety measures not only mitigate risk but may also lower insurance premiums. Generally, fewer and smaller claims will result in lower insurance costs.
Common Issues
Although this primer never could address the myriad insurance-related issues that may present on a construction project, the following should be kept in mind:
- Prompt Reporting: Most insurance projects require prompt reporting of potential claims as a precondition to coverage. If the carrier can show that its insured delayed in reporting a claim and that the carrier suffered resulting prejudice – for example, lost opportunity to investigate the claim and/or control the insured’s defense – it may deny the claim, leaving the insured to cover the losses out of pocket. The solution? If there is any doubt about whether an occurrence gives rise to a covered claim, make the report. If the claim never matures, the claim can be closed easily enough. Better safe than sorry.
- Coverage-Related Disputes: If the carrier wrongfully denies your claim, be prepared to fight for your rights. Insurance policies are considered binding contracts, and as with any other contract, there are consequences if the carrier declines to honor its end of the bargain. In addition to standard contractual remedies, many states have enacted statutes imposing stringent standards for evaluating insurance claims and prescribing serious consequences for carriers who engage in bad-faith claims handling.
- Certificates of Insurance: A certificate of insurance is a summary of an insured’s insurance program. It typically identifies the insured’s policies, the limits of those policies, and the effective dates of the policies. Many construction contracts require the parties to share insurance certificates upon request or at various intervals as proof that contractual coverage requirements have been met and maintained.
Conclusion
Don’t chance it. Speak with a broker; get insurance; understand your coverage; and don’t sleep on your rights. And if you have any questions about what your rights are, call your lawyer. Again, don’t chance it.
Chris Sweeney is a Construction attorney and partner at the Boston-based law firm Conn Kavanaugh Rosenthal Peisch & Ford, LLP
He can be reached at csweeney@connkavanaugh.com
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