A hammer swings down but misses the nail, shattering a window instead. A load of bricks plummets from a scaffold, crushing a parked car below. Slippery wet cement splashes onto a bystander’s clothes, burning their skin. In an instant, accidents like these can turn a construction project into a legal nightmare.
While minor mistakes may seem like an inevitable part of the job site hazards, the liability risks they carry are no small matter. A single claim could bankrupt even the most established of contractors. That’s where general liability insurance comes in, providing critical protection in an industry where dangers lurk around every corner.
As any seasoned builder knows, construction zones are unpredictable beasts. No amount of caution can fully prevent accidents from striking. But the right coverage can help shield a business when the unexpected inevitably occurs.
This article explores the value general liability insurance brings to contractors, large and small, and why it’s an essential piece of staying financially sound no matter what surprises the workday may bring.
What Is General Liability Insurance?
General Liability Insurance (GLI,) also called commercial general liability (CGL) insurance, is a critical type of coverage for companies of all sizes. It provides broad protection against financial losses that may occur due to bodily injuries, property damage, personal injury claims like libel and slander, and more.
This insurance is particularly important for construction and contracting businesses. Their work often involves complex tasks that could potentially cause harm to third parties if mistakes are made. Incidents of accidental injury or property damage during operations are an occupational hazard. If a claim arises, the associated legal fees and settlement costs could seriously damage a small business.
That’s where general liability coverage helps. It reimburses policyholders for expenses related to covered claims filed during the policy period. This includes attorney fees, court costs, settlement payouts, and damage awards if the case goes to trial.
According to the Los Angeles Times, typical GLI policies cover completed work as well, so contractors remain protected after a job is finished. Premiums are affordable even for small firms, starting at a few hundred dollars per year for $1 million in coverage limits.
However, GLI generally does not apply to employee injuries, professional errors, and omissions, or pollution-related damages.
Due to the inherent risks of construction work, GLI has become essentially mandatory for contractors. It transfers those risks away from the business itself onto the stronger shoulders of the insurance company. This crucial protection helps contractors avoid potential financial ruin from an unexpected legal case.
What Does GLI Cover?
The insuring agreement section outlines the insurer’s responsibility for payment under three primary coverage sections, provided the insured meets certain requirements. These include paying the policy premium and following other obligations.
The three primary coverage sections are coverage A – Bodily Injury and Property Damage, coverage B- Personal and Advertising Injury, and coverage C- Medical Payments.
The insuring agreement also details the insurer’s rights, such as settling claims and obligations to defend the insured in covered lawsuits.
Coverage A provides liability protection for bodily injury and property damage claims made by third parties. Bodily injury includes physical and mental harm as well as emotional distress. For example, a customer could suffer a concussion if a large box fell on their head in a store. With a $1 million per occurrence limit, the insurer would likely settle for $200,000, reducing the aggregate limit to $1.8 million.
In another instance, a plumbing company’s faulty pipework caused $80,000 in flood damage to a kitchen. With a $1 million product limit and a $2 million completed operations limit, the insurer would cover the $80,000 claim, leaving $1.92 million remaining on the aggregate limit.
Coverage B covers reputational harm claims like libel, slander, copyright infringement, and wrongful eviction.
For example, if a retail CEO’s false statements about a competitor in an interview led to a slander lawsuit, the policy’s $1 million personal and advertising limit would cover $600,000 in defense costs and damages. $400,000 would then remain available for further coverage or expenses.
Coverage C, also known as medical payments coverage, provides no-fault payments for third-party medical bills, even if the insured was not at fault. With a $10,000 medical payments limit per person, a customer who slipped dancing on a magazine in a store could have their $6,000 medical bill paid in full without reducing the limit.
While the three coverage sections protect against certain liability claims, standard general liability policies also contain numerous exclusions. Claims typically excluded without additional coverage include property damage to insured property, professional errors, injuries to employees, shareholder claims, cyber threats, and liquor liability.
If you want to learn more about the coverage in detail, speaking to a licensed agent would be a wise decision. A qualified agent can explain the types of claims covered, policy limits, exclusions to coverage, and optional additional protections.
Why Do General Contractors Need General Liability Insurance?
According to Commodore Insurance Services, Inc., general liability insurance is indispensable for individuals operating as general contractors. Without sufficient coverage, contractors expose themselves to substantial financial risks stemming from injuries, property damage, or other unforeseen circumstances. There are several compelling reasons why contractors should maintain general liability insurance.
In the construction industry, effective risk management is paramount due to inherent safety hazards. Accidents can occur unexpectedly, potentially resulting in injuries or property damage. General liability insurance enables contractors to mitigate financial losses stemming from unforeseen events beyond their control.
Moreover, many clients and project owners insist on proof of liability insurance before entering into contracts. This requirement provides assurance to clients that the contractor possesses the financial readiness to address any liabilities arising during the project.
Furthermore, certain state and local governments impose minimum liability insurance thresholds for contractors. Adhering to these regulations is essential to avoid penalties or legal entanglements.
Maintaining liability coverage also enhances a contractor’s professional reputation. Clients are more inclined to select a contractor who demonstrates proactive concern for potential issues through adequate insurance coverage.
Additionally, even baseless claims against a contractor can result in substantial legal expenses. Without insurance, contractors risk financial strain in dealing with lawsuits or settlements out of pocket.
With liability protection in place, contractors can focus confidently on their work without worrying about how to cover costs resulting from incidents beyond their control.
Moreover, contractor policies often extend coverage to incidents caused by their work, even if the damages occur off-site. This broad coverage safeguards contractors against liabilities that may arise in locations other than the work site.
It is projected that the size of the general liability insurance market, as measured by gross written premiums, will reach $324.5 billion in 2024. On average, spending per capita on general liability insurance is expected to be around $41.88 in 2024. The growth rate for gross written premiums between 2024 and 2028 is estimated to be 4.07% compound annual growth rate (CAGR), resulting in a total market volume of around $380.7 billion by 2028.
The United States is projected to generate the highest gross written premiums in global comparison, with around $179.7 billion expected in 2024. This data shows that general liability insurance provides critical financial protection for contractors against inherent risks in their line of work. Construction projects involve complex tasks and potential dangers, so accidents are an occupational reality that could ruin a business without proper coverage.
Contractors rely on general liability insurance to shield them from unforeseen claims arising from issues outside of their control, allowing them to focus on their work without fear of financial ruin. It provides valuable peace of mind knowing the business is protected from uncertainties that are an inevitable part of operating in the construction industry. For contractors, the cost of general liability insurance is a small price to pay for such crucial risk management and protection.
