A basic mechanism for managing risk on construction projects is insurance. Insurance policies provide two basic benefits: protection from losses arising out of covered claims; legal representation for covered claims. There are numerous kinds of insurance coverage available for a construction project. It’s worth carefully assessing your risks and matching them with the appropriate coverage.
Commercial General Liability Insurance (“CGL”). CGL coverage is a basic business liability policy. Typically, a CGL policy provides only “first party” coverage: it protects only the parties named in the policy. Third parties, such as an injured bystander, cannot submit a claim to the insurer. It is therefore important to ensure that all of the parties required by contract are included as “named insureds” or “additional insureds.” However, in doing so, the additional insureds are then made first party claimants should they be sued by a third party
Property Insurance. Property insurance provides protection against most risks to property, such as fire, theft and possibly weather damage. Special forms of property insurance include flood insurance, earthquake insurance, home insurance, and boiler insurance.
Builder’s Risk Insurance. Standard property insurance policies do not cover losses to new improvements to the property. Builder’s risk insurance provides coverage to new improvements for damage to the work during construction, including installed materials and equipment as well as permanent structures. Typical exclusions from builder’s risk policies are land, existing structures, tools and machinery not part of the new permanent structure, contractual liabilities and faulty workmanship. Builder’s risk insurance does not provide liability coverage in the case of loss to another party. Both the owner and the general contractor are typically named insureds under a builder’s risk policy. Subcontractors are sometimes also named insureds.
Professional Liability Insurance. Professional liability insurance provides malpractice coverage to construction designers such as architects and engineers for defects or deficiencies in the design aspects of the project, and for any deficiencies in the project administration responsibilities undertaken by the design professional. To the extent that a construction manager or the general contractor has a licensed designer on its staff, or if they have design responsibilities, the GC or CM should have an additional design insurance policy.
Excess/Umbrella Insurance. Additional coverage for construction parties is readily available in the form of “excess” or “umbrella” policies. It is a good practice for construction contractors to procure liability insurance in addition to their CGL coverage in the form of excess insurance policies. The additional coverage is implicated only when the underlying insurance is exhausted. It is important to give prompt notice to both insurers if a claim arises. This is so even if the two policies are issued by the same insurer as the insurer typically assigns two adjusters to the claim, one for each policy.
Other Policies. Besides the policies described above, there are also other policies typical on construction projects including worker’s compensation, automobile/vehicles, directors and officers, so called “wrap” policies (essentially insuring all parties to the project), and products completed operations hazard policies.