You'll need more than one!
Main topic: What kind of insurance do I need?
After strong contracts, insurance is the second most important consideration during a development project.
The first thing to know about how insurance works: if you don't have a signed contract, the other party’s insurance coverage is not in effect.
That's right; without a contract, those insurance certificates in your inbox do not indicate coverage. When a claim is filed, one of the first things an insurance company will require is the contract under which the work was commissioned and during which the claim arose. If there is no contract to be had, you're in a bad way!
There are two general categories regarding insurance coverage. The first is the insurance you need for your development company, and the second is the insurance you should require other involved parties to carry. Both are crucial in ensuring that all project activities performed by your team or any other party are adequately covered. It is also relevant to note that these types of insurance are different and, for most development projects, are required.
1.Own Insurance. This is pretty straightforward. You need your own insurance. The purpose of having insurance is to cover the project from claims that occur while the work is ongoing. The two types of insurance you will need are:
Builder's Risk
General Liability
2. Other's insurance and Proof. Aside from your own insurance, you need to ensure all contractors and consultants working on the project are also sufficiently insured and that the applicable project entities are named 'additional insureds.’ Typically, lenders and insurance companies will require that you add insurance-related language to the contracts to ensure that insurance types, limits, and indemnification clauses are adequate. Ask your insurance broker and lender if they have standard/specific language you need to use. The types of insurance other parties will need to have for the project to be sufficiently covered are:
General Liability
Worker's Comp
Excess & Umbrella
Professional Liability
SDI/Bonding (Not exactly insurance like the rest, but another 'insurance-like' item you need to account for in project costs and that lenders will undoubtedly require
3.Wrap Policies like CCIP/OCIP and what they cover. This is where most people get really confused. CCIP stands for Contractor Controlled Insurance Program (OCIP is the same, but "Owner" instead of "Contractor"). This is exactly what it sounds like: a program the contractor/owner administers. It is essentially a master insurance policy that provides commercial general liability, excess, and worker's comp, depending on what the project requires.
The way it works is that once it is established that this is the type of insurance strategy for the project, all relevant parties will 'enroll' in the program. This includes the contractor, subcontractors, and owner. The benefits of a CCIP or OCIP are many. The two most significant ones are that all insurance terms are pre-established to meet the project’s needs, so coverage for every party enrolled is uniform, and second, that the amount of paperwork and fees passed down to subcontractors is much lower than if they had separate policies. Since adequate coverage is guaranteed, the risk is lower, and the rate (which is passed on to the owner) is often lower, too.
A wrap policy can get tricky in its administration, making it a better option for projects where the contractor or owner has existing wrap policy coverage currently being used for other projects, and there is efficiency in dealing with the required paperwork. When neither the owner nor the contractor has project volume to support a master insurance program, it is better (in terms of administrative cost) to go with individual policies as required.
Aside from lender requirements, there are some cases when additional insurance types or higher-than-normal insurance limits are required. Some examples include government projects or projects on government land, certain neighbors that may be part of neighboring agreements or projects where you are working on an improvement within someone else's building. In some instances, additional insurance may be very costly and should be considered when underwriting a project.
This leads me to the usual advice I often share: each project is different and has unique requirements. While there are some general guidelines for what insurance your project will need and what it is likely to cost, it is best to check with your lenders, capital partners, insurance broker, and construction counsel to ensure all project-specific bases are covered.
1. Builder's Risk.
Builder's Risk insurance is required (most often by lenders and local jurisdictions) to cover a building for the many risks it will endure while it is under construction. This coverage indemnifies the land owner, who, under common law, also owns the building as it is being built.
Technically, Builder's Risk insurance can be purchased by the GC or the owner, although it has become customary for the owner to purchase the insurance directly. Should a claim arise, the owner (not the GC) would be the payout beneficiary and thus could direct how the funds are used. Whereas if the GC were the policyholder, they could (in theory) take the cash and not use it to repair the damage for which they are being indemnified.
Typically, Builder's Risk will cover most property theft and physical damage to the project, with some exceptions. It will not cover things like personal injury, damage to equipment, or damage related to faulty materials or drawings. Builder's Risk insurance will typically also carry exclusions for natural disasters like hurricanes, floods, or earthquakes. A specialty rider is recommended and sometimes even required by the lender in areas prone to these natural phenomena.
So how do you get covered for everything excluded from Builder's Risk? You guessed it! You'll need other types of insurance.
2. General Liability.
One of those other policies you'll need is General Liability. Every party involved in the project must carry their own GL-- from consultants to subcontractors. Ensuring that everyone's GL insurance policy has adequate limit amounts and lists the relevant project entities is crucial, as is ensuring that all related contracts are executed before construction begins.
The most significant coverage that General Liability insurance provides for development projects are property damage and bodily injury. This coverage differs from what is provided under Builder's Risk and Worker’s Comp in that GL is intended to cover claims that can occur during "common business operations.” This means that GL will cover claims like someone slipping on site and getting injured as a result but will not cover things like a subcontractor getting injured while performing the work. General Liability also covers other things like reputational harm or copyright infringement.
General Liability does not cover employee illness or injury caused by performing the work, errors in professional service, or commercial auto accidents, among other items. All of these items are covered under different and specific policies.
3. Worker's Comp.
Although labor law varies from state to state, the requirement generally is that if a company exceeds a certain number of employees (typically 3-5), that company is required to have worker's compensation insurance, with some exceptions.
If a company meets the criteria, it must carry worker's compensation, and its certificate of insurance must show the limits as required for the project. Small companies may fill out a waiver form to document that they do not meet the threshold and are therefore not required to carry this type of insurance-- this is acceptable only for worker's comp.
Worker's compensation insurance covers injury and illness resulting from a work-related cause. It does not cover willful negligence or intentional self-harm. It is intended to cover categories like medical expenses and lost wages, among other things (like funeral expenses and ongoing care).
While it is not required for the project owner to show proof of worker's comp in relation to a project, it does not mean they are exempt from state and federal requirements when it comes to company operations outside of project-specific activities.
4. Excess & Umbrella.
No insurance policy will cover beyond the stated policy limits. Sometimes, claims can exceed these limits-- this is where Excess and Umbrella coverage kicks in.
Even though these two terms are often used interchangeably, they have one notable difference. Excess is used to extend the coverage of a single policy (typically GL). In contrast, commercial Umbrella is typically used to extend the limits of several policies, often including GL and auto.
These policies are basically insurance over insurance. They further help minimize risk by extending the insurance limits of existing policies to cover things like an escalating lawsuit. For this reason, they are essential for smaller businesses. It is important to note that Excess and Umbrella policies typically do not widen coverage since they follow the same terms as the underlying policies, so it is essential to understand the range of coverage all other policies provide.
5. Professional Liability.
Professional Liability Insurance, also known as "Errors and Omissions" Insurance, covers exactly that. Claims arising from damage related to mistakes in the project drawings are typically covered under a PL (AKA EO) policy. This is why it is essential to execute contracts with consultants early in the design process-- remember that without an executed contract, insurance is ineffective.
More specifically, EO policies typically cover claims arising from work performed in the past, alleged or actual negligence, defense costs, and claims by temp staff or independent workers, among other things. PL doesn't cover bodily injury, property damage, or willful acts.
Any consultant that is providing drawings used for the execution of the project should carry and provide proof of professional liability insurance. There are very few exceptions when I agree not to require PL insurance, and those exceptions rarely occur on commercial projects.
6. SDI/Bonding.
What is SDI?
SDI stands for subcontractor default insurance, and it is exactly what it sounds like. On a project with SDI, the general contractor is always the policyholder.
Default insurance essentially allows the general contractor to replace a subcontractor on the project due to contract default. The GC can then bring in a new subcontractor and file a claim with the insurance company to recoup the cost related to replacing the original sub.
This process allows for a swift resolution of a subcontractor default, and it shifts the risk to the general contractor. The other obvious benefit is that it doesn't delay project progress until after the default is cured since the defaulting subcontractor can quickly be replaced. And while there may be some delay related to bringing a new sub up to speed, it is less likely to be a catastrophic delay.
For this reason, SDI is becoming more prevalent in large projects where general contractors can handle this increased risk and where subcontractors will often hold considerably large contracts that can potentially derail an entire project. For smaller projects, bonds are a better option.
What are Surety Bonds?
A surety bond works the same way as a bail bond, where a third party assesses the actuarial risk of a subcontractor and agrees to guarantee (for a fee) to the general contractor the subcontractor's performance on the project.
Since bonding is based on actuarial risk on a case-by-case basis, smaller and newer subs are often not 'bondable.’ For this reason, subcontractors with small scopes are sometimes not bonded.
While this is okay on smaller projects, given that the default of a single, smaller contractor is unlikely to derail the job, this is not adequate on large jobs with proportionately larger subcontracts.
Typically, I recommend that owners require GCs to request bonding for all 'wet trades' and for all subcontracts exceeding $500k. If you're ever on a large project ($5M+) and a major trade refuses to bond, consider that a red flag.
When a project gets large enough, SDI is always the better option since it allows for a swift default resolution and is likely to cover more trades than just those that a surety deems as 'bondable.’
It is also good to keep in mind that bond costs are a great way to additionally vet contractors. If you see a GC or sub stand out of the pack because of a high bonding fee, this may be a sign to look further into their financials, safety, or legal track record.
The Limits & The Certificates.
In order to make sure third parties are insured as required, it is imperative to ask for a Certificate of Insurance, especially when performing work on site. A "COI" is essentially a term sheet issued by the company that provides the insurance that lists the terms and limits of the insurance.
Certificates of insurance follow a very narrow industry standard, which means your insurance broker can provide you with sample COIs you can send to consultants and contractors so they know your specific project requirements. Once you have a set of insurance standards for your projects, checking others' insurance terms becomes a cursory task.
A section of the insurance certificate that often gets overlooked is right below the type of insurance description. This area offers options that significantly affect total coverage. You'll want to ensure the boxes selected reflect the correct requirements because a limit attached to all claims made against the policy is not the same as a limit attached to the project.
The other important part of a COI is towards the bottom of the first page, where the certificate holder entity and the additional insured entities are listed. This language should match exactly the entities listed in the corresponding contract under the insurance and indemnity sections.
Finally, keep in mind that all projects are different. The newsletter aims to give you a starting point from which you can ask informed questions. Your consultants (including your insurance broker and construction counsel) are your best resource regarding your specific project's insurance requirements. If, for some reason, you cannot get good explanations from your broker or counsel regarding indemnity and insurance terms and limits, consider interviewing other brokers/lawyers!
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Main topic ideas for future newsletters.
Between conversations with clients, industry professionals (and RE Twitter) these are some subjects we will be diving deeper into in future newsletters.
Creating contract templates (guest newsletter writer)
What is MADDPROJECT's consult service for?
How to create an Anticipated Cost Report
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