INSURANCE: LIABILITY, WORKER’S COMP and BUILDER’S RISK

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By their nature, construction projects carry a fair amount of risk – among other things, you’ve got big trucks and power tools that can cause damage, heavy objects that can fall, workers who can fall from rooftops and stagings, and partially built spaces full of danger and attractive to kids.

There are three main kinds of risks, each covered by a separate type of insurance. If the contractor is not properly insured, the homeowner can be held liable for any of these risks.
View the Insurance clause in our Model Construction Agreement.

General Liability

The contract should require that the contractor carry General Liability insurance with you as an “additional insured” for the duration of the project. General Liability insurance offers broad protection against third-party claims. It is relatively inexpensive in most parts of the country, but can be quite costly in high-cost regions.  While the type of losses covered are relatively rare, they can also be quite large. Some cities and states require contractors to carry this coverage.

General liability insurance protects you from claims caused by accidents at the job site that harm property or people other than workers (who should be covered by Workers Comp). Claims could result from falling objects or job-site conditions, like ditches, that injure visitors to the job site, or kids who hurt themselves while playing in the partially built structure. It also covers claims by third parties caused by failures of the new structure, like a deck collapse. Of course, there are always coverage limitations and exclusions (aka, weasel words), so read the fine print.

Worker’s Compensation

The contract should also require the contractor carry Worker’s Comp insurance for all employees. Otherwise, you will be liable for injury to workers. Although this coverage is required by law, it is expensive insurance and some contractors do not carry it. In addition, your contractor should require that his subcontractors provide him with their proof of insurance.

Builders Risk

Finally, you (or your contractor) should carry Builder’s Risk insurance, which covers damage to the building or materials during construction. Also known as “Course of Construction” insurance, covered risks typically include fire, storms, theft and vandalism.  On a renovation project, this may already be covered by your homeowners insurance or can be added as an endorsement. On a new home, you may be able to get a policy that converts to homeowners insurance upon completion of the project.

Lenders will typically require all these insurances, but you will want them regardless, along with proper documentation of coverage. For example, AIA A105 states that “Each party shall provide certificates of insurance showing their respective coverages prior to commencement of the Work.” Again, the contractor should also require his subcontractors to provide him with proof of their insurance, naming the contractor as an “additional insured.”

Many contracts carry indemnification or “hold harmless” clauses that essentially state that one party will not sue the other in the event of a loss. An indemnification clause may further try to protect you from third parties who are harmed and go after you, rather than the contractor. People try to write indemnification clauses as broadly as possible in an attempt to protect themselves from liability. These do not always hold up in court, but may protect you from a lawsuit if, for example, the contractor is uninsured or underinsured, and decides to sue you for damages or injury that occur during a project. These can get pretty verbose and technical. For example, the Indemnification clause in the AIA A105 (the short-form contract) reads:

8.12 To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claims, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.

Bottom line. Construction is risky business, so make sure you and your contractor are properly insured. In general, you, the owner, will be held liable for all claims if the contractor does not carry the proper insurances. When in doubt, ask your lawyer for advice.

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