Managing risk is a foundational part of operating a construction company. Job sites can be dangerous, and operating without the appropriate insurance coverage can lead to both financial and human catastrophe. However, many general contractors, especially residential general contractors, operate with significantly more liability exposure than they’re aware. In fact, many general liability policies specifically exclude core functions of the construction industry. Such exclusions lead many construction companies to unwittingly operate without essential protection.
Broadly speaking, general liability insurance protects the insured from third-party claims of bodily injury or property damage as the result of a covered occurrence. That protection is subject to several conditions, such as whether the injury or damage occurred during the policy period. Policies also often delineate several other exclusions to coverage that specifically impact the construction industry because of its high-risk nature.
For example, many insurers attach exclusions to contractors' and subcontractors' policies that target common types of construction defects claims, such as mold and damages attributable to the use of External Insulation Finishing Systems (EIFS) on the building. Other common exclusions include demolitions, work with explosives, and other particularly high-risk activities.
However, some general liability coverage exclusions are even more wide-ranging and could represent an existential threat to the construction company that unknowingly purchases a policy with such exclusions.
Exclusions which are common in general liability policies and carve out massive slices of construction-related activity from your protections include:
- Blanket exclusions for residential construction, which removes coverage relating to any operations in connection with property intended for habitation.
- Earth movement and subsidence exclusions, which remove protections for damage caused by events such as a foundation moving, sliding, or cracking. Some of the largest property damage claims in construction are related to the foundation.
- Subcontractor exclusions, removed using a form called CG 2294. This is a particularly onerous exclusion. A standard general liability policy covers damage that your work causes and that of your subcontractors. CG 2294 removes coverage for damages caused by your subcontractors’ work, which could represent a vast majority of the work done on a project. In this case, it’s imperative that you confirm all of your subcontractors are insured themselves.
- Roofing operations exclusions which identify several factors during roofing work that may lead to a denial of coverage.
- Height limitations, which remove coverage for work done on buildings in excess of three stories or 35 feet of height.
The problematic nature of these exclusions is two-fold: they fundamentally diminish the protection the general contractor may think they are purchasing with the policy, and the exclusions are difficult to find. Rather than being spelled out in the certificate of insurance, these exclusions are generally baked deep within the policy documents of the coverage. As a result, even a general contractor who is diligent about keeping their policy up to date and collecting policy documents from their subcontractors may fall into an exclusion trap.