Construction projects involve a lot of moving parts. From start to finish, dozens of subcontractors, vehicles, tools and chemicals may be brought into the fold. Digital project management solutions make it easier to keep these components aligned. However, the different types of risks they introduce are often left unaccounted for.
Where are contractors getting insurance wrong?
Every business is different, but the following concerns are most likely to create insurance gaps for contractors:
- lack of per project aggregate coverage;
- lack of professional liability coverage; and
- inadequate subcontractor coverage.
Per project aggregate coverage
A per project aggregate is an endorsement that ensures contractors are equally covered on a “per location” or “per project” basis. Some insurance companies add it to contractors’ commercial general liability policy automatically, but others don’t, which means contractors have the same claims ceiling for their policy terms (e.g., $2 million), whether they’re completing five projects this year or 50. If contractors are planning to tackle more than one job at a time, it makes sense for them to ask their broker about per project aggregates.
General liability vs. professional liability coverage
Some independent contractors operate with just a general liability policy, which typically covers property damage, bodily injury and advertising injury claims. But not every insurance issue is triggered by an accident or injury—especially if the work involves design-build or construction management-type contracts. Bad advice, poor workmanship, faulty materials and service errors can be just as costly. This is where professional liability insurance for contractors comes into play.
Professional liability insurance
Professional liability coverage (e.g., errors and omissions insurance) can protect a business against lawsuits claiming negligence, misrepresentation, violation of good faith/fair dealing or faulty recommendations. It may also cover contractors for the cost of defending these types of client claims.
What does commercial general liability (CGL) policy not cover?
Professional liability isn’t the only gap in most contractor insurance plans. Other potential exposures include the following.
A generation ago, pollution liability used to fall under the scope of a CGL policy. But as society has come to better understand the causes and effects of different contaminants, the costs/laws to contain them have multiplied. Today, most contractors need to purchase pollution liability coverage separately or in the context of a professional liability policy that expressly covers pollution (e.g., a CPPI policy).
Pollution liability coverage protects a business in the event of damage caused by hazardous materials (e.g., asbestos, waste, spilled oil or hydraulic fluid). Depending on the specific terms of the policy, coverage may extend to jobsites, hazmat transport or the contractor’s commercial property. It’s important for contractors to review the types of services they provide and the environments in which they operate to establish ideal coverage. For example, contractors that routinely deal with water intrusion issues may want to purchase mold coverage through a specific pollution liability endorsement.
Independent contractors and construction companies are now growing targets for cybercrime—including malware, ransom ware and spear phishing attacks. In fact, Verizon’s 2014 Data Breach Investigation Report revealed that one-third of all reported cyber incidents occurred in the construction industry. Experts predict these numbers will only continue to grow. Unless contractors are willing to gamble thousands—potentially millions—of dollars, not to mention their business’ reputation, it makes sense to invest in cyber liability coverage.
If contractors work with subcontractors, it’s essential that they require two documents from these partners upfront to ensure any damage caused by third parties is settled through subcontractors’ insurers first:
- a certificate of insurance (with you listed as an “additional insured”); and
- a signed “hold harmless” agreement.
Keep in mind that at the end of each insurance policy period, contractors are going to be asked to list all subcontractor work and to document all third-party certificates. If the carrier finds that subcontractors were uninsured, the contractor could wind up paying a much higher rate than the standard subcontractor rate. It also could be on the hook for workers’ compensation costs. And if anything actually goes wrong with uninsured subcontractor work, contractors will be stuck with claims that aren’t theirs.
Why is contractors’ insurance so complex?
As many general contractors can attest, the line between hands-on services and professional services is fuzzier than it used to be. Today, the person at risk for falling off a ladder may well be the same person at risk for a faulty design. That person needs insurance coverage for both types of exposure.
Do I need professional liability coverage?
Again, most general liability policies for contractors exclude professional liability claims. If any of the work a contractor does falls under the professional heading, it probably needs separate coverage. If a contractor is still not sure this applies to them, it should contact an insurance specializing in construction to make sure its gaps are covered.