Construction companies work in high-risk environments where accidents, property damage, and legal issues can arise at any time. Having the right insurance is crucial to protect a company’s assets, meet legal requirements, and fulfill contracts.
For contractors, choosing the right coverage can be challenging, but it’s important for keeping your business protected. This article will break down the various insurance policies that contractors and skilled tradespeople should consider. It’s a valuable resource for both contractors who want to ensure they have the right coverage in place.
UPDATED AT: August 12, 2024
The table below is a summary of the different types of insurance policies & bonding required for a construction company.
General Liability Insurance is essential for construction companies because it protects them against claims related to bodily injury, property damage, and advertising injury. In an industry where accidents are common, this insurance helps cover legal costs and potential payouts. For example, in the U.S., the construction industry reports about 150,000 injury cases each year, with the average slip-and-fall claim costing around $20,000.
Workers' Compensation Insurance covers employee injuries or illnesses that occur while performing job duties. It is a no-fault system, meaning employees receive benefits regardless of fault, and it protects the company from lawsuits related to the injury.
General Liability Insurance, on the other hand, covers claims of bodily injury or property damage that aren't directly related to an employee's job duties, such as if a client or third party is injured on-site. Workers' Compensation is typically the first line of defense for employee-related injuries, while General Liability covers incidents involving non-employees or those outside the scope of Workers' Compensation.
This coverage is crucial not just for accidents but also for incidents like a subcontractor's faulty work causing damage to a client's property. Additionally, most construction projects, especially those involving larger clients or public entities, require companies to have General Liability Insurance before work can begin. Having this insurance ensures that the company is financially protected and compliant with contractual obligations, helping to safeguard its operations.
Workers’ Compensation Insurance provides financial protection in the event an employee is injured on the job. This insurance covers medical expenses, lost wages, and rehabilitation costs, ensuring that injured workers receive the care they need without imposing a financial burden on the company. It also covers legal fees if an employee sues the company over a work-related injury.
Given the high-risk nature of construction work, where employees face a 75% higher risk of severe injury compared to other industries, this coverage is not just beneficial but often legally required. In fact, most states mandate Workers’ Compensation Insurance as soon as a company hires its first employee.
The average cost of claims for accidents that occurred in 2020-2021 was $41,757, which showcases the financial impact such incidents can have on a business. For instance, if an employee suffers a back injury while lifting heavy materials or is hospitalized after an accident involving construction equipment, Workers’ Compensation Insurance guarantees that the company can manage these costs without jeopardizing its financial stability.
Commercial Auto Insurance is particularly essential for construction companies that own or use vehicles for business purposes, such as trucks, vans, or other construction vehicles. This type of insurance provides coverage for liability claims, vehicle damage, and medical expenses that may arise from vehicle accidents.
Given that nearly 40% of all motor vehicle accidents in the construction industry result in injuries, this insurance protects both the company and its employees. The financial implications of such accidents can be significant, with the average cost of a commercial vehicle accident claim reaching $70,000.
For example, if a company truck is involved in a collision while delivering materials, or if a vehicle is vandalized while parked overnight at a job site, Commercial Auto Insurance ensures that the company is not left to bear the financial burden of repairs, medical expenses, or legal costs.
Builder’s Risk Insurance protects buildings and structures while they are under construction. This insurance covers damage caused by events such as fire, vandalism, theft, and certain natural disasters, ensuring that the costs of materials, labor, and potential lost profits are covered if construction is delayed due to a covered event. With the average construction site theft leading to losses of around $30,000, having this insurance in place is a smart investment.
The cost of Builder’s Risk Insurance typically ranges from 1% to 4% of the total construction budget, making it an essential component of any construction project, whether it involves new construction or renovation. For instance, if a storm damages a partially completed building or construction materials are stolen from the job site, Builder’s Risk Insurance helps the company recover financially, preventing significant setbacks in the project timeline.
Inland Marine Insurance provides coverage for tools, equipment, and materials while they are in transit to job sites or stored temporarily off-site. This type of insurance also extends to mobile equipment like excavators and cranes, which are often essential for construction projects.
With equipment theft costing the industry up to $1 billion annually, according to the National Equipment Register (NER), and less than 25% of stolen equipment ever being recovered, Inland Marine Insurance becomes a vital safeguard for construction companies.
This insurance is especially important for companies that frequently move equipment and materials between locations. For example, if tools are damaged in a vehicle accident during transport or if a crane is damaged while being used at multiple job sites, Inland Marine Insurance helps cover the costs, ensuring that the company doesn’t suffer significant financial losses.
Professional Liability Insurance, or Errors & Omissions (E&O) Insurance, covers claims of negligence, errors, or omissions in the professional services provided by a construction company. Unlike General Liability Insurance, which covers physical injuries or property damage, E&O Insurance is specific to mistakes or oversights in the design, planning, or management of a project.
For construction companies involved in design-build services or engineering and architectural planning, this insurance is essential. If a design flaw causes structural issues, or if a project management error leads to financial losses for a client, E&O Insurance helps cover the resulting claims.
Given that construction-related professional liability claims average around $300,000 and design errors contribute to 38% of construction defect disputes, this coverage is vital for protecting a company's financial stability.
Contractor License Bonds ensure that contractors adhere to the regulations and laws governing their specific licenses. Unlike insurance, which protects the contractor, these bonds are designed to safeguard the public and clients. The cost of these bonds typically ranges from $500 to $10,000, depending on the project size and state regulations. The bond amount itself can range from $5,000 to $100,000, depending on the type of work and location.
Local governments often mandate these bonds as part of the contractor licensing process. For instance, if a contractor fails to complete a project in compliance with local building codes, leading to financial losses for the client, the bond can be used to cover claims from those affected by the contractor's failure to meet legal obligations.
Construction bonds help manage risks in construction projects by making sure that the work is completed according to contract specifications. They provide financial protection to project owners if the contractor does not fulfill their obligations. These bonds come in several types:
Bid Bonds guarantee that the contractor will enter into the contract if selected. Performance Bonds ensure that the project is completed as per the contract terms, and Payment Bonds guarantee that subcontractors and suppliers are paid.
Performance Bonds are required for all federal projects over $150,000. Non-payment of subcontractors can lead to cost overruns of 15-20% on projects. These bonds are commonly required for public projects and large-scale private construction.