A General Liability insurance policy is probably the most critical for builders, remodelers and light commercial general contractors, but also the most difficult to understand.
General Liability responds to covered lawsuits alleging negligence resulted in bodily injury, property damage, personal injury, or advertising injury to a third party. A third party could be a trespasser, visitor, prospective buyer, employee of a sub, vendor, utility company, neighbor, competitor, buyer, or subsequent purchaser. There are endless scenarios where third parties can be injured and sue builders.
Personal injury is defined as committing unintentional slander or libel. An example of advertising injury would be making false statements about a competing builder in your advertising materials. Another example would be infringing on the copyright of another builder by unintentionally using his blueprints or plans in your house design.
A major benefit of General Liability is that it covers the legal defense costs if you’re sued. Even if you’re ultimately found not to be negligent, your legal defense costs can easily exceed $50,000 or even $100,000. The policy also pays up to the policy limits in the event that your insurance carrier decides to settle the case or if you go to trial and lose a jury verdict.
Minimum Acceptable Policy Limits
$1,000,000 Each Occurrence (Bodily Injury and Property Damage)
$2,000,000 General Aggregate
$2,000,000 Products/Completed Operations Aggregate
$1,000,000 Personal/Advertising Injury
$ 100,000 Damage to Rented Premises
$ 5,000 Premises Medical Payments
There are different limits displayed on the declarations page of the modern policy form. The most important is the Each Occurrence limit, which should be at least $1,000,000. This is the amount that the policy will pay for any one covered lawsuit arising out of a single occurrence.
The other two most important limits are the General Aggregate and the Products/Completed Operations Aggregate, which should both be at least $2,000,000. These aggregate limits put a cap on what the policy will pay out for multiple lawsuits during a 12-month policy year. Industry experts recommend that the aggregate limits should be double the each-occurrence limit. The General Aggregate applies to lawsuits that arise from injuries while the construction is in progress and the Products/Completed Operation aggregate applies to lawsuits that arise from injuries that occur after the sale.
The personal and advertising injury limit should be at least $1,000,000. The damage to rented premises limit of $100,000 only comes into play when you are a tenant and you damage the landlord’s building. Premises medical payments with a limit of $5,000 is a no-fault coverage that pays benefits primarily to visitors to your business premises that have slip and fall accidents. If their injuries are more serious, you can fall back to your each-occurrence limit of $1,000,000 if they threaten a lawsuit.
Examples of Covered Lawsuits
Below are actual lawsuits resulting from claims that we’ve received in our office over the past ten years. 
These examples are just the tip of the iceberg. Many lawsuits filed against our builder clients were legitimate, but many others were frivolous or asked for outrageous damage amounts. One suit filed against a client who performed a relatively simple $60,000 fire restoration job sought $6,000,000 in damages. Thankfully, the court dismissed the lawsuit but the legal defense fees were in the $100,000 range.
While construction was in progress (prior to the closing of the sale)
- Child trespasser fell down unguarded stairs
- Worker digging with backhoe severed utility cable
- Worker using heavy equipment threw out spark causing forest fire
- Worker using tractor pinned worker of sub against building
- Sand from job site washed onto neighbor’s property
After construction was completed
- Disappearing staircase collapsed resulting in bodily injury
- Balcony railing collapsed resulting in bodily injury
- Faulty plumbing resulted in leak and resulting water damage to house and contents*
- Faulty electrical wiring resulted in fire damage to house and contents*
- Faulty siding and flashing installation resulted in water damage to house*
- Faulty installation resulted in buckling of floors*
- Deck collapsed, resulting in bodily injury to six persons
* current coverage for construction defect dependent on policy form
Also, some of the examples represent construction defect lawsuits. These lawsuits used to be covered, in many cases in their entirety, by the General Liability policy. However, because carriers were taking heavy losses as a result of the construction defect crisis, most started to either partially or totally exclude these types of claims from coverage. Some of the carriers are now offering coverage buybacks for an additional premium charge. We’ve dedicated a separate video to the issue of construction defect.
The Named Insured on your policy
It’s of essential importance that the named insured is properly listed on your General Liability policy. If a mistake is made here, your insurance carrier has the legal right to deny a claim.
Your policy should list the names of the current legal entities under which you are operating. Most underwriters will allow you to cover multiple entities under one policy if a single owner or group of owners have voting control over all the listed entities.
A legal entity can be a sole proprietorship, partnership, corporation, or LLC. Not only is the entity covered, but coverage is automatically provided for the respective directors, officers, shareholders, proprietor, partners, or employees while operating within the scope of their official duties. This is important, because these individuals will typically be shotgunned into all lawsuits.
The policy should also list past legal entities that you operated under that are still in existence, even if they are dormant. The reason is that such an entity can be sued in the future as a result of a product or construction job that was sold or completed years earlier. This is confusing to a lot of builders until they understand that the General Liability policy only covers bodily injury or property damage that occurs 
within the policy term. As a result, a policy that was carried in the past won’t cover damages that arise after the policy is no longer in force.
For example, suppose John Smith started out as a sole proprietor in 2004 under the name of John Smith Builders and converted to John Smith Builders, Inc. in 2006. In this case, the named insured under the policy should read: John Smith dba John Smith Builders and John Smith Builders, Inc.
The 6 major components on which General Liability premiums for builders are usually based
- There’s a charge made for each active owner by classification code of work performed. The typical classification codes for owners of building companies include executive supervisor, outside sales, or residential carpentry in some cases if the owner performs labor or stays on the jobsite to directly supervise work. Unlike Workers’ Compensation, the class code for executive supervisor is actually more expensive than the class code for residential carpentry. Under the General Liability rating rules, the owner is assigned an assumed payroll, usually $24,100. It’s important to note that owners can’t exclude themselves from coverage under General Liability like they can under Workers’ Compensation.
- Payrolls paid to executive supervisor employees.
- Payrolls paid to other employees by classification code of labor performed.
- Amounts paid to uninsured subs for labor by classification code of labor performed.
- The most expensive for builders is total cost of labor and materials paid to insured subs. Some carriers will also include builder-provided materials in the total cost. This is the most expensive classification because the total cost for labor and materials represents such a high number. Based on our years of experience, a good rule of thumb for estimating the total cost paid to insured subs for labor and materials for the typical builder is to take total projected annual sales less lot costs and multiply the difference by 40%.Many builders want to know why there’s even a charge under General Liability for using insured subs? One reason is that the builder will always be shotgunned into any lawsuit, even if the sub is 100% negligent and carries his own General Liability. Even if this is the case, the builder’s insurance carrier will still spend significant dollars to mount a legal defense. The second reason is because the builder’s General Liability policy may cover certain types of property damage not covered under the negligent sub’s General Liability policy. For these reasons, a charge must be made under the Builder’s policy, even if the sub is insured.
- Ownership of dwellings, acreage of real estate development property, and acreage of vacant land. Ownership of all of these results in exposure to lawsuits and a charge is made under a separate classification code for each.
Policy Set Up Premium vs. Final Premium
When setting up your first policy or your renewal on an annual basis, you’re required to come up with good faith estimates of each of the above six rating components for the next 12 months. These estimates broken out by each classification code will be the basis for the estimated premium that you’ll be charged when your policy is set up. Your insurance carrier will offer a payment plan so that you can spread the cost over many months.
The policy premiums you pay are just an estimate. You’ll be audited at the end of the policy year and an adjustment will be made at that time to take into account your final premium.
WARNING: Lowballing your estimates is dangerous because you’ll be faced with a huge audit bill that is payable within 30 days. If you can’t pay within 30 days, your policy will be cancelled at that time for nonpayment of premium and you’ll find it very difficult to find a new carrier once you have that blemish on your record. It’s always best to set up your policy based on your best estimates, especially since low or no interest rate payment plans are available to spread the cost over many months.
Premium Saving Tips
- Just as with Workers’ Compensation, it’s a no brainer that you want to use insured subs. Even thought there’s a General Liability charge for insured subs, the charge is much lower compared to the charge for uninsured subs. You also want to protect your loss record by making sure that most of the claims are picked up under your sub’s polices. Protecting your loss record is another way to save money in the long term. A better loss record translates into more discounts.
- You must know how to properly collect certificates of insurance from your insured subs. You have to be careful because what appears to be a legitimate or valid certificate of insurance can have flaws that will result in it not being accepted by your auditor. At that point, it can be too late for you to go back to the sub to get reimbursement because he could be long gone or you could have lost your leverage if he is no longer doing work for you. Please view our training video on how to properly collect certificates of insurance.
- You must know how to properly deduct from uninsured subs. The General Liability charges per $100 of payroll are much smaller than those of Workman’s Comp. For this reason, some builders choose not to deduct for General Liability. However, you can save some premium dollars by doing so and this provides incentive for your sub to get his own coverage. If the invoice from the sub breaks out labor vs materials, you should only be charged for the labor portion. On the other hand, if the invoice does not have a break out, the auditor has wide discretion in estimating the labor charge. Most auditors will generally assume that 50% or more of the charge is labor. When the sub provides heavy equipment, most auditors will assume that only 33% of the charge is for labor. Your insurance agent should provide a withholding sheet that indicates what rate to charge for each classification code of uninsured sub. Please view our instructional video on how to properly deduct from uninsured subs.
- The classification code for insured subs makes a charge based on total cost paid to them, which includes both labor and materials provided by the sub. They’re some creative ways that you can structure these transactions to attempt to avoid the auditor picking up the portion attributable to materials. You can purchase the materials separately and provide them on behalf of the sub. As a result, the subs invoice will reflect labor only. It’s increasingly common to pay the material supplier to handle the installation of their materials under a turnkey job. In these situations, you may want to require the material supplier to provide separate invoices for material versus labor. This may allow you to get away with only being charged for the labor portion under the insured sub class code when you’re audited.
- These premium-saving techniques may or may not work. It depends on the auditor and how your carrier interprets the definition of “total cost.” Some insurance carriers include builder provided materials that are used by the sub under this class code. If that’s the case, none of these techniques will work.
General Liability Premium Saving Tips
- Your underwriter has the ability to apply certain discretionary discounts to your policy based on factors such as your premium size, competitiveness of market, loss history, and risk management practices and programs. The total discounts available are usually around 30%- but the underwriters are stingy and tend to save them for their largest and most profitable accounts that are the most proactive in preventing claims.
- The use of insurance carrier-approved homeowner warranty programs on all new home sales can lower your costs in two ways. First, they can lower your long-term premiums to the extent that they protect your loss record by reducing construction defect claims. Many experts believe that the dispute resolution services offered by certain homeowner warranty companies greatly reduce the risks of construction defect lawsuits filed against the builder. Second, one carrier that we represent offers an up front 25% discount for the use of homeowners warranty products from their approved list of five providers.
- The use of carrier-approved subcontractor agreements is a vital part of your risk management program. A well written subcontractor agreement is a form of contractual transfer that allows the builder to shift the risk of many losses to the sub. A well written agreement will specify the insurance requirements that the sub must comply with and have a hold harmless and indemnification provision in favor of the builder. General Liability carriers that insure builders definitely want to see mandatory subcontractor agreements in place on all subs. They’re an indication of strong management practices and will reduce long-term premiums to the extent that they protect the builder’s loss record.
- Builders should be proactive in addressing homeowner complaints. It makes good business sense to be willing to spend several thousand dollars out of pocket to make a potential claim go away. What you have to remember is that the few carriers that do a good job of writing General Liability insurance for builders will become alarmed if you turn in two or more small claims over a three-year period and this will result in the loss of policy discounts and possible nonrenewal of your policy. Also, your documentable loss record stays with you and any new carriers that are approached will be wary if you have several claims on your three- or five-year loss history.
- Do business with an insurance agent who specializes in insuring builders. An insurance agent who has a large book of builder business should represent several carriers that will offer you options. No one insurance carrier can meet the needs of all builders. At different points in time, different carriers run hot and cold on their competitiveness. A good insurance agent will keep you informed about what’s going on in the marketplace for builder insurance and will offer a renewal quote with a different carrier if your carrier is no longer price competitive.
