Insurance in Construction

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Insurance is one of the larger indirect costs on a construction project. Typically, a general contractor’s insurance is based upon the contract with the client as well as other minimum standards the general contractor may have for themselves. Often, contracts with clients will not only include the minimum insurance required of the general contractor, but the minimum required of their subcontractors as well. General contractors must make sure that their subcontracts include these minimum requirements or else be unable to enforce the requirements set upon them by the client.

Understanding Requirements

Contracts with clients will typically have a section for insurance ranging from one page to many, many pages. General contractors must understand what is expected of them or face repercussions later such as penalties or litigation. If a general contractor(GC) fails to include all of the specific insurance requirements of their subcontractors in their subcontracts, the GC will be unable to force the subcontractor to obtain that insurance. Once a subcontract has been obtained, the GC must immediately request copies of insurance from the subcontractor and continually obtain renewed insurance policies until the project is complete. Keeping a good tracking system is key in order to maintain current records.

Standard Insurance Requirements

Minimum insurance requirements will most likely include the general contractor as well as their client being listed as additional insureds. Naming the project on the policy is also commonly required. Standard insurance coverage expected of a subcontractor for many projects is two million for general liability, one million for automobile liability, and one million for workers’ compensation and employers’ liability. Insurance coverage will vary for the general contractor depending on the size of the project.

Commonly Overlooked

It is imperative that general contractors receive general liability policies that include both ongoing operations and completed operations, which covers litigation after the project has finished. If the policy only states ongoing operations, the policy is no longer applicable once the subcontractor finishes their work. The general contractor must request the “products-completed operations hazard” from their subcontractor in order for the policy to cover litigation after the subcontractor has completed their work. This is essential since most construction issues arise a year or years later. Many insurance companies will initially not provide the completed operations clause so GCs must check all insurance policies when received.

Atypical Insurance Requirements

Umbrella insurance may be required on top of general liability insurance on larger projects. Some contracts will also require a waiver of subrogation which waives the right of the insured’s insurance company to seek recovery from the additional insured’s insurance. This has become more commonly practiced as insurance companies are more consistently seeking recovery from each other. Some projects will use wrap-up insurance instead of requesting each subcontractor to purchase their own insurance policies. Wrap insurance is a liability policy that serves as an all-encompassing insurance, which protects both general contractors and subcontractors. These policies are used for construction projects typically over $10 million. Wrap insurance can be expensive but since it is typically divided among the contractors, the cost can be mitigated. These insurance policies allow GCs to know that their subcontractors are within compliance as well as stops the cycle of insurance companies seeking recovery from one another.

When receiving bids from subcontractors on projects, GCs must remember to communicate any atypical insurance requirements for these projects. Otherwise, a bid can be underestimated and problems can arise later on. There are many other insurance requirements that can make it confusing and difficult to grasp. Working closely with insurance companies to gain a better understanding of insurance documents can help alleviate confusion among subcontractors and GC’s.

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Photo Credit – Trius Construction

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