Construction / 4 min read
Managing Risk in Construction: Insurance Basics for Contractors
There are inherent risks in every construction project, including workplace injuries, delays, and defective work. All businesses must plan for how they will handle these risks.
The process server hands you the lawsuit—you've been served. Now what? The first thoughts that may go through your mind are: Am I responsible? How much am I at risk? Who is going to pay for this claim? Fortunately, if you have planned ahead and secured the right insurance coverage, you may be able to shift that risk to your insurance company.
The first step is always to provide the lawsuit to your insurance company to place it on notice of the claim. They may be able to help you determine what insurance coverage is available.
It may sound simplistic, but reading the lawsuit to determine what is being claimed is essential to determining coverage. This will determine what type of insurance may cover the damages being sought (in legal terms, this is called indemnification). For example, if the claim involves someone being injured in an automobile accident caused by one of your vehicles, you would look to your auto insurance. If the claim involves defective work, it may fall under several different policy types.
Common Insurance Policies for Contractors Commercial General Liability (CGL):
CGL coverage is considered general-purpose insurance that covers bodily injuries and damage to someone else's property. This type of policy typically covers legal expenses, settlements, and judgments for claims made during the coverage period, including completed operations, up to the policy limits.
A full analysis of CGL coverage is beyond the scope of this article, but here are a few helpful pointers:
- Occurrence-Based Coverage: Using the policy terms, CGL policies provide coverage for an "occurrence" that causes "property damage" or "bodily injury." These are defined terms and their meanings are often hotly contested by insureds and insurers. Their application depends heavily on the specific facts of each case. When seeking insurance coverage, always consult a competent attorney.
- Exclusions and Exceptions: Insurance policies contain exclusions—certain types of claims that are not covered—unless there's an exception to that exclusion (which would reinstate coverage). Important to contractors are the business risk exclusions, such as those for the "contractual assumption of liability," "performing operations" (i.e., damage caused to property while work is ongoing), "faulty workmanship," and the "Your Work" exclusion.
- The "Your Work" Exclusion: This frequently debated exclusion means insurance typically will not cover your own defective work. However, there are exceptions. Coverage may apply to:
- damage to your work arising from work performed by subcontractors, or
- damage to a subcontractor's work arising from your work.
- Duty to Defend: Another critical issue is whether your insurance carrier is obligated to defend you in the lawsuit, or if you'll need to hire and pay your own attorney. This is known as the insurer's duty to defend. Courts determine this duty based solely on the plaintiff's allegations (regardless of their truth) and the policy's language. If the claim potentially falls within coverage, the insurer generally must defend.
It's worth noting that an insurer may have a duty to defend, but not a duty to indemnify. Unlike the duty to defend, indemnification is based on the actual facts and evidence—not just the plaintiff's allegations.
Builder's Risk Insurance:
Builder's risk insurance protects the contractor's work during the construction period. This insurance may be carried by either the owner or contractor. It covers property damage due to fire, weather, explosions, theft, and Acts of God. It may also cover indirect losses such as lost sales, rental income, or extra interest on construction loans.
Workers' Compensation Insurance:
Employee injuries are covered by workers' compensation insurance. In Texas, having workers' compensation coverage protects employers from most other legal remedies related to workplace injury or death, provided the injury wasn't intentional or caused by gross negligence. Employers without this coverage lose access to many legal defenses, such as contributory negligence, assumption of risk, and the fellow servant rule.
Commercial Auto Insurance:
As you might expect, commercial auto insurance covers your employees' activities while driving company vehicles. It may include bodily injury liability, property damage to others, and damage to your own vehicles.
Errors and Omissions (E&O) Insurance:
E&O insurance is professional liability coverage that protects you from claims involving mistakes, negligence, or failure to perform professional services properly. While a CGL policy covers events like physical damage, an E&O policy is triggered by an error, omission, or act that results in liability during the performance of professional services. Contractors offering advice or design services should always carry E&O coverage. E&O insurance generally protects against claims of faulty workmanship, use of improper materials, and professional negligence.
Additional Policies to Consider:
Other important types of insurance not covered in detail here include:
- Inland marine insurance
- Pollution liability insurance
- Subcontractor default insurance
- Wrap insurance (e.g., OCIP, CCIP)
If you are sued—whether as an owner, contractor, subcontractor, or design professional—the first thing you should do is contact a competent attorney experienced in construction law and insurance claims. Your attorney can ensure your insurance carrier is properly notified and that all potentially responsible parties are placed on notice.