If you construct commercial or institutional buildings, you know the market for new construction has had its ups and downs. Contractors benefited from an uptick in commercial and multifamily starts in 2021 and 2022 only to see demand fall in 2023 due to rising interest rates and tight credit.
According to construction market research company Dodge Construction Network, higher interest rates, increased energy costs and continued political uncertainty mean a “return to broad-based growth in construction starts is still some time away.”
Contractors must also contend with building material inflation, a skilled labor shortage and catastrophic weather events. Transferring some of your financial risk can make the difference between surviving an adverse event and jeopardizing your company’s future. Here, we’ll look at some of the most important contractors insurance coverages you should consider.
Liability coverage is essential
One major lawsuit could be catastrophic for your company. Many things can go wrong on a project, from design mistakes and faulty workmanship to injuries and fires. You may also have additional risk exposure from your use of multiple subcontractors.
Commercial general liability (CGL) is a baseline policy all contractors need. CGL covers claims of property damage, bodily injury and personal injury to nonemployees. It helps with medical expenses, property damage, attorney fees, judgments and settlements.
The owner of a project will usually require the general contractor to have CGL coverage. Most general contractors also require proof of coverage from their subcontractors. And banks usually require contractors to have CGL insurance to get a loan or line of credit.
Bear in mind that CGL insurance by itself doesn’t cover workers if they’re injured on the job. For those types of claims, you’ll need workers’ compensation insurance. CGL doesn’t cover professional or employment practices liability, either. You can purchase these types of coverage separately.
If you’re a general contractor, you’ll want to make sure the subcontractors you hire, particularly critical- path subs, carry sufficient liability coverage. One way to ensure that everyone who works on a large project is adequately covered is to use a wrap-up policy, or controlled insurance program.
A wrap-up insures your company and your subs. Either you or the project owner can purchase the policy. Wrap-ups usually include CGL and workers’ comp and may sweep in other policies you need for a job. The advantage of a wrap-up is that you or the owner controls the coverage. This can give you peace of mind while reducing the overall insurance costs for the job based on economies of scale.
Commercial auto and property insurance
You’ll need commercial auto insurance for your trucks and vans. Commercial auto covers costs from property damage and liability. You may also need insurance for heavy equipment and machinery. Commercial coverage allows you to name your employees on your policy as additional insureds so they are financially protected when they are operating your vehicles.
Pricing for commercial auto coverage depends a lot on your fleet’s loss history. Safe driving is the key to holding the line on premium increases, so consider instituting a safety program and monitoring driver behavior through telematics.
As you weigh your risk management decisions, be aware that premiums have increased considerably. Your agent or broker can negotiate with insurers to get the higher insurance limits required for large projects, as well as the best terms and prices.
With all the uncertainty in the commercial construction market, be sure you’re well-positioned to take advantage of new opportunities when they come along. Make risk management a key aspect of your planning. Securing the appropriate protection takes time, but it will pay off if you have a large claim or loss.
Commercial property insurance covers your business property, including buildings, office equipment, computers, furniture, supplies, tools and materials. Check the types of perils your policy covers and whether your limits are high enough.
Most property insurance policies only cover items located at your business address. You’ll probably need to purchase a separate inland marine policy to cover tools and equipment you transport to and from job sites.
Workers’ compensation insurance
Workers’ compensation insurance is essential for any contractor who has employees. It’s required by law in nearly every state. You can usually purchase it in the standard insurance market. Some states have their own purchasing arrangements, and most offer coverage through assigned risk pools if you are declined by regular insurance companies.
Workers’ comp provides benefits if one of your employees is hurt on the job or becomes sick from work-related exposures. Many health and safety programs are designed to help construction companies lower their workers’ comp premiums. Adhering to Occupational Safety and Health Administration requirements and state regulations is a good first step. By making safety awareness part of your work culture, you can reduce accidents and your workers’ comp premiums.
Builders risk insurance
Builders risk insurance, or course-of-construction insurance, covers hazards from ground-up construction as well as renovations and remodeling. Builders risk allows for multiple insureds on one policy. Usually the owner, general contractor, subcontractors, architect and lender are named on the insurance contract, depending on who has a financial interest.
Builders risk covers property losses for building materials, supplies and equipment while on-site or in transit. Like a property insurance policy, builders risk protects against many perils, including theft and vandalism, fires, hurricanes, earthquakes, lightning, explosions and sewer backups. The coverage remains in force until the project is completed.
Builders risk policies can cover soft costs, such as additional interest on a loan if the project is delayed. You can also add loss-of-earnings coverage to protect against lost income if a commercial building doesn’t open on time.
Understand that builders risk losses have increased in recent years, especially due to natural catastrophes. This has led to higher premiums and constrained availability of coverage.
Surety bonds for large projects
Many commercial and most institutional projects must be bonded. Almost all public projects require bid and performance bonds, which protect the owner (obligee) if the contractor (principal) defaults. Surety companies, which are regulated by state insurance departments, issue these bonds based on their examination of a contractor’s financials, past job performance, managerial experience and capacity to take on new projects.
Underwriting for bonds is usually extensive. You’ll be asked to provide the following:
- CPA-prepared financial statements going back several years
- Tax returns
- Balance sheets
- Work-in-progress schedules
- References
- Letters of recommendation
Bonding is important because it ensures the contract will be executed as agreed to by all parties. In the event of a default, the surety company will step in and take over the project. An insurance agent who specializes in bonding, known as a surety bond producer, can help you secure a surety bond.
Work with an insurance professional
Insurance for contractors requires knowledge of the construction industry, including the opportunities and constraints in the insurance market. Working with an insurance professional can save you time and help you get the best financial protection.
