Construction insurance protects you from losses incurred due to errors, mistakes, and any unforeseen events leading to damage during the construction of a building. This is the type of insurance construction companies take out before beginning a project to ensure financial compensation and full coverage.
What is Construction Insurance?
Construction insurance is one of those types of policies that not everyone knows about but is considered crucial in the construction industry. You see, construction projects are extremely risky endeavors that when derailed, even at the slightest, can cost construction companies massive losses.
Without construction insurance providing the protection against financial losses, construction companies end up paying out of pocket to correct mistakes, deal with lawsuits, and compensate affected parties involved in bodily injuries all while trying to finish their construction project to get paid by the end customer.
This makes construction an industry where you lose money if you don’t have protection of any sort.
Without insurance companies providing construction insurance, construction companies have an excuse to raise the premium of their services to cover damages incurred. In the end, the customer loses the most.
So that’s why construction insurance is important. As a customer looking to have a project built, it is in your best interest to make sure the construction company you hire has construction insurance to cover those losses should any unexpected event occur.
Types of Construction Insurance
There are different types of construction insurance so that the contractor or construction company can choose which policy is best suited for their needs for the project they are about to undertake.
Now as the property owner, you can secure an insurance policy that covers the protection of your existing building prior to construction. The contractor or construction company then gets their own insurance policy that covers their own interests to avoid massive losses during the project undertaking.
Here are the types of construction insurance property owners and construction companies can avail:
Builders Risk Insurance
This is the most basic type of construction insurance. The reason for this is because a lot of things can happen during a building’s construction. During the construction process, any delays can quickly rack up losses due to delays in payment.
As an industry standard, construction companies are only paid a certain percentage at the start of the construction and receive reimbursements as the project progresses with the completion of the payment at the end of the process.
Some companies may even be subject to a security deposit in case issues arise after the handover. Technically, a construction company is at the losing end of the deal during the beginning of the build and can only recoup their finances once the building is completed.
This is why Builders Risk Insurance is important.
Builders Risk Insurance protects you from damage incurred while the project is under construction due to these risks:
- Fire (including explosions)
- Weather (including lightning and hail)
- Theft and Vandalism
- Acts of God (including hurricanes)
Types of Property covered under Builders Risk Insurance:
- Building materials
- Foundations
- Landscaping
- Outdoor Fixtures (including paving and fences)
- Scaffoldings (and other temporary structures)
Builders risk is applicable to any of these construction projects:
- Residential new construction, remodeling, or replacement projects
- Model or display homes
- Commercial properties
To get the most coverage out of your builders risk construction insurance, get the premium package.
Commercial General Liability Insurance (CGL)
Commercial general liability insurance has a broad scope of coverage. What it typically does is protect your business in case it is involved in an incident involving bodily harm, physical injury, faulty workmanship, and/or defamation.
It can also cover non-professional negligent acts that can result in the damages mentioned above. Basically, anything that falls outside of the professional liability insurance you have is covered by this type of insurance.
Commercial Vehicle Insurance
Commercial Vehicle Insurance protects you from exorbitant vehicle repair costs, medical expenses, and/or vehicle-related lawsuits.
Commercial auto insurance also has these additional coverage options as standard features:
- Liability Coverage
- Physical Damage Coverage
- Medical Payments Coverage
- Uninsured Motorist Coverage
Any type of vehicle that is used for commercial purposes should have this type of insurance applied.
Contractor License Bonds
Contractor License Bonds are legally binding contracts that protect clients and the general public to ensure fulfillment of contractual obligations that the contractors or construction companies enter into. This ensures financial compensation should there be non-completion of a task or a defect is found.
This is typically offered by insurance companies but falls under a different class of insurance policy. Contractors purchase this bond with a value in escrow held by the insurance or surety company until the contract or obligation is fulfilled.
The cost of the bond varies from one contractor to another based on the company’s track record. Needless to say, the cost of the bond is less expensive the better the track record of the contractor or construction company.
These also fall under contractor license bonds, or more specifically construction bonds:
- Bidding bonds – this ensures all bids entered are submitted by a company as it has a value based on the amount of the project to be undertaken.
- Performance bonds – this ensures construction companies complete the task with strict adherence to the standards set by the industry.
- Payment bonds – this ensures all payments are made to subcontractors, laborers, and suppliers.
- Subdivision bonds – these ensure the locale where property development is to take place will adhere to the strict laws, local guidelines, requirements, and/or mandates set by the city, county, or local municipality.
- Site improvement bond – regarded as a smaller scale subdivision bond as it only guarantees the development of existing structures to be improved.
- Supply bonds – obligates suppliers to deliver building materials and supplies with the quality and quantity agreed upon by the parties involved in a timely manner and to the construction site specified.
- Warranty bonds – this protects the building owner from defective or shoddy workmanship for a limited amount of time after the project completion. Also known as maintenance bonds.
Workers’ Compensation Insurance
This is a state mandated insurance providing coverage for lost wages and medical aid in the event of a work-related injury involving any employee. This protects construction companies from suffering massive losses as the lost wages and medical aid is shouldered by the insurance company up to the amount stated in the policy.
This insurance policy also covers the following:
- Legal fees should the injured party choose to sue the company or policy holder
- Recovery costs for the injured
- Death benefits including shouldering the funeral costs
This insurance policy is also consulted before the injured party returns to work.
Environmental Insurance
Any construction project has a negative effect on the environment. Massive amounts of dirt and debris can be displaced as well as unintended release of toxic or harmful fumes. Environmental Insurance covers against pollution and can provide compensation for any adverse environmental effects if someone should choose to sue.
Note: when securing a building or renovation permit, the local municipality does stipulate that construction companies have to adhere to strict practices that lessen the environmental impact.
Professional Liability Insurance
Professional liability insurance provides coverage against acts, errors and/or omissions of design and offered services. It protects construction companies in the event that they are sued for negligence leading to bodily harm, injury, or death.
Contractor Equipment Insurance
This is a broad scope type of insurance that covers owned or rented properties and equipment stored, in transit, or used in operation. In the past, it also covered ocean bound marine vessels.
Here are other things covered by this type of insurance:
- Tools, clothing, equipment, and other construction supplies
- Mobile or heavy equipment
- Computer equipment (including digital information)
- Communication tools (including cellphones, walkie-talkies, tablets, etc)
- Assorted materials and equipment declared as essential to construction
As stated above, this insurance policy covers owned, rented, leased, or borrowed equipment. It protects construction companies in the event of losses due to damaged, missing, or stolen equipment. It also covers damage caused by fire or other natural disasters at the construction site or in transit.
“It’s better to have it and not need it than to need it and not have it at all”
That’s essentially what insurance policies are. But due to revisions in the construction industry’s standards, a bare minimum was set to ensure basic protection for construction companies and project owners alike.
Before undertaking any project, it’s best to know the type of construction insurance required as set by the local municipality, city, or locale before looking at specialized construction insurance policies that increase your coverage.
This helps save money outright and in the long run. It also makes sure you will get fair compensation should any unexpected incidents happen that cause delays, injury, bodily harm, and/or death that can result in massive financial losses.
For help in understanding types of insurance policies give us a call! We have the expertise and the software management tools that can efficiently help you track certificates of insurance for proper risk management.