How Do You Know You Carry Enough Construction Liability Insurance?

November 7, 2019

Maintaining adequate liability insurance is not just a smart idea for any construction company, it’s a requirement in nearly all circumstances. But, how we define “adequate” leaves room for interpretation in some cases. For instance, if a government contract you’re bidding on requires you have $1 million in liability coverage, does that mean $1 million is all you actually need?

Being underinsured can be risky business in a society like ours where medical care is very expensive and people are quick to sue. But, at the same time, carrying more liability insurance than you need is a drain on profits, and may be throwing good money down the drain.

Here we’ll break down the basics of construction liability insurance with a focus on determining how much you need to be safe but not sorry.

What is included in construction liability insurance?

Construction liability insurance is generally set up as an “umbrella” policy, meaning it covers a number of different situations that may otherwise be covered separately by individual policies. For most construction companies, a comprehensive liability insurance policy should at least cover these basics:

Bodily injury - Depending on your circumstances, this may need to include coverage for subcontractors working on your project and/or visitors who slip and fall on your site. It does not cover possible injuries to your own employees, however, as that would require a Worker’s Compensation policy.
Immediate medical expense - This coverage is closely related to bodily injury, but covers the cost of providing immediate care, such as an ambulance or Emergency Room visit, if there’s an injury onsite. Sometimes, providing excellent care immediately can reduce or eliminate the need for costlier long-term care or legal fees down the road.
Property damage - There are numerous ways you or your team could accidentally damage a customer’s property during the course of a job. And, it’s possible damage can be done outside the job site as well.
Completed products - If you’ve built something that later fails to function properly or ends up hurting someone, there’s a chance your company may be held liable to some extent. Completed products protection can help cover legal fees and judgments in that instance.

Two other coverage types that can often be included in a general liability policy, but are not necessary for every construction company, include:

Faulty workmanship - This is related in some ways to the completed products coverage noted above, but it generally covers negligence from a contractual point of view. For instance, if a customer seeks damages because a job went over budget or took too long. The contracts used for many job types handle these matters differently, so check with your insurance professional to see if it’s applicable coverage for your circumstances.
Personal and advertising injury - If you extensively market your business, and especially if you’re doing so in a highly competitive environment, this coverage can protect you against claims of libel, slander, invasion of privacy, or copyright infringement.

Some important insurance products that are not going to be included in a general liability “umbrella” plan include:

Worker’s Compensation - Under most circumstances, injuries sustained by you and your employees will need to be handled via Worker’s Compensation insurance, not general liability.
Builder’s risk - This is an insurance policy that protects the property being constructed from events such as fire, flood, wind, and vandalism. It is generally required by property owners along with an adequate general liability policy.

How do you determine how much liability coverage you need?

As with all insurance purchases, a wise decision comes down to balancing risk and cost, both for the construction company and the insurance provider. Work with your insurance representative to answer the following questions as liberally as you need to in order to feel comfortable with your coverage:

How many jobs will be running at any one time?
How much control do I have over jobsite access and security?
How much is my company currently worth if a lawyer wants to destroy me with damages from a lawsuit?

Since general liability insurance includes coverage toward legal fees and potential damages or settlements resulting from many kinds of lawsuits, it’s important to recognize that people (and their lawyers) are not going to check your policies ahead of time and limit the amount they demand based on what’s covered. If an applicable lawsuit is filed against your company and a judgment is awarded by the court, your general liability policy will pay out to the maximum allowed, but your company will be on the hook for the remaining balance.

So, if your company owns assets worth $10 million, but you’ve only purchased the minimum required liability policy to get jobs in your area (a common policy minimum might be $1 million per occurrence with a $2 million annual maximum payout), damages from a serious lawsuit could bankrupt you.

It’s also important to recognize that general liability insurance is just one of many different kinds of insurance construction companies should be carrying. Speak with your representative to determine exactly how much and which kinds of coverage are most appropriate for you and your company.