Coverage Gaps Construction Companies Can’t Afford to Overlook

Construction risks tend to be complex, and they’re always evolving. If construction insurance coverage doesn’t keep up, coverage gaps can emerge. Business owners and contractors can avoid uncovered claims with regular coverage reviews and tailored specialty insurance policies.

How Construction Insurance Gaps Leave Construction Companies Exposed

A single construction project can involve multiple parties and millions of dollars in investment. The bigger the project, the higher the stakes, but even a modest project can bring significant risks. Insurance is essential. However, construction insurance is also complex, and coverage gaps can result in uncovered claims.

Consider the following scenarios:

• Your wrap-up insurance policy doesn’t cover everyone. A wrap-up insurance policy can simplify coverage for a big project and reduce the risk of coverage gaps, but if the policy is not written to cover everything it needs to, it can still leave gaps. As IRMI explains, one problem occurs when wrap-up policies exclude certain contractors, such as design professionals or suppliers. Imagine a supplier is involved in an incident while delivering materials to your worksite. You report the claim on your wrap-up policy, and that’s when you find out the loss isn’t covered because the supplier is excluded. You can go after the supplier, but if adequate coverage is not in place, you may not be able to get the compensation you need.
• You don’t have pollution liability coverage. General liability for contractors typically excludes pollution liability, and pollution claims can be expensive. Some contractors underestimate their exposures, and they may skimp on coverage as a result, but pollution claims can happen. For example, your team could hit asbestos or other toxic materials while excavating a construction site, or toxic materials could spill. Your company could be liable for the cleanup costs, as well as any injuries or property damage that result. Without pollution liability coverage, it could be quite costly.
• Work done by subcontractors isn’t covered. Construction projects often rely on subcontractors to carry out key tasks, and subcontractors may utilize their own subcontractors. While this can be efficient, it can also result in insurance gaps if the policies in place do not cover subcontractors and the subcontractors do not have their own insurance. For example, you may use a subcontractor to perform electrical work, and that subcontractor may use a subcontractor. If the sub-subcontractor’s work results in a claim, whether or not it’s covered will depend on the specific policies in place and the terms of those policies.
• Losses during a renovation project aren’t covered. If you’re doing renovations on an existing building, there’s probably already property insurance in place, but that policy may not cover losses that occur during renovations. Construction projects bring heightened risks, and property insurance often exclude losses associated with renovations. If you don’t have builders risk insurance for a renovation project, losses caused by jobsite theft, vandalism or even severe weather may not be covered.
• The company isn’t covered when a worker uses his personal vehicle. Contractors sometimes transport equipment to job sites using their personal vehicles. At many construction companies, this is done without any thought to the insurance implications. If a worker is involved in a crash while transporting equipment, the worker could be considered on duty, and the company may be named in any resulting litigation. However, the worker’s personal insurance policy won’t cover the company. Construction companies can protect themselves by securing business auto coverage that includes hired and non-owned auto coverage. (Also make sure you have adequate coverage for the equipment – that’s another common coverage gap!)
• Subcontractor injuries aren’t covered. Workers’ comp construction requirements tend to be strict, so construction companies will typically have coverage for their employees. However, workers’ compensation coverage does not always extend to contractors or subcontractors. Workers’ compensation doesn’t just protect workers who have been injured on the job. It also protects companies by shielding them from lawsuits. If a subcontractor is injured and no coverage is in place, the construction company may face expensive legal costs.
• There’s no coverage when tech goes wrong. Construction companies are adopting drones, AI, and other tech systems. While this can boost efficiency and even safety, it can also leave companies exposed to cyberattacks, incorrect AI outputs and other risks. Standard insurance policies may exclude these losses.

Is Your Construction Policy Leaving You Exposed?

An uncovered loss can threaten a construction company’s financial security. More than that, it can ruin reputations and derail success. When a loss occurs, the goal is to make things right as quickly as possible so you can get the project back on track. Insurance makes this possible. Without insurance coverage, you may not have enough funds to continue work. That can lead to project delays, missed deadlines, and breached contracts, along with all the reputational damage that goes with those issues.

When you’re facing a claim, it’s too late to start thinking about whether you have adequate coverage. These questions need to be asked ahead of time – before any losses occur.

• Who’s covered? Does the policy just cover the company and its employees? What about contractors and subcontractors? What about vendors and suppliers?
• Which locations and activities are covered? Do you have coverage for your worksites and any offices? What about equipment stored off-site or in transit?
• What are the limits? Many policies contain sub-limits that can drastically reduce the coverage available for certain losses.
• What’s excluded? If a loss is excluded, you won’t have any coverage at all. Some exclusions are standard, while others vary from policy to policy, so it’s important to check this carefully.
• What other policies are needed? In some cases, coverage gaps can be filled with insurance policies purchased by third parties, such as subcontractors or vendors. Identify which policies are needed and confirm that appropriate coverage is in place.

How to Close the Gaps in Your Contractor Insurance Policy

An uncovered loss can threaten a project and jeopardize your construction company finances. Take the following three steps to help mitigate your risks:

1. Require (and confirm) third-party coverage. When using contractors, subcontractors and vendors, written contractors should spell out liability issues and insurance requirements. It’s also important to confirm that the required insurance is in place, and to check this every year when policies are up for renewal.
2. Conduct regular reviews of your contractors insurance. Insurance carriers may introduce new exclusions or restrictions that reduce your coverage and leave you exposed to uncovered claims, so regular reviews are critical.
3. Secure specialty construction insurance. Standard property insurance and general liability insurance won’t cover construction risks adequately. Construction companies require insurance products designed for the construction sector, including important policies like builders risk coverage and pollution liability coverage.

Like construction projects themselves, construction insurance can be complex. Mavrix helps construction companies and contractors manage risk proactively with access to top carriers and custom programs. Contact us to learn more.