Liability Insurance for Construction Business: A Comprehensive Guide

Liability insurance is a crucial aspect of running a construction business, as it protects you from financial losses due to accidents or damages caused to others.

Construction sites are inherently risky, with many potential hazards such as falls, equipment malfunctions, and material damage. In fact, the construction industry has one of the highest rates of workplace injuries and fatalities.

Having liability insurance can help mitigate these risks by covering the costs of damages or injuries sustained by third parties. This can include compensation for medical expenses, lost wages, and property damage.

Typically, liability insurance policies for construction businesses cover damages or injuries caused to people or property, including third-party property damage and personal injury.

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A Contractor General Liability policy typically covers third party claims from damages that arise from the operations of the insured contractor business.

Coverage does not include faulty workmanship or damages to the insured's work. Most policies will have coverage with limits of $1 million per occurrence, $2 million in aggregate, and $2 million product/completed operations.

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Insurance companies can offer several variations of those limits. If additional coverage limits are required, a contractor may purchase an Excess policy to cover damages above the base General Liability policy's max limits.

Here are the typical coverages included in a Contractor General Liability policy:

A Contractor General Liability policy covers third party claims from damages that arise from the operations of the insured contractor business. This means it protects you from financial losses due to bodily injury, property damage, or personal and advertising injury to third parties.

Coverage does not include faulty workmanship or damages to the insured's work. This is an important distinction, as it means you'll need to purchase separate coverage for issues related to the quality of your work.

The policy covers various types of claims, including:

Most policies have coverage limits of $1 million per occurrence, $2 million in aggregate, and $2 million product/completed operations. However, insurance companies can offer variations of these limits, and you may need to purchase an Excess policy if you require additional coverage limits.

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Claims on a contractor's General Liability insurance policy can be a bit confusing, but basically, there are two types of policies: occurrence and claims-made. Occurrence policies cover claims that happen during the policy period, no matter when the claim is filed.

An occurrence is defined as an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which can be discovered while the work is being done or long after it's completed.

The claims process starts with an occurrence that happens during the policy period, and the contractor or the aggrieved party can report the claim to the insurance carrier. A claim can be reported up to ten years following the policy period on an occurrence policy.

The insurance company has a duty to defend the contractor, but they also have the discretion to settle any suit. The contractor is responsible for paying the deductible, and the insurance company will cover the balance of damages and/or medical payments up to the policy limits.

It's a good idea to have an occurrence policy with a ten-year tail for claim reporting, which limits the time frame in which a claim can be reported. This can help prevent unexpected claims from being made years after the policy has ended.

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In California, contractors are required to carry a $25,000 contractor license bond as a condition of their license. This bond protects consumers who may be affected by a contractor's actions.

Certain contractor licenses in California may also require a $25,000 Bond of Qualifying Individual, a $100,000 LLC Employee/Worker Bond, or a Disciplinary Bond, depending on the license status. These bonds provide additional financial protection for consumers.

Contractors may also be required to provide a bid, performance and payment bond, often referred to as Contract Surety Bonds, on a job by job basis. This type of bond ensures that the contractor completes the project as agreed upon.

As a construction business owner, it's essential to understand the various insurance requirements that may apply to your operations. Federal or state law typically requires commercial auto insurance and workers' compensation insurance.

Commercial auto insurance covers your business vehicles, while workers' compensation insurance protects your employees in case of work-related injuries or illnesses. The requirements for workers' compensation insurance can vary by state and the number of workers employed.

For larger commercial projects, general liability insurance and builders' risk insurance are typically required by the construction contract.

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