Construction projects are high-risk environments from an insurance standpoint, large capital commitments, significant physical activity, numerous parties with overlapping responsibilities, and a long timeline during which any number of damaging events can occur. The insurance requirements that govern construction projects are designed to allocate the financial consequences of those events to the parties who carry the risk, and to ensure that adequate coverage exists to respond when events occur.
For developers, owners, and lenders, understanding what insurance is required, who is responsible for obtaining it, and what verification is needed before and during construction is part of the due diligence that protects their financial interests.
Builder’s Risk Insurance
Builder’s risk insurance covers physical damage to the project under construction, damage from fire, wind, hail, theft, vandalism, and in the most comprehensive policies, collapse, water damage, and equipment breakdown. The coverage applies to the project during the construction period, from the commencement of construction through the certificate of occupancy.
Builder’s risk is typically obtained by either the owner or the GC, depending on which party’s contract requires it. Lenders universally require that builder’s risk be in force before the first draw is funded, and that the lender be named as a loss payee on the policy, meaning that any insurance proceeds for a covered loss flow to the lender rather than directly to the owner.
Several coverage provisions are particularly important for lenders and owners to verify:
Named storm coverage. Standard builder’s risk policies exclude losses caused by named tropical storms and hurricanes. For projects in coastal markets, Houston, anywhere along the Gulf Coast, named storm coverage is not optional; it is a mandatory addition that must be specifically requested and confirmed in the policy. A builder’s risk policy without named storm coverage on a Houston construction project is inadequate.
Coverage amount. Builder’s risk should be written for the completed value of the project, not just the hard construction cost. A policy written for the contract amount may leave a coverage gap for soft costs, architectural fees, financing costs, and permit fees, that would need to be rebuilt if the project were destroyed and had to start over.
Extended reporting period. After the certificate of occupancy, builder’s risk coverage ends and the property insurance (the permanent operating policy) takes over. The transition period between the two, when the project has substantial completion but the permanent insurance has not yet been bound, can create a coverage gap. Builder’s risk policies with an extended reporting period provision or specific coverage through a defined post-completion date close this gap.
Commercial General Liability
Commercial general liability (CGL) insurance covers the GC’s legal liability for bodily injury and property damage that occurs in connection with the construction project. If a subcontractor falls from scaffolding and sues the GC, if a passerby is struck by falling material, or if adjacent property is damaged during construction, CGL responds to the GC’s legal liability.
Lenders and owners should be named as additional insureds on the GC’s CGL policy, and on the major subcontractors’ CGL policies. Additional insured status provides coverage to the named party for the insured’s operations, which means that if the GC’s negligence causes damage to a third party who then sues the owner, the GC’s CGL may respond to the owner’s liability exposure as well.
The coverage limit that is appropriate depends on the project’s scale and the exposure it creates. Most commercial multifamily and commercial projects require minimum CGL limits of $1 million per occurrence and $2 million aggregate, with umbrella or excess liability coverage bringing the total limits higher for larger projects.
Workers Compensation
Workers compensation insurance covers the GC’s employees, and their subcontractors’ employees, for injuries sustained during the course of construction work. Workers compensation is required by law in every state, but the state-specific requirements vary in their coverage mandates, benefit levels, and administration.
Lenders and owners should verify that the GC and all major subcontractors carry current workers compensation certificates before construction begins, and that those certificates remain current throughout the construction period. A subcontractor who has allowed their workers compensation coverage to lapse is exposing the project to liability that the project’s insurance program may not adequately cover.
Washington State has a state-managed workers compensation system, L&I, rather than the private market system that most states use. GCs and subcontractors working in Washington must be registered with L&I and current on their L&I assessments. A GC from another state whose workers compensation coverage is provided by a private carrier may not be in compliance with Washington’s L&I requirements.
Professional Liability Insurance
Professional liability insurance, also called errors and omissions (E&O) insurance, covers the legal liability of design professionals (architects and engineers) for errors and omissions in their design work. If the architect’s design contains a deficiency that causes a construction failure or property damage, professional liability responds to the architect’s legal liability for that deficiency.
Developers and owners should require their design team to maintain professional liability coverage at specified limits throughout the design and construction period and for a defined post-construction tail period. The tail period matters because construction defects related to design errors may not manifest until years after the building is occupied.
Verification During Construction
Insurance verification is not a one-time event at loan closing. Lenders and owners should require annual updated certificates of insurance from the GC and major subcontractors throughout the construction period, and should verify that the coverage is current before each major draw cycle. A GC who has allowed their builder’s risk coverage to lapse mid-project, an event that sometimes occurs without anyone noticing if the monitoring program does not include insurance verification, has left the project exposed to uninsured physical loss.
Construction managers and owner’s representatives who include insurance verification as a standard part of their ongoing project management function provide this protection as part of their routine engagement.
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