What Does Contractor Liability Insurance Cover?

Contractor liability insurance provides financial protection for businesses in the construction and contracting sectors. This type of coverage helps mitigate significant financial risks from daily operations, safeguarding a contractor’s assets and business continuity. This coverage protects against claims by third parties alleging bodily injury or property damage caused by the contractor’s business activities. Without it, a single lawsuit or accident could result in substantial financial losses, jeopardizing the business’s future. This insurance transfers risks from the contractor to an insurance carrier, allowing contractors to operate with greater confidence, knowing they have a financial backstop for unexpected incidents.

Key Coverages of General Liability Insurance

Commercial General Liability (CGL) insurance provides fundamental protection for contractors, addressing a wide range of risks. This policy covers claims from bodily injury, property damage, and personal and advertising injury to third parties. It also includes products-completed operations, covering incidents after a project is finished.

Bodily Injury

Bodily Injury coverage addresses physical harm, sickness, disease, or death sustained by a third party, excluding the contractor’s employees. For instance, if a delivery person slips on debris at a job site, the policy covers their medical expenses and legal defense costs. This protection is important for contractors, as their work environments often pose risks to visitors, clients, or members of the public. It helps address medical bills and compensation for physical harm to others, preventing direct financial strain on the contractor’s business.

Property Damage

Property Damage coverage protects against physical damage to others’ property resulting from the contractor’s operations. This includes a construction crew accidentally damaging a neighbor’s fence or a plumbing contractor causing water damage to a client’s basement. The coverage applies to the repair or replacement of damaged third-party property and covers legal defense expenses. This protection is distinct from damage to the contractor’s own work, which CGL policies generally do not cover.

Personal and Advertising Injury

Personal and Advertising Injury coverage extends protection beyond physical injury or property damage, addressing non-physical offenses like libel, slander, false arrest, and copyright infringement in advertising. For example, if a contractor’s promotional material uses copyrighted images without permission, or an employee makes a defamatory statement, this policy section responds. It covers legal defense costs and any resulting judgments or settlements.

Products-Completed Operations

Products-Completed Operations coverage addresses bodily injury or property damage occurring after the contractor’s work is completed and handed over. This includes a newly installed deck collapsing or a heating system malfunctioning post-installation. This coverage is important because many claims in the construction sector arise long after the physical work has concluded. It provides a financial safeguard for liabilities emerging from finished projects or supplied products.

Other Important Liability Coverages for Contractors

While Commercial General Liability insurance addresses many common risks, contractors often need additional liability coverages for diverse exposures. These specialized policies address unique forms of liability outside a standard CGL policy, providing a more complete risk management strategy. Understanding these distinct coverages helps ensure comprehensive protection for various facets of a contracting business.

Professional Liability

Professional Liability, or Errors & Omissions (E&O) insurance, covers financial losses from professional negligence, errors, or omissions in the contractor’s advice or services. This differs from general liability, which covers physical injury or property damage. For instance, if a design-build contractor provides flawed architectural plans leading to structural issues, E&O insurance responds. This coverage is relevant for contractors offering design, consulting, or project management services, where intellectual mistakes are the primary concern. It covers legal defense costs and settlements from claims of inadequate work.

Commercial Auto Liability

Commercial Auto Liability insurance covers contractors who use vehicles for business purposes, whether transporting materials, equipment, or personnel. This policy covers bodily injury and property damage that the contractor’s business vehicles cause to third parties in an accident. For example, if a company truck is involved in a collision injuring another driver and damaging their vehicle, the policy provides coverage. This insurance protects against the financial consequences of vehicle-related incidents.

Workers’ Compensation

Workers’ Compensation insurance covers medical expenses and lost wages for employees injured on the job, and includes an employer liability component. This protects the employer from lawsuits by injured employees in states where workers’ compensation is not the exclusive remedy. It shields the business from direct financial liability if an employee claims negligence led to their injury, covering legal defense costs and judgments. This coverage is distinct from CGL’s third-party liability, focusing on the employer-employee relationship for workplace incidents.

Common Exclusions

Understanding what contractor liability insurance does not cover is as important as knowing what it does cover. Commercial General Liability policies contain specific exclusions that limit coverage. These exclusions define the boundaries of the insurer’s responsibility and prevent coverage for certain uninsurable risks, risks covered by other policy types, or predictable business risks.

Damage to Your Own Work or Products

Damage to Your Own Work or Products is a common exclusion. The policy generally does not pay for correcting or replacing the contractor’s own defective work. For example, if a newly installed roof leaks due to faulty workmanship, the CGL policy would not cover the roof repair itself, though it might cover damage the leak caused to other property. This exclusion emphasizes that liability insurance is not a warranty of workmanship.

Injuries to Employees

Injuries to Employees are typically excluded from CGL policies. These incidents are covered by Workers’ Compensation insurance, designed to address workplace injuries and illnesses for a contractor’s workforce.

Intentional Acts

Intentional Acts causing injury or damage are generally not covered. Insurance is designed for accidents and unforeseen events, not deliberate actions intended to cause harm. If a contractor intentionally damages a client’s property, the claim would likely be denied. The exclusion applies to bodily injury or property damage intended by, or reasonably expected from, the insured’s intentional or criminal acts.

Punitive Damages

Punitive Damages, awarded to punish a wrongdoer rather than compensate for actual loss, are often excluded. While compensatory damages are typically covered, many policies exclude punitive or exemplary damages, and some state laws prohibit their insurability.

Pollution or Environmental Damage

Pollution or Environmental Damage is a significant exclusion. CGL policies generally do not cover bodily injury or property damage from the release of pollutants. Specialized environmental liability policies are usually required for these risks, reflecting the unique and potentially catastrophic nature of pollution claims.

Contractual Liability

Contractual Liability assumed under a contract that would not exist otherwise might be excluded. If a contractor voluntarily takes on additional liability through a contract not imposed by law, the CGL policy may not cover it. This exclusion often has exceptions for liabilities that would exist regardless of the contract or those assumed under an “insured contract” as defined by the policy.

Property of Others in Your Care, Custody, or Control

Property of Others in Your Care, Custody, or Control may have limitations or exclusions. This applies to property temporarily under the contractor’s physical control, such as a client’s tools or materials stored on a job site. While some aspects might be covered, significant limitations often apply, sometimes necessitating separate inland marine or property insurance for such items.

Understanding Policy Limits and Deductibles

Beyond what incidents are covered, understanding the financial parameters of a contractor liability insurance policy is important. Policy limits and deductibles define the extent of coverage and the policyholder’s initial financial responsibility for a claim. These elements determine the maximum amount an insurer will pay for covered losses.

Policy Limits

Policy limits establish the maximum amount an insurer will pay for a covered claim. CGL policies typically have two main limits: a per-occurrence limit and an aggregate limit. The per-occurrence limit is the maximum the insurer will pay for any single incident. The aggregate limit is the total maximum the insurer will pay for all covered claims within a policy period, usually one year. Once the aggregate limit is reached, the insurer will not pay for further claims during that period.

Deductibles

Deductibles represent the amount the policyholder must pay out-of-pocket before the insurance company covers the remaining costs of a covered claim. For instance, if a claim is $50,000 and the policy has a $5,000 deductible, the contractor pays the first $5,000, and the insurer pays the remaining $45,000. Deductibles help manage premium costs by shifting some initial risk to the policyholder.

Self-Insured Retention (SIR)

A Self-Insured Retention (SIR) is similar to a deductible but operates differently. With an SIR, the policyholder is responsible for managing and funding the entire claim, including defense costs and indemnity payments, up to the retention limit before the insurer becomes involved. Unlike a deductible, where the insurer handles the claim from the start, an SIR requires the insured to administer the claim.