Insurance and surety are the parts of a construction contract most owners delegate entirely and read only once, usually while something bad is happening. That is unfortunate, because the decisions are cheap to get right at award and expensive to fix afterward.
This is an orientation, not legal or insurance advice. Coverage terms vary substantially and every project should be reviewed by the institution's broker and counsel.
The Two Different Instruments
Insurance transfers risk of loss to an insurer in exchange for premium. It responds to covered events — fire, storm, theft, injury, certain defects — subject to its terms, limits, and exclusions.
Surety bonds are not insurance. A bond is a three-party guarantee that the contractor will perform. If the contractor defaults, the surety steps in, and it then pursues the contractor for what it paid. Insurance spreads loss; a bond guarantees performance and expects reimbursement.
Owners sometimes assume a bonded contractor is an insured one, or that a general liability policy covers defective work. Neither assumption is reliable.
Coverages That Matter to the Owner
Builder's risk covers the work in progress against physical loss — fire, wind, water, theft of materials. Key questions: who procures it, whose interests are named, what the deductible is and who pays it, whether it covers materials stored offsite and in transit, and critically, when it ends.
Commercial general liability covers third-party bodily injury and property damage. Owners typically require to be named as an additional insured, and the wording of that endorsement matters more than its presence.
Professional liability covers design errors. Where design responsibility is shared — design-build, or a contractor with delegated design — an owner should confirm that professional coverage actually follows the design responsibility, because general liability generally will not.
Workers compensation and umbrella coverage round out the typical requirement set. Umbrella limits are worth sizing against the actual exposure of the project rather than a habitual number.
Payment and Performance Bonds
A performance bond guarantees completion of the work if the contractor defaults. A payment bond guarantees that subcontractors and suppliers get paid, which protects the owner from liens and from paying twice.
Two practical points. First, bonding capacity is a useful screen: a surety underwrites the contractor's finances and track record, so a firm that cannot obtain a bond at the project's value has failed a financial review the owner might not otherwise perform. Second, a performance bond is not a fast remedy — invoking it involves declaring default, and the surety has options including financing the original contractor. It is protection, not a switch.
Both are usually mandatory on public work and worth serious consideration on private institutional projects, particularly with a contractor the institution has not worked with before.
The Gap Owners Miss Most
The most common uncovered exposure is a timing gap rather than a missing policy.
Builder's risk generally terminates at some defined point — substantial completion, occupancy, or acceptance. The owner's permanent property insurance has to be in force at that moment. If the two do not overlap cleanly, there is an interval where a completed but not-yet-insured building is exposed, and that interval frequently coincides with the owner moving in staff, equipment, and in some cases collections or clinical assets.
Related gaps worth checking before substantial completion is declared:
- Coverage during owner-directed early occupancy of part of the building
- Coverage for owner-furnished equipment stored on site
- Whether the definition of substantial completion in the construction contract matches the trigger language in the insurance policy
- Whether warranty-period damage is covered, and by whom
Read the Certificates, Then Read the Policies
A certificate of insurance is evidence that a policy existed on the day it was issued. It is not the policy, it does not bind the insurer, and it does not disclose exclusions.
For significant coverages, the owner or their broker should review the actual endorsements — particularly the additional insured wording, the waiver of subrogation, and any exclusions relevant to the work. Certificates should be tracked for renewal throughout the project, because a policy that lapses in month fourteen of a twenty-month project is a real and quiet exposure.
What to Do Before Award
- Have the broker review the insurance and bonding requirements against the actual project risk, not a template
- Confirm additional insured and waiver of subrogation wording, not just their presence
- Confirm professional liability follows any delegated design responsibility
- Establish who pays which deductible
- Map the builder's risk termination trigger to the permanent property policy inception
- Verify bonding capacity as part of contractor qualification
- Set up certificate tracking for the life of the project
None of this is glamorous, and all of it is cheaper than the alternative. Contract administration is largely the discipline of making sure the protections an owner paid for are actually in place when they are needed.
