Construction Insurance Explained

Construction insurance protects your business from financial catastrophe. Understanding coverage types, requirements, and cost optimization ensures adequate protection without overpaying.

General Liability Insurance

What it covers: Bodily injury to third parties, property damage to client property, advertising injury claims. Typical limits: $1M per occurrence, $2M aggregate standard. Large projects may require $5M+. Cost: $1,000-$5,000 annually for small contractors, varies by work type and claims history.

Workers Compensation

Purpose: Covers medical expenses and lost wages for injured employees. Required in most states. Cost calculation: Based on payroll and class codes. High-risk work (roofing) costs more than low-risk (painting). Experience modification: Good safety record reduces premiums, poor record increases. Typical cost: $0.75-$15.00 per $100 of payroll depending on trade.

Commercial Auto Insurance

Covers: Company vehicles, hired vehicles, non-owned vehicle liability. Requirements: Higher limits than personal auto. Commercial use voids personal policies. Cost factors: Number of vehicles, driver records, coverage limits, deductibles.

Builders Risk Insurance

Coverage: Property damage to building under construction. Fire, theft, vandalism, weather (if wind). Duration: Project-specific, usually 6-12 months. Who buys: Owner or contractor depending on contract. Exclusions: Typically excludes flood, earthquake (separate coverage).

Professional Liability (E&O)

Covers: Design errors, negligent advice, breach of professional duty. Who needs it: Design-build contractors, construction managers, consultants. Claims-made basis: Only covers claims filed during active policy period, not when error occurred.

Surety Bonds

Bid bonds: Guarantee contractor honors bid if accepted (typically 5-10% of bid). Performance bonds: Guarantee project completion per contract terms. Payment bonds: Ensure subcontractors and suppliers get paid. Bonding capacity: Maximum bonded work allowed, based on financial strength. Costs 0.5-2% of contract value.

Umbrella/Excess Liability

Purpose: Additional coverage above primary policies. Typical limits: $1M-$5M additional. Requirements: Must have underlying policies at specified minimums. Cost: Relatively inexpensive ($500-$2,000 for $1M) due to rare claims.

Cost Reduction Strategies

Safety programs: Reduce claims = lower premiums. Higher deductibles: Accept more risk to reduce premiums. Proper classification: Ensure employees classified correctly (office vs. field). Bundle policies: Multiple policies from one insurer earns discounts. Shop annually: Compare quotes from multiple carriers.

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