Types of Insurance Your Construction Business Needs
Insurance is a significant need and a major component of cost in the construction industry. It is needed by both general contractors and subcontractors. The property and casualty insurance coverages, which are important characteristics of contracts, are described as follows.
State laws governing this type of insurance vary, but the basic coverage in all states provides construction workers with on-the-job injury protection. The amounts of compensation for injuries, medical benefits, and coverage that employers must purchase are generally specified in the state laws.
This coverage protects the contractor from legal liability in the operation of the business. Types of coverage needed are:
- premises operations,
- products-completed operations,
- broad form property damage,
- personal injury liability,
- contractual liability, and
- underground damage, collapse, and explosion (only certain types of contractors have this exposure).
Careful consideration should also be given to the need for pollution liability and public liability exposure involving mobile equipment.
This insurance coverage provides protection to the contractor for the ownership, maintenance, and use of vehicles in the business or for personal use. The policy should be written to cover any vehicle for which there is exposure, whether owned by the contractor or not. The minimum limit should be $500,000 for combined bodily injury and property damage.
Excess Catastrophe Liability (Umbrella)
Most general contractors, and many subcontractors, are required to purchase liability insurance in excess of the basic coverages (for example, automobile liability, workers’ compensation, public liability, etc.). The excess coverage provides protection beyond the limits provided in a contractor’s basic coverage or, at times, provides broader coverage than the primary insurances.
An owner of a project will usually want the property insured during the course of construction and will either buy this type of coverage or require the general contractor to purchase it. The insurance is written to protect the owner and contractor should any problems arise with labor or materials used on the job. The carrier will pay if the project is damaged by fire, wind, hail, vandalism, or other covered perils during construction until the project is accepted by the owner.
This insurance coverage provides protection against subcontractor default. The contract is between the insured, usually the contractor, and the insurance company. Thus, subcontractor default insurance is a two-party contract. The insurance company reimburses the contractor for subcontractor default costs subject to limits and a deductible or co-payment. This type of insurance coverage may be known as subguard coverage.
Two other types of insurance products that are important to the construction industry are small captives and bonding.
A captive insurer is a legal entity formed primarily to insure the risks of one corporate parent company, or a number of affiliates, thereby reducing the parent company’s total cost of risk. Captives are usually domiciled in a specialized location, either onshore or offshore. The term “small captive” refers to a captive insurance company typically created by midsize companies writing less than $2.2 million in premium (threshold effective January 1, 2017). Should the captive meet certain risk distribution and risk shifting elements and qualify as an insurance company for US federal tax purposes, they can then elect to be taxed only on investment income. Captives that make this election often insure risks that are characterized with historically high-severity and low-frequency losses. According to Marsh’s 2015 benchmarking survey analysis, Construction has the largest percentage of Small Captives by industry at 17%
Read principal Chris Benko’s article on bonding capacity to learn more.
After years of experience working with construction companies, we know that protecting your business from risk requires a deep understanding of the industry. Depending on your company’s needs, it may help to meet with your trusted advisor at Apple Growth Partners to facilitate a discussion with a qualified insurer to identify the tools and techniques that allow you to accurately manage and control risk.