Crafting Effective Insurance Provisions in Construction Contracts
The construction industry is built on a network of contracts between property owners, general contractors, and trade contractors. Each party seeks insurance protection from the others involved in the project. One of the most critical sections in these contracts is often labeled “Insurance.” Over the years, I’ve encountered numerous provisions—some drafted by attorneys, others by well-meaning do-it-yourselfers—that fall short of their intended purpose. This article aims to help you craft more effective insurance provisions that truly secure the protection you or your client needs.
Use the Correct Terminology: Commercial General Liability vs. Public Liability
The term “Public Liability” has its roots in British insurance and legal language, dating back to the formalization of commercial insurance in the UK during the late 19th and early 20th centuries. If you’re reading this from the United Kingdom, Australia, or other Commonwealth countries, feel free to use this term—it’s widely recognized and sold in those markets.
However, in the United States, no insurance carrier offers a product called “Public Liability Insurance.” Instead, the correct term is Commercial General Liability (CGL). CGL is a foundational business insurance policy that protects companies from financial losses due to third-party claims involving bodily injury, property damage, personal injury, or advertising injury arising from normal business operations.
Therefore, in the United States, use Commercial General Liability in your contract requirements.
Additional Insurance Coverages to Consider
Beyond CGL, your contract’s insurance section should address several other coverages:
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Business Auto Liability: Covers bodily injury and property damage resulting from the use of commercial vehicles.
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Workers Compensation and Employers Liability: Provides statutory coverage for medical expenses and lost wages for employees injured on the job. Employers Liability protects against other employee-related liability claims.
Note: In Ohio, Washington, Wyoming, and North Dakota, Workers Compensation must be purchased through the state. These states are referred to as Monopolistic States. These state policies do not include Employers Liability. In such cases, “Stop Gap” coverage should be obtained through the CGL carrier or an endorsement to a non-monopolistic Workers Compensation policy. -
Umbrella or Excess Liability: Offers additional limits of liability that sit above CGL, Business Auto, and Employers Liability coverages.
These four—CGL, Business Auto Liability, Workers Compensation/Employers Liability, and Umbrella/Excess Liability—form the core insurance protections you should include in your contracts.
Depending on the nature of your project, you may also need to consider:
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Environmental Liability: Essential for projects involving environmental risks, such as asbestos abatement.
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Professional Liability: Necessary when contractors provide professional services, such as engineering. For example, an HVAC contractor offering design services should carry this coverage.
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Privacy/Network Security Liability: Increasingly important when confidential corporate or personal data is at risk. A notable example is the Target Corporation data breach, which originated from a contractor’s compromised access to Target’s vendor payment portal. Depending on your situation, this coverage may be worth requiring from subcontractors.
Determining Appropriate Coverage Limits
There’s an old story in the insurance world: A group of travelers was told to gather stones from the forest floor. The next morning, they awoke to find the stones had turned into precious gems. They were thrilled with what they had—but regretted not collecting more. The moral? When it comes to insurance limits, gather as much as you reasonably can.
While determining the exact amount of coverage needed depends on various factors, here are some recommended starting points for the coverages mentioned:
Commercial General Liability
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$1,000,000 Each Occurrence (Bodily Injury and Property Damage)
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$2,000,000 General Aggregate
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$2,000,000 Products and Completed Operations Aggregate
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$1,000,000 Personal and Advertising Injury
Business Auto Liability
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$1,000,000 per accident for Bodily Injury and Property Damage on a combined single limit
Employers Liability
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$500,000 Each Accident
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$500,000 Each Employee (Injury by Disease)
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$500,000 Aggregate (Injury by Disease)
The above limits could also be $1,000,000 each. Most Umbrella/Excess Liability Insurance underwriters are willing to offer Excess Limits if the $500,000 limits are used. If the project is in a Monopolist State (Ohio, Ohio, Washington, Wyoming, or North Dakota) then a $1,000,000 limit of Stop Gap Coverage ma be required by the Umbrella/Excess Liability insurer.
Umbrella/Excess Liability
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Minimum of $1,000,000, extending over CGL, Business Auto, and Employers Liability
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Higher limits can be considered based on project scope and risk exposure
Professional, Environmental, and Privacy/Network Security Liability
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$1,000,000 is a practical starting point for each
These limits are readily available in the insurance marketplace; however, adequacy should be evaluated based on specific project needs.
Final Thoughts
By understanding the appropriate terminology and selecting the right types and limits of coverage, you can significantly strengthen the insurance provisions in your construction contracts. These protections not only safeguard your interests but also ensure smoother project execution and risk management.
In future parts of this series, I will delve deeper into additional insurance requirements you may want to include, such as waiver of subrogation, additional insured status, and primary/non-contributory language.
Image by Cytonn on Pexels.
About the Author:
Scott T. Harrigan (CIC, CRM, CCIC), currently at Rue Insurance, has over 30+ years of experience in the insurance industry. He creates comprehensive insurance and risk management portfolios for clients. In addition to creating portfolios, he enjoys writing and teaching about various insurance coverages and risk management topics. Scott is an active member of the Rue Insurance Educational Team, providing continuing education classes to Rue Insurance professionals on an annual basis.
