Does General Contractor Insurance Cover Specialty Contractors?

Accidents happen, especially in construction. Between miscommunication, the wrong specifications, carelessness, or events out of anyone’s control, things can go wrong, and the damages can be expensive. General contractors know these risks when they take the role. 

But what if the general contractor (GC) isn’t at fault, and a specialty contractor is to blame? Does a general contractor’s insurance cover their specialty contractors’ accidents or mistakes? While there isn’t a cut-and-dry answer to these questions, we’ll take a deeper look into insurance coverage and what happens in these situations.

Who is covered by an insurance policy?

At their core, insurance policies are agreements between two parties: the insurer and the policyholder. 

The policyholder is the primary beneficiary of the policy. What this means is that financial losses caused by accidents, mistakes, and other issues that are the fault of the general contractor will be covered under the policy. This is the case when the losses impact only the contractor or sub holding the policy, or when a mistake affects a third party. 

If a specialty contractor accidentally drops a steel beam on the project manager’s new sports car, that contractor’s liability insurance policy would likely cover the damage. The car owner generally can't go after a different contractor's insurer for the damage.

GC insurance & specialty contractor coverage

In some states, GCs and specialty contractors are required to carry an insurance policy in order to obtain a contractor license. However, the types of policies and their limits (the maximum amount claims can pay out) are not the same.

With the amount of risk involved in a standard construction project, general contractors may need to hold multiple policies. General liability, builder’s risk, and specialty contractor default insurance are among some of the policies a GC may consider, but there are several others as well. Let’s take a look at each of these policy types — and whether or not a GC’s insurance will cover specialty contractors.

General liability insurance

Verdict: A contractor’s general liability insurance generally does not cover specialty contractor damage. 

A general liability insurance policy protects the policyholder from claims of property damage or bodily injury caused by the contractor or its employees. This policy may also cover legal fees involved in certain types of lawsuits. The contractor (policyholder), the property owner, or a third party unrelated to the problem may file a claim against the policy.

For example, if a plumbing contractor accidentally damages the foundation of the building they're working on, their general liability insurance policy will likely cover it. Or, if that same contractor damaged the neighboring structure while in the course of their work, they could submit a claim through their general liability policy. 

General liability is a common type of insurance carried by construction companies. It affords the contractor some stability against financial stress, helping them continue to provide quality service. It can also give the property owner a safety net against mistakes or accidents caused by the contractor.

A general contractor may add a specialty contractor as an additional insured entity under their policy, but this is not a requirement.

Builder’s risk insurance

Verdict: Builder’s risk insurance may cover specialty contractor damage in some situations. 

When a contractor or project owner wants to protect the structure against risk, they can purchase a builder’s risk insurance policy. Builder’s risk insurance protects the building while it’s under construction or renovation, allowing the policyholder to recoup losses caused by accidents, fires, weather, vandalism, theft, or other risks named in the policy. The work completed by the specialty contractor will be covered, though damaged or stolen equipment may be on a case-by-case basis. 

There are certain damages that a builder’s risk insurance policy won’t cover. Events like damage to tools and equipment, faulty building design, or defective materials generally aren’t covered in a builder’s risk policy. 

Specialty contractor default insurance

Verdict: Specialty contractor default insurance covers the policyholders against specialty contractor failures.

Specialty contractors don’t always complete their obligations for various reasons, and the financial implications of this can be significant. Contractors can protect themselves from these risks by purchasing specialty contractor default insurance (SDI). 

SDI protects policyholders against the financial losses caused by a default of performance of a specialty contractor. For example, if a specialty contractor fails to complete their obligation and causes schedule overruns, the need to hire a new specialty contractor, or other negative ripple effects, the policy may cover the costs associated with the failure. 

Wrap policies (OCIP/CCIP)

Verdict: Wrap policies may provide general liability insurance to everyone on the project, including specialty contractors.

In situations where the project owner or general contractor prefers to carry a policy that may cover uninsured specialty contractors, they can purchase a wrap policy, known as a controlled insurance program (CIP).

A CIP provides everyone on the project with general liability insurance, allowing some specialty contractors to forgo carrying their own policy. In some cases, a wrap policy may even include workers' compensation coverage.

There are two forms of wrap policy: OCIP and CCIP. An OCIP stands for Owner Controlled Insurance Policy, while CCIP stands for Contractor Controlled Insurance Policy. The main difference between the two is who purchases the policy.

There are several reasons contractors and owners purchase a wrap policy for a project. First, it helps ensure that any accidents or mistakes are addressed as seamlessly as possible. Since one insurer provides coverage, multiple companies won’t be fighting over responsibility for payment. Also, a wrap policy may allow a project owner or GC to avoid penalties for hiring uninsured specialty contractors.

Bonds and specialty contractor coverage

While insurance protects the policyholder from loss due to accidents and mistakes, a bond is quite different. A construction bond is a three-party agreement between the principal (i.e., the contractor), the surety, and the obligee (i.e., the person hiring the contractor). 

The bond is purchased by the contractor and protects the property owner from financial risk. A GC’s performance bond protects the owner from non-performance of the prime contract. A payment bond protects the owner’s property from mechanics lien claims in case a specialty contractor or other party doesn’t receive payment. 

A contractor’s bond typically does not cover the actions of specialty contractors unless they are specifically named on the bond. In practice, if a specialty contractor defaults on a critical path task, it could cause the GC to default on their prime contract and could lead to a claim on the bond.

How to ensure specialty contractors are covered

The effects of accidental damages and injuries can sidetrack a project or result in financial stress. For those reasons, general contractors and project owners should ensure they are protected against specialty contractor mistakes or damage. 

Luckily, obtaining coverage for specialty contractors isn’t difficult. Project owners can require the general contractor to purchase a specialty contractor default insurance policy, while also providing proof of their own coverage. Or, general contractors can require specialty contractors to provide proof of their insurance policy, and the general contractor can keep track of specialty contractor policies along with other compliance documents.

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