Contract documents

June 16, 2022

It is important to have some knowledge about insurance and bonds going into a construction project. What types of insurance should your architect and contractor carry? What insurance should you have? And, what does it mean for a contractor to be bonded? We will discuss these topics in this article.

Insurance

Architect: Standard insurance coverages that an architect should carry are commercial general liability, automobile liability, workers’ compensation, and employers’ liability, which covers claims by employees not otherwise covered by workers compensation. Commercial liability insurance is a common type of insurance that most businesses carry. It covers third-party claims for personal injury and property damage arising out of the course of normal business operations. Commercial automobile liability insurance covers liability for accidents involving business vehicles. Workers’ compensation insurance is required by statute and provides coverage for injuries sustained by the business’ own employees in the course of their work. It is important to be sure that any business that operates on your premises has workers’ compensation insurance because, if not, you could potentially be liable if the employee of a business is injured on your property.

The architect should also have professional liability insurance. You probably have some familiarity with the types of insurance discussed above but you may not know about professional liability insurance, also referred to as errors and omissions or E&O, insurance. This policy covers the architect for claims made relating to their performance of professional services, such as claims for additional costs required due to a design error.

Some contracts will include fill points in which to specify the amount of coverage that the architect should carry for each of these types of insurance. Contracts for smaller projects may not include that, but you should check with your architect to make sure that they have these types of insurance policies and that you are covered by them, as applicable.

Contractor: Your contractor should also carry commercial general liability, automobile liability, workers’ compensation, and employers’ liability insurance. In addition, the contractor should  have builder’s risk insurance, which covers damage to the work under construction. If the contractor is providing design services, the contractor should have professional liability insurance. In some instances, the contractor may need to carry a specialized form of insurance which is project specific, such as pollution insurance.

As with the architect’s contract, there may or may not be fill points to specify the types and limits of required insurance coverage in the owner/contractor agreement, but you should make sure your contractor has the standard insurance. In some jurisdictions, contractors are required to post their insurance coverages online with the governing agency so the clients can easily access the information. If a specialized form of coverage is needed, that should be written into the owner/contractor agreement.

Owner: You should have liability insurance and property insurance to cover the value of your property. For a residential project such as a remodel, you would want to provide property insurance sufficient to cover the replacement value of your property that might be damaged or destroyed and that is not otherwise covered by the contractor’s builder’s risk insurance. This might be relevant if, for example, during the course of a remodel, there is damage to another part of the structure.

It’s a good idea to contact your insurance agent or broker before signing your agreements to ask for recommendations on what insurance and coverage limits all of the parties should have. You would also want to confirm that the other parties have the required coverages by asking for certificates of insurance or looking at the web site for your jurisdiction if the information is posted there.

Bonds:

Most states require contractors to be licensed and bonded. You can check on a contractor’s license status by inquiring with the relevant government agency in your jurisdiction. States typically have training or education requirements for obtaining a license, which gives you some assurance that your contractor is competent to do the job. The state-required bonds, which are issued by a surety company, usually provide financial resources for completion of the job if, for some reason, the contractor cannot complete it. The owner can make a claim against the bond. Note that a bond is not the same thing as insurance and the surety company, which is paying under the bond, may have rights, such as providing the new contractor and overseeing completion of the project. Again, you should check your state’s specific requirements so that you know exactly what the contractor’s bond will cover. There may be different requirements for commercial and residential bonds.

There are also many types of specialty bonds, such as bid bonds, or bonds that may exceed the state’s minimum bonding requirements, such as performance and payment bonds written with higher limits. These are not typical in residential and small commercial projects but, if you have a project with a higher budget than the state-required bond amount, you may wish to look into requiring your contractor to obtain an additional bond. In that case, you might need to negotiate which party will pay for the cost of the additional bond.

Conclusion

Insurance and bonds are excellent tools by which to allocate risks and provide protections in construction projects.  Although not as exciting to think about as materials for your new countertops or your new gaming room, they are important to incorporate appropriately into your project requirements.

We hope you have enjoyed reading these articles and that they have helped to equip you with some basic knowledge about construction projects. We encourage you to consult with your attorney, insurance adviser, and other relevant professionals prior to beginning a project. And, mostly, we hope you have great success with your project!

Susan Van Bell, Esq. was Senior Director of Content for AIA Contract Documents for over ten years. She is currently a consultant.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.