Construction insurance has evolved into its own specialty subset of insurance with its own language, policy forms, and endorsements that can wreak havoc for those who are not versed in the area or the market conditions. Far too often, well intentioned decision-makers in the construction industry rely on advice from individuals who do not appreciate, consider, or recognize the complexities involved in matching insurance products to construction projects.
In our practice as construction attorneys, we have seen far too many construction-industry clients that may have thought they were covered—and probably should have been covered—but were not. This article discusses some of the unique aspects of construction insurance as it relates to common insurance policies found in the construction industry and provides an overview of alternative insurance products of which construction professionals should be aware. Our article is not intended to provide a comprehensive overview of all things construction but rather provides a sampling of some of the unique issues that construction professionals face.
Insurance advisers should strive to provide claims certainty to their clients. Ideally, clients should know, before a loss occurs, whether they have elected to transfer the risk to an insurer or retain the risk. This should be an informed, conscientious choice rather than mere happenstance. We do not suggest in this article that all contractors should purchase all available policies, purchase all expansive endorsements, and refuse all restrictive endorsements. But they should familiarize themselves with available policies and common endorsements and tailor their insurance programs to meet their needs, risk tolerance, and culture.
Overview of Construction Insurance
While each industry has insurance concerns unique to it, a few industries are particularly esoteric. The construction and energy industries are two common examples. Both industries have a high degree of risk concerns and available products to transfer the risk. Brokers and advisers working in these industries require some degree of specialization to be effective.
Specialization, however, should not be feared but embraced. For example, a person who has heart troubles seeks out a cardiologist rather than a general practitioner. Similarly, those seeking structural expertise do not go to a landscape architect—they go to a structural engineer. Considering construction insurance and tailoring an insurance program to meet a construction client's needs also requires specialized knowledge and expertise.
In addition to the specialized products that have been developed exclusively to meet the construction industry's needs, most construction professionals maintain at least commercial general liability, workers compensation, property insurance, and automobile liability insurance policies.1 It is important to remember that even these "standardized" policies have issues that are specific to the construction industry. It is even more important to remember that nonstandard policies create a whole host of additional problems and must be reviewed in detail to understand the coverage—sometimes very little, if any—the insurer is offering.
The standard commercial general liability (CGL) policy serves as a great example. Construction professionals—like other commercial enterprises—typically use the same standard Insurance Services Office, Inc. (ISO), CGL policy that covers bodily injury and property damage caused by an occurrence subject to 17 standard listed exclusions. The CGL standardization deceptively leads many to believe that they do not need specialized knowledge or training to counsel or advise their clients on CGL insurance issues. But the CGL policy has a host of endorsements that apply specifically to the construction industry. Depending on how one categorizes construction-specific risks, at least 35 standard ISO endorsements apply directly and exclusively to the construction industry, including 10 standard endorsements concerning additional insured status.
Contractors and brokers must have at least a working understanding of these construction-specific endorsements to properly understand the coverage they are purchasing. For example, if it is important to a contractor that its CGL policy covers property damage from the work of its subcontractors, the policy should not have the CG 22 94 or CG 22 95 endorsements. Similarly, contractors and subcontractors that work with exterior insulation and finish systems may want to ensure that their policies do not have the CG 21 86 endorsement. Unfortunately, too many brokers who do not routinely practice in the construction industry do not know what they do not know, and their clients suffer as a result.
CGL insurance is not unique in its application to the construction industry. Property insurance creates the same types of unique issues. Professionals need to understand the types of builders risk insurance available, and they need to understand that builders risk insurance is not a "standardized" product or one-size-fits-all policy. There are a host of builders risk policies available in the market, and in fact, certain insurers write multiple forms. Construction professionals need to understand the specific coverages they maintain and any reporting or conditional requirements that they must fulfill. Again, far too often, construction professionals face an uncovered loss that they expected would be covered.
Construction professionals also need to work to ensure that their property insurance policy, builders risk policy, and equipment floaters do not leave coverage gaps or overlap. They may also want to consider whether they want to pursue business interruption, extended business interruption, or contingent interruption coverage.
While workers compensation and employers liability insurance do not have the same unique policy-related issues as CGL and property insurance, they too have their own unique considerations in the construction industry. Contractors often face the highest workers compensation rates and are often relegated to the residual markets or markets of last resort in their state. Additionally, given the expense and loss history that contractors may have, they may want to consider using alternative risk transfer mechanisms to reduce workers compensation expenses. Again, no insurance program is right for every construction professional, but it is important to seek out unique expertise in each of these areas.
In addition to the nuances and technicalities involved in standard insurance products, the construction industry also has unique construction-specific insurance products that include the following.2
Wrap-up programs including owner-controlled insurance programs, contractor-controlled insurance programs, and rolling wrap-ups
Duties to purchase owners and contractors protective liability insurance
Duties to purchase owners protective professional indemnity
Equipment breakdown insurance
Contractors equipment coverage
These policies do not address bonding requirements (though subcontractor default insurance can take the place of a bond). The bonding market is another area requiring expertise and sophistication to properly counsel construction professionals. Additional differentiation can also be made in alternative risk financing transfer methods such as entity-specific captives.
In addition to the unique policies and considerations in construction insurance, there are other considerations that are not standard in other industries. Construction contracts routinely dictate the coverages that construction professionals and owners must maintain. Far too often, construction professionals assume that they have the coverages without understanding whether they do. This can lead to uncovered losses and breaches of contract. Unfortunately, brokers often cannot directly answer for the construction professionals they service whether the policies fulfill the contractual requirements.
The construction industry also has unique considerations for additional insured and indemnification issues that are not as common in other industries. Of course, the contractual obligations for these duties must also be addressed in the construction professional's insurance program.
As risk finance and transfer becomes increasingly critical to construction organizations, professionals in the industry must understand (or at a minimum have trusted brokers and advisers who understand) the specialized knowledge unique to construction insurance.
The purpose of this article is not to scare construction professionals or the brokers who service their needs but to provide an explanation of the unique issues and considerations that they must consider. Proper advice and guidance on the front end can help reduce and eliminate coverage surprises on the back end. It is often much cheaper and certainly more prudent to consider the implications of the policies purchased on the front end so that construction professionals can make informed decisions about what they want to have covered, what they hope to have covered, and where they realize they are not covered but accept that risk.
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1 This article uses the term "policies," but this can also include alternative insurance programs including captives, self-insured programs, or similar options.
2 These products are in addition to other policies contractors may want to consider including directors and officers, key man, cybersecurity, and similar policies.