By Joseph Lalla, Account Executive
Georgetown Insurance Service, Inc.
Silver Spring, MD
Bringing a construction project to life is a team effort. There’s usually a general contractor, who is responsible for the full management of the project, but there’s also a group of subcontractors, who perform the actual work itself. When it comes to insurance coverages for both parties, many of the same rules apply. It’s often the general contractors who set the pace but it’s the subcontractors who carry the limits. There may also be a variety of stipulations set forth in a contract or certain requirements depending on the state or municipality where the work is being performed. So, what type of insurance coverages should general contractors and subcontractors carry?
INSURANCE FOR GENERAL CONTRACTORS
Let’s start by talking about general contractors. General contractors typically take on a project for its entire lifecycle, start to finish. This includes not only management aspects but also hiring the right teams to perform the work. It’s important for a general contractor to ensure the subcontractors they hire all have proper insurance, including any subcontractors hired by those subcontractors. If they don’t, they could find themselves paying for any number of different lawsuits or claims. But what type of insurance coverage should a general contractor have for themselves?
- General Liability
This is an essential piece of coverage. A general liability policy protects your business against property damage claims and bodily injury, paying for third-party medical costs and property repairs. Although a subcontractor should have their own general liability policy, in many cases, all parties are likely to be sued in the event of an accident or incident. So, it’s critical for general contractors to have their own policy, in addition to their subcontractors.
- Commercial Auto
Commercial vehicles are exposed to more risk than personal vehicles, so they require separate auto insurance coverage. These policies provide company’s with liability and physical damage protection for vehicles such as cars, trucks, and vans and tend to have higher coverage limits to account for the additional protection.
- Workers’ Compensation
Construction is a risky industry, and workers’ compensation is an essential piece of coverage. It helps to offset some of the unavoidable risks your employees face by protecting your business in the event a lawsuit is filed by an injured or ill employee.
Many people wonder why their business would need an umbrella policy if they already have general liability. Simply put, depending on the type of job you’re undertaking, sometimes one policy isn’t enough. For example, if you take on a new project where the contract states that you much carry $2 million of general liability, but your policy only covers $1 million, an umbrella policy can provide the extra coverage you need.
- Commercial Property
This coverage protects your company’s physical business space and assets including tools, computers, signage, furniture, and more. In the event of a fire, broken pipe, storm, theft, or vandalism, a commercial property policy provides protection for your office and its contents.
Some might think this is an unnecessary coverage when in fact, it’s quite the opposite. Technology has changed the way we do business. Cyber risk is real, and it affects businesses in all industries and of all sizes. Cyber insurance typically covers your business’ liability for a data breach involving sensitive customer information such as credit card numbers, account numbers, drivers’ license numbers, and more.
- Employment Practices Liability Insurance (EPLI)
An astounding 60 percent of all businesses will be sued by an employee at some point in time, yet most don’t have the proper coverage in place help to protect themselves in these situations. That’s where employment practices liability insurance (EPLI) comes into play. EPLI protects your business against employee lawsuits including discrimination, wrongful termination, sexual harassment, invasion of privacy, wage and hour disputes, illegal background checks, pregnancy, and more. It also should be purchased completely separately from your other policies.
Licensing and permitting are nothing new to general contractors. A variety of different bonds are often required by federal, state, and local municipalities to ensure the services companies are expected to provide are completed according to regulation. There are several different types of bonds that contractors should become knowledgeable about, including:
- Surety Bonds: An agreement under which one party (the surety) guarantees to another (the owner or oblige) that a third party, the contractor or principal, will perform the duties of a contract in accordance with contract documents or fulfill the obligation according to the agreement.
- Construction Bonds: An agreement guaranteed by a third party (insurance company or surety) to finalize construction in accordance with the terms of the contract, in the event a contractor fails to perform according to the terms of the contract.
- Commercial Bonds: Often required by commercial business entities such distributors, suppliers, etc., federal, state, and local municipalities can require various commercial bond obligations. These help to guarantee individual compliance to follow certain rules or legal requirements.
INSURANCE FOR SUBCONTRACTORS
You wouldn’t hire a doctor who didn’t have proper insurance, right? The same goes for general contractors who hire subcontractors to work on their projects. As a general contractor, if you fail to properly vet your subcontractors, you could find yourself financially liable should something go wrong.
Subcontractors need to carry the exact same type of insurance that general contractors do (see our list above) but they also need to ensure their limits are adequate. A good rule of thumb to follow is that a subcontractors’ limits should be comparable to the general contractors’ policy limits.
In addition to those outlines in the section above, there are a few other coverages subcontractors should consider:
Depending on the nature of your business, pollution insurance may be an important investment. Businesses can often add endorsements to their general liability and/or auto policies, however, obtaining a standalone policy is usually the better option. Pollution insurance helps financially safeguard your company from legal defense fees, clean-up costs, and provides coverage for injuries and medical costs.
- Errors & Omissions
We all know that mistakes happen. But in the world of construction, errors can often be expensive. Errors & omissions (E&O) insurance protects subcontractors from unintentional work errors, failure to deliver promised services, and instances of professional negligence.
TRANSFER RISK AGREEMENT
All contractors want to limit their liability and control insurance costs at much as possible. A general contractor will often ask subcontractors to have the same insurance coverages as they do, pushing liability down the chain. Risk transfer is what protects the general contractor and places (or transfers) responsibility for claims, losses, and damages on to the subcontractor. But what about when subcontractors hire other subcontractors? Well, the same applies. Subcontractors also need a transfer risk agreement that indemnifies them. When a subcontractor hires another subcontractor, proper risk transfers techniques need to be employed in order to protect the business.
Whether you’re a general contractor searching for a subcontractor or a subcontractor seeking another subcontractor to perform a specific task, it’s important to ensure your business is protected and you have partners you can trust. Working with a knowledgeable insurance agent who understands the construction industry is also critical in helping you understand what you need, what to require from your subcontractors, and how you can keep your business safe.