Types of Construction Insurance

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There are several types of insurance products used in the construction industry to cover potential losses. They include Commercial General Liability policies, builder's risk policies, and errors and omissions policies.

Commercial General Liability

Commercial General Liability (CGL) policies serve to protect the policyholder and any other named insureds for claims brought by third parties. Oftentimes, the construction contract will specify that the subcontractors must name the general contractor as an additional insured on their respective CGL policies.

Normally, both general contractors and subcontractors hold CGL policies that cover personal injury and property damage on either an occurrence or claims-made basis. For occurrence-based policies, it does not matter when the claim is made, just that the occurrence happened during the policy period. On the opposite side, claims-made coverage extends to claims that are made within the policy period regardless of when the occurrence leading to the claim happened.

CGL policies contain a general aggregate limit that states the most that the insurer will pay during the policy period for damages resulting from bodily injury, property damage, and personal and advertising injury. It is of utmost importance for a general contractor or subcontractor to be aware that, in some policies, the costs of defense incurred by the insurer will reduce the policy limits. Litigation costs in construction disputes can be substantial, sometimes even going so far as to exhaust the policy limits. As a result, additional protection is often purchased in the form of an “umbrella” CGL policy that would operate when the primary policy limits were exhausted.

Builder's Risk

Unlike CGL policies, which focus on losses incurred by third parties, a builder's risk policy is first party insurance, focusing on losses incurred by the policyholder as a result of damage to the project during construction. These policies are generally purchased on a project-specific basis and cover damages caused by fire, lightening, windstorm, hail, explosion, aircraft, motor vehicle, and vandalism. Notably, faulty workmanship and construction defects are excluded from coverage. Builder's risk policies will usually last from the start of construction to acceptance of the completed project.

Errors and Omissions

Policies for errors and omissions (E&O) cover the liability of design professionals for malpractice in the execution of their work. E&O coverage extends to the payment of defense costs, court costs, and any resulting judgments up to the policy limit. Liability for a design professional's negligence is not addressed in CGL policies, leaving the E&O policy as the primary protection tool for architects, engineers, and the like.