When I first learned the basics of commercial construction, I perceived the main benefit of a construction management firm’s involvement to be expertise and experience. Although these are pretty critical qualities, one main area I wasn’t considering were the licenses, insurance, and bonds that GCs carry, making their involvement key in risk mitigation. These components of a construction manager or general contractor’s work are a fundamental reason that a building owner cannot buy a software solution and take care of each element independently.
I stumbled upon an article within the April 2016 edition of Construction Business Owner Magazine that covers a few pointers surrounding the requirements and options available to construction companies to reduce risk as much as possible—insurance and surety bonds being the main focus. Being equipped with relevant bonds, insurance, and licenses means general contractors and construction managers are able to offer unique features that allow business owners to be free of worry about this protection.
What is the Significance of Bonds and Insurance – and what’s the difference?
To spare the breakdown of what an insurance relationship looks like between insurer/insured in a general sense, I’ll apply it directly to a construction project. With the potential for an accident in the field, there are two main types of insurance that come into play in a contractor’s work: general liability insurance covering whichever property damage/bodily injury areas the policy protects, and workers’ compensation insurance encompassing the inevitable accidents that can occur in physical work. The difference between the two lies within the party receiving the protection. General liability insurance from a construction perspective covers the contractor from any costs if a third party suffers any damage. Compensation insurance presents coverage for employees if they become injured on the job.
Bonds, on the other hand, work a little differently. The surety bonds that are a part of construction engagements involve an agreement where three parties align: the contractor (the principal), the party that requires the bond in order to issue the license (the obligee), and the firm that is writing the bond and backing the financial end if the GC cannot meet the contracted terms (the surety). This property provides financial coverage that is a bit more specific towards contract details and scope. These bonds often serve as a prerequisite for many licenses to perform work on certain projects. There are also bid bonds which qualify certain bidders by showing project owners that bidders are 100% in a position to deliver quality work on their project.
Why This Distinction is So Important
In order to have the most confidence in your policy, you need to know what the traditional coverage for that type of insurance property entails. There are a lot of broad claims that can make one type of policy seem to encompass the coverage of another—but in reality do not. Circumstances can pop up where with a surety bond, if a contractor fails to adhere to their agreed terms in the bond (even if they are deemed unclear), then a claim payment may need to be made for the full bond amount by the surety to the obligee. In other words, make sure you understand and agree to all components of the documents so that they don’t ever work against you.
Construction management experts, JH Greene & Son, recognize this distinction and are fully equipped to roll-out your next project with the full protection needed to ensure successful, comprehensive coverage from conception to completion.