Construction Insurance Types: What’s Covered and What’s Bad Faith?

The state of Arizona recognizes several insurance types that protect contractors, architects, and other construction professionals from withheld payouts, injury-related claims, and contractual breaches. Even so, coverage disputes involving delays, exclusions, and denials are regularly reported across projects.

Knowing which risks fall within coverage limits can prevent unjust losses. If an insurer acts unlawfully, the policyholder has legal grounds to file a bad faith claim.

Common Types of Commercial Construction Insurance

Commercial construction projects have overlapping legal, financial, and operational risks. State law, contractual agreements, and lender conditions determine which insurance policies a construction professional must secure. From contractors and developers to property owners, all parties involved must grasp which policies apply at each phase of the project and understand how Arizona statutes affect obligations and coverage.

1. General Liability Insurance

General liability insurance protects against third-party claims involving bodily injury and property damage. Contractors obtain commercial general liability (CGL) coverage to address claims that arise during active construction. For example, if a subcontractor damages a neighboring structure or a visitor suffers injury at the job site, the CGL policy may cover the loss. Coverage for completed operations also applies to post-construction claims, such as water intrusion or structural failure, but only if the policy includes that endorsement. Arizona courts assess the scope of “property damage” and “occurrence” in these disputes.

2. Builder’s Risk Insurance

Builder’s risk insurance covers physical loss or damage to structures, materials, and equipment during the course of construction. Standard coverage applies to theft, fire, vandalism, and some weather-related events. It does not cover workmanship defects, construction delays, or design flaws unless specifically stated. Most builder’s risk policies expire at substantial completion or occupancy, whichever occurs first.

3. Workers’ Compensation Insurance

A.R.S. § 23-961 requires employers to obtain workers’ compensation insurance. This coverage applies to employees who suffer injury or illness in the course of their work. The policy pays for medical treatment and partial lost wages. It also shields employers from personal liability in most cases. General contractors must verify that subcontractors maintain their own workers’ compensation coverage. If they do not, the general contractor may be held responsible for those claims under Arizona’s statutory employer doctrine.

4. Commercial Auto Insurance

All motor vehicles (e.g., company-owned trucks, vans, trailers, equipment haulers) used during construction must comply with Arizona’s financial responsibility requirements under A.R.S. § 28-4009. The policy may include bodily injury, damage to or destruction of property, and damage to the vehicle. Many construction policies also include endorsements for hired and non-owned autos used during project-related tasks.

5. Professional Liability Insurance

This policy addresses claims due to alleged errors, omissions, or technical misjudgments in the planning or design phase. The insurer limits coverage to services identified as professional in the policy terms.

Contractors and construction managers who engage in design-build work may also require this coverage, depending on the project delivery method and the terms of the agreement. Arizona courts distinguish between coverage for physical labor and professional judgment, particularly when the claim has overlapping responsibilities. Policies may exclude supervision or project management unless the insurer extends coverage through endorsement.

6. Subcontractor Default Insurance

Subcontractor default insurance (SDI) reimburses general contractors for financial loss when a subcontractor fails to complete its work. This policy differs from a surety bond because it pays the contractor directly. Covered costs may include project delays, extra labor, and material reordering. General contractors purchasing SDI must follow the insurer’s established prequalification standards, internal controls, and reporting procedures.

7. Umbrella Liability Insurance

This form of construction insurance adds excess coverage above the limits of a contractor’s primary liability policies. It applies only when the underlying insurer has paid out its full policy limit, and the claim falls within the umbrella policy’s terms. Arizona contractors typically secure umbrella insurance when contract terms or project size expose them to high-dollar losses. For example, if a subcontractor causes property damage and the general liability limit is exhausted, the umbrella insurer may still reject the claim if the damage falls outside its defined coverage.

8. Contractor’s Pollution Liability Insurance

Contractor’s pollution liability (CPL) insurance addresses third-party claims involving pollutants released during construction, including but not limited to fuel spills, asbestos disturbance, or mold growth. Most general liability policies exclude pollution, making CPL a separate and necessary form of protection. Contractors working in excavation, remediation, or demolition frequently obtain CPL to satisfy contractual requirements and reduce the risks tied to environmental liability.

9. Inland Marine Insurance

Inland marine insurance protects equipment, tools, and materials in transit or temporarily stored off-site. It covers mobile equipment not permanently affixed to the project, such as cranes, compressors, or surveying tools. Most builder’s risk policies do not include these assets. Contractors must report each insured item by type and cost and notify the insurer when adding or replacing equipment.

Each of the above has its scope of coverage, conditions, and exclusions. Mishandling a claim or misstating obligations under those terms may constitute bad faith under common law and A.R.S. § 20-461.

Common Bad Faith Tactics and Examples

Arizona recognizes an implied covenant of good faith and fair dealing in all insurance contracts. Insurers act in bad faith when they unduly investigate, undervalue, delay, or deny a valid claim without a reasonable basis. The Arizona Supreme Court clarified this in Zilisch v. State Farm, 196 Ariz. 234 (2000), affirming that insurers cannot place their interests ahead of the insured.

Some examples in commercial construction claims:

A builder’s risk carrier denies coverage after a storm damages framing, claiming the materials were “unsecured” without inspecting the site.
A CGL insurer refuses to defend a contractor sued for property damage during demolition, despite policy language that covers such risks.
An SDI insurer delays a payout for a subcontractor’s default for months, stalling project progress and causing financial harm.

Each of these actions may qualify as bad faith if the denial or delay lacked a reasonable explanation.

Legal Remedies and How a Commercial Construction Lawyer Can Help

A policyholder may pursue damages when an insurer wrongfully delays payment, fails to investigate a claim properly, refuses to defend the insured in covered litigation, or issues a denial without reasonable justification. In addition to compensatory damages, the court of Arizona may award punitive damages when the conduct involves conscious disregard of the insured’s rights.

Under A.R.S. § 12-341.01, prevailing parties in contract disputes, including insurance coverage litigation, may recover reasonable attorney’s fees. This statute applies to contractual breaches and bad faith claims, provided that the claim stems from the insurer’s failure to honor its policy obligations.

FR Law Group has represented contractors, developers, business owners, and several other professionals in insurance disputes across Arizona. Contact us to discuss how we can assist with construction-related insurance matters or evaluate claims for insurer misconduct.

To learn more about construction disputes, claim enforcement, or insurer bad faith practices under Arizona law, please review our related articles:

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