4 Key Options for Construction Liability Insurance

One of the most frequent questions we receive is “What are my options for construction liability insurance for our development project?” The reality is, there is no one-size-fits-all solution. Every project, whether it’s ground-up construction, a renovation, or an adaptive reuse, comes with its own unique challenges. Factors, such as project size, state laws, asset class, geography, project duration, and whether we are working directly with the developer or the contractor, all influence the insurance strategy that should be considered.

In this article, we give you a brief overview of the four main options for satisfying construction liability insurance. Our goal is to give you a foundational understanding so that you feel confident discussing. The Baldwin Group’s Real Estate and Construction Practices will guide you through the details and help you make informed business decisions about which insurance route is best suited for each of your projects. Additionally, we can assist in budgeting for these coverages to help ensure you are prepared for premium payments when they are due. We’re here to support you every step of the way.

What is liability insurance on a construction project?

Construction liability insurance is a type of coverage designed to protect against risks associated with accidents, injuries, or damage that can occur on a construction site. This insurance responds if someone is injured or third-party property is damaged due to construction activities, typically excluding injuries to the contractor.

For instance, if a group of teenagers sneaks onto a job site at night and someone gets hurt, or if a passerby is struck by falling debris, liability insurance should provide coverage. Beyond accidents, this insurance can also address defects that arise during the applicable statute of limitations or repose period — often referred to as “completed operations coverage.”

We encourage our developer and contractor clients to carefully assess all available insurance options to help ensure broad protection and compliance with lender requirements.

Consider this example: as a developer of a newly constructed residential building, you receive reports of leaking shower trays in multiple units. An investigation reveals extensive water damage and mold due to faulty installation across nearly every bathroom in the building. Even though the project is complete, you are now facing substantial repair costs and legal fees stemming from a class-action lawsuit. With the right construction liability insurance in place, many costs would be covered, helping ensure you are financially protected against such unforeseen issues.

Four main options for construction liability insurance:

1. Owner Controlled Insurance Program (OCIP)
   • An OCIP is a liability product placed by the owner that insures the owner, contractor, and all enrolled subcontractors. This option offers comprehensive coverage throughout the project’s duration and extends through the applicable statute of repose for completed operations or product defect claims.
   • OCIPs are not always the most cost-effective option but should be considered for all viable development projects. Institutional lenders often favor this option.
   • Benefits include the owner’s control over coverage quality and limits purchased, cost transparency, deductibles, and non-shared limits with other jobs. The owner is also protected from issues, like subcontractor non-payment, limit exhaustion, or exclusions specific to the subcontractor’s work, or insurance policy exclusion specific to the subcontractor’s work.
   • Modern OCIPs are less administratively burdensome due to improved wrap administration teams in place for the life of the project.
2. Contractor Controlled Insurance Program (CCIP)
   • A CCIP is similar to an OCIP but is placed by the contractor to insure the owner, contractor, and all enrolled subcontractors.
   • This coverage also lasts for the project duration plus the statute of repose for completed operations or defect claims.
   • Owner/developers should carefully evaluate a contractor’s CCIP, considering whether the policy is shared with other projects, the status afforded to the owner on the policy, potential coverage gaps, and administrative fees charged back to owner.
   • CCIPs provide contractors with control over the insurance process, costs, and claims, however can offer comprehensive coverage to all parties involved. But not all CCIPs are created equal, and coverage can vary significantly from one policy to another. Developers should carefully review the specifics of a CCIP to understand its scope and limitations. In some cases, an additional owner’s interest policy may be necessary to address potential coverage gaps.
3. Owner/general contractor (GC) project-specific insurance (dual interest program)
   • This program insures both the owner and the GC equally but excludes subcontractors, who must carry their own liability insurance.
   • Typically placed by the owner but can be placed by the GC, this option is often suitable for smaller projects when a CIP or wrap is not viable for whatever reason.
   • Institutional lenders generally accept this option. However, it’s important to monitor subcontractor compliance with insurance requirements. In other words, if a subcontractor lacks the necessary insurance, it could affect the coverage available to the owner or contractor under this policy.
   • Contractors using their CCIP program are incentivized to implement strong safety programs, as they bear the risk for the project’s insurance and incidents may impact their larger corporate programs. This can lead to fewer accidents and lower claims.
4. Traditional insurance
   • In this approach, the contractor insures themselves, trades insure themselves, and the owner usually insures themselves, despite often being added as an additional insured by those performing work onsite.
   • This is the least sophisticated and comprehensive of all the options and is generally reserved for smaller projects, like renovations or fit outs, when the risk of a catastrophic loss is lower, and owners are more willing to accept coverage gaps or shared limits.
   • The traditional route may be less costly, but it often offers less protection and quality. Many institutional lenders will not accept this for large ground-up projects, accordingly.
   • Due to coverage limitations, potential exclusions, and the complexities of renewals, the traditional route requires careful consideration and may necessitate supplemental coverage, such as an owner’s interest policy, to effectively manage risks. Additionally, it’s crucial to ensure that proper contract language is in place with every trade working on the site.

In conclusion

Selecting the appropriate construction liability insurance is critical and should be based on the unique characteristics of each project, the roles of the parties involved, and the comprehensiveness of coverage required. We encourage our developer and contractor clients to carefully assess all available options to help ensure broad protection and compliance with lender requirements. Even if you are a contractor relying on your development partner’s insurance, it’s important to confirm that your own interests are fully protected.

It can be challenging and time consuming to navigate your insurance options, which is why we’re here to help guide you. Our expertise lies in navigating the complexities of construction insurance, helping ensure that you are well-informed and adequately insured.