What Is Construction Insurance?

Construction insurance is insurance that covers losses suffered during the construction of a building. As with other forms of insurance, it is a means of managing risk and uncertainty in which the person buying insurance makes regular, comparatively small payments to the insurer in return for compensation in the event of an unexpected and potentially much larger loss. The term construction insurance is often used to refer to several forms of insurance, including builder's risk insurance for harms to the building itself and liability insurance for potential sources of legal liability that may arise during the construction process. Construction insurance is required by law in many jurisdictions in order to legally construct a building.

Builder's risk insurance provides compensation in the event of losses due to damage to the building while it is under construction. It generally covers damage from sources such as vandalism, fires, and weather phenomena such as lightning strikes and high winds. Most construction insurance policies do not cover damage from acts of war or large-scale natural disasters such as earthquakes and floods. The specific sources of damage covered are specified in the policy when it is purchased. Payments from the insurer to the insured in the case of damage to the building under construction are based on the expenses incurred during construction up to that point, not the expected value of the completed building.

The policyholder is usually the owner of the building being built, though in some cases the insurance policy is bought by the construction contractor. A builder's risk insurance policy usually ends when a building is completed. Thus, it should be distinguished from other forms of property insurance, such as homeowner's insurance or landlord insurance, which cover damage to completed buildings. In some cases it is possible for part of the premiums paid to be rolled over into a property insurance policy for the completed structure if construction is completed before the term of the builder's risk policy is up. Builder's risk insurance is sometimes also bought during alterations or additions to existing buildings, though in some cases losses during this work may be covered by the owner's preexisting property insurance for the structure.

Several types of liability insurance are commonly purchased by building construction contractors and may be included in a single construction insurance policy. Worker's compensation insurance insures against medical and legal costs resulting from workplace injuries or deaths among employees of the contractor during construction. Construction work is one of the most hazardous jobs in the industrialized world, and worker's compensation insurance is often legally mandatory for employers in the industry.

Professional liability insurance covers legal damages owed by the contractor if she is successfully sued for professional negligence by her client. Public liability insurance pays for damages if the contractor is sued by a third party who was harmed by a construction accident. This category can include specialized types of insurance for hazards that are especially common in construction, such as pollution insurance for liability due to chemical spills.