The responsibility for maintaining proper subcontractor insurance coverage within a construction company typically falls on the CFO; however, other competing demands often mean that the remote-seeming risk of a workplace accident takes a backseat to more pressing operational demands.
But leaving yourself or your company exposed to liability from either a work defect or a workplace accident can be a big mistake. By preparing for the worst-case scenario, you can make your life easier, especially if an audit happens.
This article covers basic concepts around subcontractor insurance, presents simple steps to mitigate risk for your company, and identifies some technology trends that may affect how the construction industry interacts with insurance.
A common way to manage risk is to pass it on to another party, and insurance is one such mechanism to transfer some of the risks that occur on construction projects.
Typically, the owner transfers risk onto the GC, which then passes risk onto each subcontractor via their subcontracts. The subcontractors then transfer some of their risk onto the insurance carriers via their insurance policies, and finally, the carriers transfer their risk onto reinsurance companies.
The Anatomy of a Policy
Insurance policies generally have the following structure:
- Declarations, also known as the dec page, summarize the key points about the policy such as the insured, policy limits, effective dates, and endorsements.
- Insuring agreements describe the scope of coverages.
- Exclusions highlight what a policy doesn’t cover. Standard construction policies typically have around 20 exclusions.
- Conditions provide details on the limitations and obligations of the policy.
- Endorsements detail the riders which alter the language or coverage of a policy.
In looking at the legal concepts of construction insurance, subrogation “occurs when a party’s insurer pays for a loss that was caused by, or the responsibility of, another party.”1
In general, prime contractors and their insurers do not find it desirable to be responsible for unnecessary risks from their subcontractors; and as a result, they will typically request that their subcontractors waive their rights in the subcontract. Additionally, the insurance policies of the subcontractors must also acknowledge and waive subrogation rights.
Additional insureds are additional parties whom the policy covers. As an example, an owner of the project may request to be one of the parties covered by the prime contractor or subcontractor’s insurance. While there are often limits and exclusions, the presence of additionally insured parties ultimately reduces the additional party’s risk.
Traditionally, parties working on a project have purchased their own insurance separately. A controlled insurance policy is when another party, like an owner or GC, purchases insurance for a project collectively. Controlled insurance policies are general liability only insurance, which are typically only used on larger projects exceeding $25 million in value.2
Common Insurance Policy Types
Commercial General Liability
Commercial general liability insurance policies cover liabilities arising from bodily injury or property damage. This policy is the primary mechanism of defending against third-party risk.3
This type of insurance coverage is not unique to the construction industry. However, construction-specific policies often have exclusions (e.g., contractual liability, acts of nature) or endorsements (e.g., additional insured, waiver of subrogation) added, which can result in disputes and litigation. The most common point of contention is coverages around defective work.
Professional liability insurance policies are construction’s equivalent of malpractice insurance, and they are usually focused on liabilities arising from professional work like architecture and engineering.
Auto insurance policies cover vehicles used during course of construction.
Pollution insurance policies cover environmental exposure to hazards like mold or asbestos.
Workers’ comp insurance policies cover injury to employees from duties. These policies are typically a first party coverage and are usually required by state law.
Umbrella coverage covers very large risks that might occur outside typical coverage amounts.
Builders Risk Insurance
Builders risk insurance policies cover damage to work either from negligence or acts of God.
Basic Best Practices
If you are running a traditional insurance program, here are some basic operational steps to implement: