Understanding Construction Insurance
There are many different types of insurance designed to protect property owners, developers, and contractors through the various phases of a construction project. In fact, certain types of construction insurance policies are required for many projects. In the sections below, we’ll review the basics of construction insurance, the most common types of policies available, and when those policies would apply. If you are already well-versed on the topic or just want to find a reputable company, be sure to check out our recommended construction insurance companies below.
|Progressive||Liberty Mutual||The Hartford|
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What is Construction Insurance?
Construction insurance is a broad categorization of insurance policies that provide protection during construction projects. In reality, the term “construction insurance” refers generally to insurance that relates to construction projects, and it is not itself an actual form of insurance.
Many factors dictate the type of construction insurance coverage one would need for a given project or business. These factors include, the person’s relationship to the project (contractor, property owner, subcontractor, etc.), the type of entity buying the insurance (business or individual), and the type of property to be covered.
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Types of Construction Insurance
A property owner undertaking a construction project could seek to insure a number of things related to the project—for example, the building, materials in transit, etc. Depending on the nature of the contract, a contractor for that same project might require different types of coverage, such as general liability and commercial auto insurance. Below is more information about the various types of coverage available.
1. Builders Risk (Course of Construction) Insurance
Builders risk insurance, also known as course of construction (COC) insurance, or sometimes construction all risk insurance, is insurance coverage for buildings and other structures while they are under construction. Other policies like homeowners insurance or commercial property insurance will typically not cover structures during construction. Builders risk policies will usually have options to cover the following types of property:
- Building materials
- Temporary structures such as scaffolding
- Paving, fencing, outdoor fixtures
- Lawns, trees and plants installed by the builder
Insurance providers generally cover the most common types of construction projects, including:
- Residential new construction
- Residential remodeling or smaller projects (e.g. replacing windows or doors)
- Model homes and model home contents
- Commercial property construction
However, if your construction project or type of structure is unique, there may still be specialty providers that can offer insurance policies for your unique project. Builders risk policies only protect against certain types of damages. Generally, the most basic builders risk insurance policies will cover damages caused by:
Typically, insurers will offer “premium coverage” options, which cost more, but can extend the coverage limits, insurable events, and/or insurable property for the policy. Damages from earthquakes or flooding will generally not be covered, unless coverage for those types of events is added to the policy. Insurance providers may also specify some exclusions in the policy that protect them from covering damages that occur under specific conditions or from policyholder negligence.
2. Commercial and Contractor General Liability Insurance
General liability insurance, sometimes called commercial general liability (CGL) insurance or contractor general liability insurance, is a class of insurance that provides liability protection to businesses in the case of bodily harm or property damage during the course of business. Insurance providers create various versions of these policies available to professionals in construction and for construction projects. Whether you are the property owner, a construction company, or a contractor, liability insurance policies are available to protect policyholders from unnecessary risk. So often, these plans will be advertised as Contractor General Liability Insurance or General Liability Insurance for Builders.
General liability insurance policies will usually cover a broad range of damages, including:
- Faulty workmanship
- Job-related injury
- Advertising injury / defamation
Contractors or developers may actually be required to have a minimum level of liability insurance either by law in some states or to win certain contracts that require it. Companies who complete many design-build projects will definitely want to have liability insurance in case they are sued for mistakes. Also, subcontractors are frequently required to carry liability insurance in order to work for certain general contractors.
General liability insurance policies are available through various providers for the following types of businesses:
- Residential general contractors (RGC)
- Light commercial general contractors
- Trade / specialty contractors (HVAC, electrical, plumbing, etc)
Like Builders Risk and other types of insurance coverage, certain exclusions are likely to be defined in the policy, protecting the insurance company from having to cover certain types of damages or incidents.
3. Commercial Auto/Truck Insurance
Commercial auto insurance, or commercial vehicle insurance, isn’t exclusively available for construction projects. It is insurance intended to provide auto insurance to vehicles used by businesses. The coverage provided by commercial auto insurance is intended to help policyholders avoid high vehicle repair costs, medical expenses, or lawsuits resulting from auto accidents.
There are several coverage options for commercial auto insurance policies that mirror the coverage options of standard auto insurance policies. The standard coverage options include:
- Liability Coverage – This protects the company and employees from expenses associated with accidents caused by employees.
- Physical Damage Coverage – This covers damages to company vehicles after a covered collision. This could also include comprehensive coverage, which protects against stolen vehicles, damaged from vandalism, or destruction from natural disasters.
- Medical Payments Coverage – This coverage helps to pay for injury-related expenses resulting from a covered incident, including medical bills, hospital fees, ambulance costs, and funeral expenses.
- Uninsured Motorist Coverage – This type of coverage covers damages and injuries caused by uninsured drivers. This is necessary because it is your personal liability coverage that covers damages and injuries that you cause to others. If you get into an accident with someone who does not hold this coverage, you still want to be covered from high medical or repair costs.
Insurance providers like Progressive or Nationwide offer coverage for many types of commercial vehicles, including vehicles that are commonly used during construction projects. The following vehicle and trailer types are usually covered by insurers who offer commercial auto insurance:
- Pickup trucks
- Dump trucks
- Flatbed trucks
- Cement mixers
- Pump trucks
- Bucket trucks
- Straight trucks
- Auto hauler trailers
- Dry freight trailers
- Flatbed trailers
- Utility trailers
- Bulk commodity trailers
- Concession trailers
- Dry freight trailers
- Dump body trailers or transfer boxes
- Pole trailers
- Refrigerated dry freight trailers
- Tank trailers
Something to note is that a more specific policy type—commercial truck insurance-—falls under the umbrella of commercial auto. While commercial auto insurance is a broad term that covers a wide range of vehicles used for business purposes, commercial truck insurance specifically applies to large vehicles (such as dump trucks, semi-trucks, cement mixers, etc.) and the businesses that use them. In addition to all of the coverage options provided by a standard commercial auto policy, commercial truck insurance also offers cargo coverage, general liability coverage, and downtime coverage, among other options.
Regardless of the type of vehicle you drive, it’s important to have some form of commercial auto policy when driving a vehicle for business. Keep in mind that most personal auto insurance policies will exclude accidents while using your vehicle for business purposes from coverage.
If you’d like to learn more about commercial auto insurance policies for construction, visit our detailed commercial auto insurance guide or, more specifically, our guide to commercial trucking insurance.
4. Inland Marine Insurance
Inland marine insurance is another broad class of insurance that spans well beyond the construction industry. While the name comes from an era when this class of insurance covered primarily ocean-bound materials and vessels, that is no longer the case. Inland marine insurance coverage is has evolved to cover many types of property, including property in transit, mobile equipment, property in the custody of a repairman or storage facility, property commonly used in different locations, and even computer equipment and digital information.
For the construction industry “inland marine insurance” applies primarily to the tools and equipment used by contractors and developers. For this reason, in construction industry, it’s commonly referred to as “tool and equipment insurance” or “contractor equipment insurance”.
These insurance policies cover many types of property used by construction professionals, contractors, and developers, including:
- Contractor’s tools, equipment, clothing, and supplies (hammers, drills, generators, electric saws, wood, drywall, etc.)
- Mobile equipment (excavators, forklifts, loaders, cranes, etc.)
- Leased or borrowed equipment (leased tools or mobile equipment like electric generators and forklifts)
- Computer equipment and data (laptops, tablets, private project data)
Policies will cover items either at replacement cost or at the fair market value of the damaged or stolen items, and covered incidents for this type of insurance would include:
- Equipment stolen from a jobsite
- Tools or equipment damaged in transport to a jobsite
- Equipment damaged in a fire or natural disaster at a jobsite
This class of insurance can also cover other costs that might be associated with the loss or damage of contractor tools and equipment, including:
- Debris removal / pollution cleanup following a covered incident
- Costs caused by delays resulting from a covered incident
5. Contractor License Bonds
Contractor license bonds are agreements, similar to insurance policies, which guarantee that a contractor will comply with the regulations that apply to their particular contractor license. The main difference between this and an insurance policy is that while the contractor is the one who purchases the bond, the bond is designed to protect the general public and anyone that the contractor does business with. Typically, insurance companies offer bonds, even though they are not quite the same as insurance policies.
The cost of the bond to the contractor usually depends on the contractors historical track-record of income and their credit score. And the better track record a construction specialist has, the less expensive the bond will be for them.
Certain states, industries, and types of construction contracts will require contractors to carry a contractor license bond, and in some cases additional bonds will be required.
To find more information about license bonds for the construction industry, refer to this thorough guide on contractor license bonds and how they work.
6. Construction Bonds
Construction bonds, also known as contract bonds, exist to “guarantee” certain aspects of a contract or construction project, and ultimately that the project contract is guaranteed to be completed if accepted. There are several types of contract bonds, which are:
- Bid bonds – to guarantee that bid proposals on projects are serious and that contractors can financially support the project if their bid is chosen.
- Performance bonds – to ensure that the contractors adhere to the standards and finish the project laid out in the project contract.
- Payment bonds – to guarantee that the contractor can provide payment to subcontractors, laborers, and suppliers.
- Maintenance bonds – to protect the project owner from defective workmanship or fault materials for a length of time after the contractor’s work is completed; also known as warranty bonds.
- Subdivision bonds – to guarantee to a city, county, or other local municipality that the bond-holder will develop the property in accordance with local guidelines and requirements.
- Site improvement bonds – to provide the same guarantees as a subdivision bond, but only applies to existing structures that are being improved on.
- Supply bonds – to provide assurance that suppliers will deliver materials, supplies, etc, as contractually specified.
7. Workers’ Compensation Insurance
Workers’ compensation insurance, also known as workers’ comp or workman’s compensation, is insurance coverage designed to protect businesses and contractors when their employees are injured while on the job. It does this by covering the following costs after a covered incident:
- Medical expenses
- Missed wages
- Ongoing recovery costs related to an injury
- Legal fees when an injured person sues the policyholder
- Funeral costs and death benefits
Workers’ compensation insurance, like others on this list, spans beyond just the construction industry, but it is an important piece of coverage for developers and contractors who plan to employ others who stand any chance of injury on the job. In fact, workers’ compensation insurance is required by law in some states.
Insurance companies like Progressive, Nationwide, and The Hartford offer workers’ comp coverage for many types of businesses, including general contractors, plumbers, HVAC technicians, electricians, and others.
Construction Insurance Requirements
Some might be asking, “is construction insurance necessary?” Actually, in many cases, it’s not only necessary, but required.
Commercial auto insurance is required by law. All states and the federal government have laws that set minimum requirements for auto liability insurance. Workers’ compensation is also required in most states by law; however, the specific requirements will vary by state and the number of employees in the business.
The other types of construction insurance will not be required by state or federal law; however, many construction contracts will require the contractors to purchase insurance for the projects they describe. Smaller contractors who work directly with homeowners won’t usually be required to carry insurance for the projects they take on, and most often they won’t. But when large organizations, like local governments, universities, and big companies contract out large construction projects, they almost always require contractors and commercial developers to carry insurance coverage that protects the various insurable aspects of the project. These costs are almost always passed on to the project sponsor, but nonetheless, the contractor must find and secure a policy.
Typically, these project contracts will require the contractors to at least carry general liability, workers’ compensation, and builders risk insurance. Sometimes, surety bonds and inland marine insurance will also be required, but much less often.
The increased limits and protection provided by an excess liability / umbrella policy and by professional liability coverage won’t normally be required by the project sponsor or the project contract. However, this coverage can go a long way for contractors and businesses caught in legal battles after covered incidents.
Construction Insurance Costs
This question doesn’t have a very straightforward answer because construction insurance refers to many types of policies for many different situations and can be purchased by different types of policyholders. In addition, the contractors, developers, and property owners who may purchase the policies have options when it comes to the level of coverage they want.
Factors that Affect the Cost of Construction Insurance
Several factors will affect the cost of construction insurance policies. Even though construction insurance policies are all sold independently and vary in what they cover, they are usually influenced by the same set of factors, which are:
- Credit history of the business / policyholder / named insureds
- Experience of contractors / business
- Size of the project or business
- Location of the project or business / contractor
- Coverage limits and deductibles
Other factors may affect the cost of the construction insurance policies that are necessary for your construction project. In general, these factors are used by the underwriter to estimate the likelihood of a covered loss, or the risk associated with insuring the project, contractor, or business.
Average Cost of Construction Insurance
Despite the variance in exact costs, it is possible to get an approximate estimate of what the total insurance coverage for various projects will cost. The following table shows approximate annual premiums for various construction insurance policy types:
|Average Annual Premium||Required?|
|Commercial General Liability||$500-$1,500||Usually|
|Umbrella / Excess Liability||$1,000-$3,000||Recommended|
|Builders Risk||1-5% of project cost||Usually|
|Workers’ Compensation||$5,000-$8,000 per employee||Usually|
|Commercial Auto||$800-$5,000 per vehicle||Always|
|Average Annual Premium|
|Commercial General Liability||$500 – $1,500|
|Umbrella / Excess Liability||$1,000-$3,000|
|Builders Risk||1-5% of project cost|
|Workers’ Compensation||$5,000-$8,000 per employee|
|Commercial Auto||$800-$5,000 per vehicle|
|Commercial General Liability||Usually|
|Umbrella / Excess Liability||Recommended|
The costs shown in this table are only a summary of the nationwide average costs for these insurance policies. Notice how broadly these estimates range. Any contractor, development firm, or homeowner may pay different amounts based on the details of their projects and their own background of safety and experience. Generally speaking, contractors who face more risk are subject to higher insurance costs.
For example the cost of general liability insurance for construction contractors and development firms varies by the type of projects they take on and their track record of claims. In fact, because of the risk involved with construction projects, construction contractors pay some of the highest rates for general liability of any profession. The same can also be said of professional and excess liability policies. While policies can vary widely in cost, lower risk contractors cost less to insure.
Finding the Best Construction Insurance Companies
There are many insurance companies that offer specialized policies for the construction industry. In an ideal world, businesses, contractors, and homeowners can buy all of their insurance policies from one provider to save time, energy, and money. Buyers should also consider several factors when choosing an insurer:
- Financial strength – contractors and commercial developers should consider how financially established their insurer is. In the case of a major catastrophe, the insurer could be placed under a large financial burden. Ideally, the insurer you choose is one of the more well-established companies with a strong financial outlook.
- Customer service and reputation – policyholders will frequently need to interact with their insurance provider, including when a claim is filed, a policy is updated, or a question about the policy needs to be answered.
- Coverage – it is also important to make sure that the coverage offered by the policy is complete. Protection provided the by the policy should at least meet the minimum state and contractual requirements, and hopefully much more.
- Cost – The cost of the policy is usually not going to be visible until you’ve shared many of your personal and project details with the insurer. So it’s worth finding multiple quotes before settling down with a provider. Buyers should also ask insurers about the discounts that they offer, because frequently, project sponsors and contractors can save on the final cost of the policy just through applying discounts that they already qualify for.
The companies listed below meet those criteria and are good options for those looking to meet their construction insurance needs through a single provider.
The Best Construction Insurance Companies for Contractors and Commercial Developers
Contractors and commercial developers, especially those who bid on large construction projects, are often obligated to purchase a large amount of insurance coverage. Frequently, the costs of insurance policies can be passed on to the project sponsor; however, cost should still be an important consideration for contractors, because savings can be passed on to the project sponsor and make their bids on contracts more attractive.
And more than homeowners, contractors may want to consider the construction expertise of their potential insurance providers. The more experienced an insurer is with construction projects, the easier claim filing and designing the policy will be for the buyer.
The table below shows several of the top providers of construction insurance providers, who meet the criteria we’ve laid out above. Each of these companies offers a broad range of construction insurance products that should meet the needs of most contractors and commercial developers.
|Progressive||Liberty Mutual||The Hartford|
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Best Construction Insurance Companies for Homeowners
The policies that work best for commercial developers and construction contractors are not usually going to be the best fit for homeowners and owner-builders. In general, these owners, who will also be the project sponsors, can require their contractors to purchase insurance. But they can also benefit from purchasing coverage for the project themselves. Since the project sponsor will ultimately pay for coverage anyways, they may find it beneficial to research options and secure the best rates and coverage available.
Homeowners want to look for insurers who have an expertise in construction, but are also very strong in customer service and pricing. It’s also ideal when the insurer provides coverage options with homeowners in mind. The insurers we list below are the top providers of construction insurance for homeowners and owner-builders.
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