What kinds of bonding and insurance should I expect?
One of the oldest marketing taglines for construction companies is that they are “licensed, bonded and insured.” But what does that mean? This article deals with bonding and insurance. Licensing is covered here.
Most owners require three types of insurance (which General Contractors receive from their subcontractors): General Liability, Automotive and Worker’s Compensation. On occasion, an umbrella (or excess liability) is required. It’s important that an owner understand what these policies do and do not cover.
General Liability (GL) Policy
A GL policy insures only against a very narrow type of incident. This policy covers damage done to property and people who are not the owner. For instance, if you have a painter who has a ladder propped up against the building, and the ladder falls down on a car belonging to a taxi that was driving by, this policy would cover the damage to the car and the medical expenses of the driver and passengers in the car.
If that ladder falls on a subcontractors work truck or the property owner’s car who is there to see how things are going, the GL policy would NOT cover that damage.
As another example, let’s say that there is an open excavation that was left unprotected. A group of teenagers decide to trespass and in doing so, one of them falls in the excavation and injures themselves. The GL policy would cover the medical bills. If the Owner is on site inspecting the work and has the same exact incident, the GL policy would NOT cover the medical bills.
There is often a rider for “Damage to Rented Premises” which covers the landlord primarily from fire damage during the course of construction if the work was executed by the tenant.
Typically, this policy will have a total limit of $2,000,000 with a per incident limit of $1,000,000.
An automotive policy works just like your regular car insurance policy. If a vehicle driven by the GC or a sub, and gets into an accident, then this insurance will cover the typical damage that a car insurance policy will cover.
Commercial automotive polices are typically 5-10X the cost of personal automotive policies. As such, most smaller subcontractors will not carry this coverage. In this instance, get the personal automotive coverage for each vehicle that subcontractor will use.
The automotive policy typically has a limit of liability of $1,000,000.
The worker’s compensation policy ensure that if a worker of the GC or subcontractor is injured on the job, that their medical care will be covered. This ensures that that worker will be covered if an accident occurs and that the worker will not sue the Owner or the Property to cover these expenses.
This policy typically has a limit of $500,000.
Umbrella Liability (Excess Liability) Insurance
This policy simply covers the difference in the value of the damage and the limit of the GL, automotive or Worker’s Comp policy. Say there is a single instance of damage to a neighboring property of $4,000,000. The GL policy has a single instance payout of $1,000,000. The Umbrella Insurance would cover the $3,000,000 variance IF the Umbrella policy is large enough to cover the difference. If the Umbrella policy only is valued at $1,000,000, the owner or the GC could be liable for the $2,000,000.
Do not think that this policy is a general category policy that covers any and all types of damage or injury events. The name can be a bit confusing and we have talked with several folks that assumed that’s what this policy did based on the name.
Often times, owners and GCs do not require an umbrella policy. There is no common trend. Sometimes a GC or sub will not have the policy, sometimes they have $1,000,000 and sometimes they have $5,000,000. This policy is typically sold in $1,000,000 increments.
Do you see the hole in the coverage?
So a GL policy covers third parties (the Owner is the first, the GC is the second and the third party is the General Public), the automotive covers vehicular incidents and the worker’s compensation covers the GC’s and subcontractor’s workers. What happens if there is damage to your property during construction?
Make sure that you have Commercial Property Insurance during construction. Talk to your agent and ensure that it covers damage to the property during the course of construction. This is your backup and is a worst-case scenario such as the GC walks off the job or there is a catastrophic incident such as a fire or collapse of the structure.
For the most part, the General Contractor will be responsible for damage to the building during the course of construction. The GC can pass that liability to the subcontractor. For example, the plumber is carrying pipe through the building and the pipe accidentally goes through a wall or glass pane. The GC can either repair the damage and deduct it from the subcontractors payment or the plumber can pay out of pocket to have a company come in to repair that damage.
Most people assume that bonding covers this hole, but bonding has it’s own issues.
Most commercial projects are not bonded these days. What was happening is a contractor would bond a job, an issue would come up that would be covered by the bond and the bonding company would deny the bond out-of-hand. It was then up to the owner to sue the bonding company in order to recover damages. With legal bills reaching tens of thousands of dollars, it was often cheaper to just remediate the work out-of-pocket because the recovery of monies was less than what the legal bills will be.
For larger projects, usually over $1,000,000, an owner will get a performance bond and a payment bond. The performance bond will cover the cost of firing the General Contractor for cause, finding a new General Contractor and the cost of loss of production. The Payment Bond ensures that if any subcontractors make a claim of non-payment, the bond will ensure that the subcontractor is paid and will not have a lien claim against the property.
Understand the limits of the insurance that a General Contractor will provide you.
Ensure that your Commercial Property Insurance, Homeowner’s Insurance or other insurance policies cover catastrophic damage to your property during construction.
Don’t assume a bond from a “licensed, insured and bonded” company will protect you.
Get a Certificate of Insurance (COI) specifically for each property that the General Contractor is working on and make sure it comes from the carrier.
If you are a residential property owner in Virginia, know your rights with the Contractor Transaction Recovery Fund. If you are in another state, you may have similar remedies available.