Construction contractors face potential loss with each project they take on. When a loss occurs, it can put a real crunch on a contractor’s cash flow. Large losses have the potential to bankrupt a company or cause them to close for good. Project loss insurance has the potential to save contractors from devastating project losses, no matter the cause.
Project loss insurance, or PLI, is designed to mitigate catastrophic construction project losses. It protects contractors and construction managers from unexpected increased costs in the performance of a construction contract. Its goal is to prevent contractors from going bankrupt or out of business due to a project loss. It also helps contractors manage cash flow during a loss.
Project loss insurance coverage
PLI covers actual or liquidated damages arising from the following:
- Price escalations
- Subcontractor default
- Estimate mistakes
- Delay costs
- Low productivity
- Material delivery delays
- Unforeseen site conditions
- Bad weather
Although PLI can be purchased by any contractor or construction manager, its best use may be with employee-owned companies. A company owner may sell their business to their employees when they are looking to retire and there’s no one ready to purchase the company. Employees often can’t afford to carry the weight of potential losses on a project, so PLI offers them a way to soften the blow.
It can also mitigate the losses caused by employee error, useful when training an estimator or project manager or when there’s a change in ownership.
PLI coverage is broader than subcontractor default insurance (SDI), which is purchased by the general contractor to protect themselves from losses caused by a sub not being able or willing to complete their work.
How project loss insurance works
A contractor applies for a PLI policy and provides financial statements and work in progress reports. The insurance company assesses the financial stability of the company and their estimating and project management processes. Once the policy has been purchased, the insurance company helps the contractor mitigate risks by improving their processes.
When a loss occurs that will exceed the deductible and copay, the contractor submits a notice of claim to the insurance company. The insurer starts a claim on their end and assigns a claim professional. The contractor submits a detailed, sworn proof of loss with supporting documents. The claim professional investigates the claim and may engage experts to assist them. The insurer will then decide if the claim is covered under the policy and pay damages accordingly.
How much does project loss insurance cost?
The premium for a PLI policy is based on the amount of revenue a contractor receives on each enrolled project. The rate is calculated as 0.1% – 0.3% of contract value and is billed quarterly. Commercial project rates range from $1 -$2.50 per $1000, and $2-$3 per $1000 for large civil projects.
When a loss occurs, the contractor is responsible for the deductible and any insurance copays, as per their policy agreement. Payout is subject to policy limits, usually based on project value.
The limits to this type of insurance are based on a contractor’s financial situation and the size of their average project. As with other insurance products, not every contractor will pay the same rate or have the same limits.
PLI does not provide total cost reimbursement. The contractor is expected to carry some of the loss (approximately 25%) through their deductible and insurance co-pays. The insurance company covers the remaining costs attributed to the loss.
Project loss insurance: The pros and cons
- Purchasing a PLI policy entitles you to consultation services provided by the insurance company. The recommendations they make can help you mitigate losses before they happen.
- PLI covers other business losses that are not included in standard insurance policies, like price escalations, subcontractor default, and estimating mistakes.
- It can be purchased by any size contractor, subcontractor, or construction manager.
- Claim payouts keep the cash flowing, even during a delay or other ongoing loss.
- There is a high deductible and copay. This type of policy is only meant to cover large losses that could significantly impact a company.
- Contractors may not be able to pass the cost of the insurance on to project owners.
Alternatives to project loss insurance
If PLI doesn’t make sense for your company, or it is too expensive, there are alternatives that can help protect you from a catastrophic project loss.
Performance bonds protect owners and contractors from the costs of a lower-tier contractor defaulting on the project. They can be purchased by the general contractor to protect the project owner, and/or subcontractors can purchase them to protect GCs. Bonds are cost-effective and cover all expenses caused by default.
Business interruption insurance
If you suffer substantial losses due to fire or a cause covered by property insurance, you can recover the costs to keep your doors open with business interruption insurance. This insurance covers lost revenue, rent/lease payments, relocation costs, wages, taxes, and loan payments.
Subcontractor default insurance
Subcontractor default insurance protects general contractors and project owners from the financial risk when a subcontractor defaults on a project. It helps GCs cover the expenses incurred when a sub fails to perform according to their contract. Due to the high cost of this coverage and the volume of work required (a minimum of $200 million), SDI is only available to large contractors. Contractors are expected to cover some of the expenses, both the deductible and copays.
To find out if PLI or one of the alternatives would be beneficial to your company, contact your insurance agent. They can best determine the type of coverage you need depending on your circumstances.
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