There will always be a risk that something will go awry during construction projects. When problems occur the result is usually costly time delays and a range of additional material, labor, and damage costs.
Many construction business owners view insurance as a primary line of defense. Insurance is appropriate, but it is not always economically feasible or efficient to insure every possible risk. For trade-specific liability options, contractors may review Subcontractors General Liability for examples of how coverage can be tailored.
Risk management strategies
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Transfer of Risk. There are parties, aside from your own insurance, to which you might transfer risk. Two common transfers are being named as an insured on an alternative insurance contract and using express indemnification (hold harmless) clauses. When you are named on another party’s insurance, their coverage can extend to you and their policy may pay your share of a covered loss.
A common contractual transfer is an indemnity clause. A type one (broad form) indemnity states the indemnitor will hold the indemnitee harmless regardless of whether the indemnitee caused the loss. A type three (comparative fault) clause makes the indemnitor responsible only for the loss they caused. The most common is a type two (intermediate form), where the indemnitor assumes the risk unless the indemnitee is solely responsible for the loss.
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Risk Sharing. There are often opportunities to share risk with other parties on the project. Contracts commonly include clauses that make each party liable for losses caused by their actions or inaction, allocating responsibility across the project team.
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Risk Retention. All construction businesses inevitably retain some minor risks because it is not cost-effective to insure everything. Minor retained losses—like the cost of redoing a few days of work—are typically paid from operating budgets. Insurance deductibles are another example of retained risk; ensure retained amounts are valued and can be funded if a loss occurs.
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Risk Avoidance. Some risks are best avoided entirely. For example, choosing a noticeably cheaper material that may be defective can jeopardize longevity and reputation; avoiding that supplier can protect the business.
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Risk Prevention. Risk prevention focuses on actions to avoid negative events. Simple carelessness often causes accidents, so preventive steps—keeping walkways clear, securing idle tools, and ongoing training for employees and supervisors—reduce incident rates.
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Risk Control. Risk control aims to reduce losses when negative events occur. Examples include posting emergency response numbers and maintaining procedures that limit damage. Like prevention, effective control requires ongoing training for employees, supervisors, and managers.
Different trades and operations may need specialized policies or endorsements. For example, businesses that perform installations can compare options like Home Furnishings Installation - Business Auto Insurance to address auto and installation exposure.
If you're unsure which transfers, controls, or policies fit your business, talk to an agent for a review of options and next steps.
Frequently Asked Questions
What is the difference between risk transfer and risk retention?
Risk transfer moves responsibility to another party or their insurer, while retention means the business accepts and funds the loss itself, often for smaller, predictable costs.
Can I require subcontractors to insure me on their policy?
Yes, contracts frequently require subcontractors to add the general contractor as an additional insured on their liability policy, subject to the subcontractor’s policy terms.
How should I decide what risks to avoid versus retain?
Evaluate the financial impact and likelihood of the risk; avoid risks that threaten reputation or solvency, and retain minor, manageable risks funded from operating budgets.
How often should training for risk prevention and control occur?
Training should be ongoing and refreshed regularly, with additional sessions when processes, equipment, or personnel change.