Contract Basics for Contractors: Risk Management Through Insurance and Bonds

By Susan Van Bell, Esq., Consultant, AIA Contract Documents

April 18, 2024

It is critical to know about insurance and bonds going into a construction project. These are important risk management tools. Risk is managed by assigning insurance coverage requirements to the party in the best position to procure insurance to cover a specific risk.  What types of insurance should you and the owner carry? What does it mean to be bonded? We will discuss these topics in this article.


The types of insurance you, the contractor, should carry depend on the scope, type, and any special requirements of the project. In most instances you should carry, at a minimum, commercial general liability, automobile liability, workers’ compensation, and employers’ liability insurance. These are standard types of insurance that any business would typically carry.

Commercial general liability insurance 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. Employers’ liability insurance covers claims by employees not otherwise covered by workers compensation.

Another essential type of insurance that is specific to construction is builder’s risk insurance, which covers damage to the property under construction. If you are providing design services, you should have professional liability insurance. In some instances, you may need to carry a specialized form of insurance which is project specific, such as pollution insurance. AIA Contract Documents publishes an Insurance and Bonds Exhibit that is part of most of its Owner/Contractor Agreements. The Exhibit specifies the types of insurance that are mandatory for the contractor and the owner. It also includes check boxes for a list of other types of coverages that may be selected as applicable to the project, for example, cyber security insurance (owner) and asbestos abatement liability insurance (contractor).

If the owner requires you to carry insurance with limits in excess of what you normally would carry, or if the project requires that you procure a policy that you would not normally carry, you might be able to include the premiums for that insurance as a reimbursable expense in your agreement.

Many agreements will require a listing of the types and limits of required insurance coverage. In some jurisdictions, contractors are required to post their insurance coverages online with the governing agency so clients can easily access the information. If a specialized form of coverage is needed, that should be written into the owner/contractor agreement.

You may be required to provide certificates of insurance to show that you have procured the required insurance coverage.  You may also be required to name the owner, architect, and other owner consultants as additional insureds on your commercial general liability policy.

The owner should have liability insurance and property insurance to cover the value of the project. For a residential project such as a remodel, the owner should procure property insurance sufficient to cover the replacement value of 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.

If there is an architect on the project, the architect should have carry commercial general liability, automobile liability, workers’ compensation, and employers’ liability insurance. The architect should also have professional liability insurance, also referred to as errors and omissions or E&O, insurance. This policy covers the architect for claims made relating to the performance of professional services, such as claims for additional costs required due to a design error.

It is recommended that you consult with your insurance agent or broker before signing your agreements to ask for recommendations on what types of insurance and coverage limits each party should have.


Most states require contractors to be licensed and bonded. The client can check on a contractor’s license status by inquiring with the relevant government agency in the jurisdiction. States typically have training or education requirements for obtaining a contractor’s license. You should be sure to comply with these requirements. 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 a new contractor and overseeing completion of a project. 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, the owner may require you to obtain an additional bond. In that case, you might need to negotiate which party will pay for the cost of the additional bond.


Insurance and bonds are excellent tools by which to allocate risks and provide protection for construction projects.  It is important to incorporate them 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 contracts. 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!

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

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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.