# Construction Insurance and Surety Glossary

URL: https://mycontractorsinsurancequote.com/resources/glossary
Updated: 2026-10-29 · Reviewed by the Principal, Gleason Insurance Brokers, LLC
Publisher: My Contractors Insurance Quote, a website of Gleason Insurance Brokers, LLC

This glossary explains, in plain English, the insurance and surety terms that appear in construction contracts, lender exhibits, wrap-up manuals and bond requests for projects in California, Texas, Arizona and Nevada. Each entry describes what the term usually means in practice, and how it applies on a given job depends on the actual policy, endorsement, bond form or contract wording.

## Key Decision Points
- Contract insurance exhibits use a small set of terms that each shift a specific cost or claim to a specific party.
- Builders risk, wrap-up and pollution terms often hide the exclusions that decide whether a loss is paid.
- Surety terms describe credit, not insurance: the principal owes the surety for any loss it pays.
- When a term in your contract differs from the meaning here, the contract and the policy wording control.

## How to Read This Glossary

Entries are grouped by the document where a buyer usually meets them: the liability section of a contract exhibit, the completed-work and defect provisions, the builders risk policy, the wrap-up manual, the bond request, the subdivision approval and the environmental section. Reading a whole group at once tends to be more useful than looking up one word, because these terms work together. A waiver of subrogation, for example, means little until you know which policy and which party it attaches to.

The meanings below are general. Insurers write their own forms and endorsements, sureties use their own indemnity agreements and owners draft their own exhibits, so the same label can carry different wording from one deal to the next. Use this page to frame the right question, then read the document in front of you or send it to a broker before relying on any term. Acronyms are expanded separately on the acronym reference page.

Shorthand such as OCIP, PNC or SIA is expanded in the companion list of [construction insurance and surety acronyms](https://mycontractorsinsurancequote.com/resources/acronyms).

## Liability Terms in the Contract Insurance Exhibit

Most owner-GC and GC-subcontractor agreements carry an insurance exhibit that turns risk allocation into endorsement requests. These are the terms that show up there most often, and each one moves a defense cost or a claim payment from one party's policy to another's. Several of them are limited by state anti-indemnity statutes in California, Texas, Arizona and Nevada, so the enforceable version can be narrower than what the exhibit asks for.

- Additional insured: A person or company added to another party's liability policy by endorsement, usually so the owner or GC can ask the subcontractor's insurer to defend it. The scope depends on the endorsement form and may be limited to ongoing work, completed work or liability caused by the named insured.
- Named insured: The party that bought the policy and owes its premium and duties. It holds broader rights than an additional insured, including the right to the full limits and to report claims directly.
- Primary and noncontributory: Wording that asks the downstream party's policy to respond first and not to seek a share of the loss from the upstream party's own insurance. Whether it works depends on the other insurance clauses of both policies.
- Waiver of subrogation: An agreement that an insurer will not pursue the other contracting party to recover what it paid. It is usually requested on general liability, auto, workers' compensation and builders risk, and it often needs an endorsement to be effective.
- Contractual indemnity: A promise in the contract to defend and pay for another party's losses arising from the work. California, Texas, Arizona and Nevada each restrict how far a construction indemnity can reach, so the clause may be narrower than written.
- Insured contract: The part of a liability policy that may pick up tort liability a contractor assumes under a written agreement. It is the bridge between the indemnity clause and the insurance that funds it.
- Per-project aggregate: An endorsement that gives each designated project its own general aggregate limit, so a large claim on one job does not use up the limit available to the others.
- Action-over claim: An injured worker sues the owner or GC, which then pushes the claim back to the employer through indemnity or additional insured status. Some policies exclude or limit these claims, often for New York work but sometimes more broadly.
- Certificate of insurance: A summary of policies on a given date. It does not amend the policy, add an insured or grant rights by itself, which is why owners ask for the endorsements as well.
- Notice of cancellation: A promise to tell a certificate holder before a policy ends. Many standard forms make this a best-efforts promise unless an endorsement says otherwise.

When an exhibit asks for dedicated limits that an annual program cannot spare, compare it with [project-specific liability limits](https://mycontractorsinsurancequote.com/project-specific-liability-insurance).

## Completed Work, Defects and Residential Restrictions

Claims on construction projects often arrive years after turnover, when the job file is closed and the original policy has long expired. The terms in this group decide which policy year answers, whose work is involved and whether residential or tract exposure was ever insured. Developers of for-sale housing and GCs that take condominium or tract work should read these terms against their own annual forms before bidding.

- Completed operations: Liability for injury or damage that arises after the work is finished or put to its intended use. The contract usually sets how many years the contractor must keep completed operations limits and additional insured status in place.
- Products-completed operations hazard: The policy definition that groups completed-work claims under their own aggregate limit, separate from the general aggregate in most commercial liability forms.
- Your work exclusion: The standard provision that removes damage to the contractor's own completed work. A subcontractor exception may restore some protection when the damaged work or the cause was performed by a subcontractor, unless an endorsement deletes it.
- Construction defect claim: A claim that a building or improvement was built incorrectly. Liability policies usually respond only to resulting property damage or injury, not to the cost of fixing the faulty work itself.
- Statute of repose: A law that sets an outer deadline for suing over construction work, measured from completion rather than from discovery. It shapes how long completed operations limits are worth maintaining.
- Residential exclusion: An endorsement that removes or limits coverage for work on homes, condominiums or apartments. It is common on GC and subcontractor annual forms and often surfaces only after a claim.
- Tract housing exclusion: A narrower restriction aimed at work on a defined number of homes in one development. Thresholds vary by insurer, so a subdivision contract needs a form review, not an assumption.
- Right to repair notice: A prelitigation process in some states that requires a homeowner to notify the builder and allow an inspection or repair offer before suit. Reporting the notice to the insurer promptly can matter as much as the response.

Contract periods and how long limits stay available are explained in [completed operations limits after turnover](https://mycontractorsinsurancequote.com/project-specific-liability-insurance/completed-operations).

## Builders Risk and Course of Construction Terms

Builders risk is first-party property insurance for the work while it is being built. Lenders, owners and GCs negotiate its valuation, deductibles and named insureds. A single exclusion for faulty workmanship or testing can decide a large loss. The terms below appear in lender exhibits and quotes for commercial, industrial, multifamily and data center projects.

- Course of construction: The period and the property a builders risk policy addresses, starting when work or delivery begins and ending at completion, occupancy or the policy expiration, whichever the form says comes first.
- Completed value: The method that insures the full finished value of the project from day one, rather than tracking values month by month. Change orders that raise the value may need to be reported.
- Reporting form: A builders risk structure where the insured reports values as they grow and premium follows the reports. It suits long schedules but relies on accurate reporting.
- Soft costs: Expenses beyond bricks and labor that rise when a covered loss delays the job, such as extra interest, permit fees, insurance, marketing and professional fees. They usually need their own limit and waiting period.
- Delay in start-up: Coverage for income an owner expects to lose when covered damage pushes back the date the project opens or produces revenue. Lenders on income-producing projects often ask for it.
- LEG defects language: Defects wording drafted by the London Engineering Group, offered in three levels. The first level excludes damage caused by a defect broadly, while the higher levels give back more of the resulting damage and, at the third level, part of the cost of improving the defective part.
- Hot testing: Running equipment with power, fuel or feedstock before turnover. Many forms limit or exclude testing losses unless the policy adds them for a set period.
- Permission to occupy: Wording that allows partial occupancy or use without ending coverage on the rest of the project. Without it, moving tenants in early can end the policy on the occupied portion.
- Loss payee: The party, often a lender, that is named to receive claim payments for property in which it holds an interest. It differs from a mortgagee clause, which can give the lender rights even when the insured breaches a policy condition.
- Existing structure: A building already on site before the project begins. Many builders risk forms exclude it unless the renovation or tie-in is scheduled, so it may need a property policy of its own.

[builders risk for projects under construction](https://mycontractorsinsurancequote.com/builders-risk-insurance).

## Wrap-Up Programs and Subcontractor Risk Terms

A wrap-up replaces each contractor's annual liability, and often workers' compensation, with a single program bought for one project. Its terms come from the program manual and the enrollment forms rather than from the contractors' own policies. Texas regulates these programs as consolidated insurance programs in Insurance Code ch. 151, and California has its own disclosure statutes, so the manual should be read with the state rules in mind.

- OCIP: An owner-controlled insurance program, a wrap-up bought and administered by the owner or developer. The owner controls the limits and the claims, and contractors usually remove their own insurance cost from the bid.
- CCIP: A contractor-controlled insurance program, a wrap-up bought by the GC or construction manager. The GC carries the administration and often a large deductible or retention.
- Enrollment: The process that adds an eligible contractor to the wrap-up. Coverage for that contractor typically depends on completing enrollment before starting work on site.
- Excluded parties: Contractors and vendors the manual leaves out, often suppliers, haulers, off-site fabricators and hazardous-material abatement firms. They must carry their own insurance as the contract requires.
- Bid deduction: The amount a contractor removes from its price because the wrap-up will provide coverage it would otherwise buy. Owners usually audit it against the contractor's actual insurance cost.
- Deductible contribution: A charge some wrap-ups pass to an enrolled contractor when a claim arises from its work. California limits how residential wrap-ups can collect it from subcontractors.
- Extended completed operations: A term that keeps completed operations coverage under the wrap-up for years after turnover. Its length matters because the wrap-up, not the contractors, usually answers defect claims during that period.
- Rolling wrap-up: A single program that adds several projects over time under one set of limits. It saves set-up cost but can leave later projects sharing a limit with earlier ones.
- Subcontractor default insurance: A policy bought by a GC that may reimburse its costs when an enrolled subcontractor fails to perform. It is an alternative to bonding each subcontractor, and the GC carries a sizable deductible and controls the qualification of each subcontractor.

[owner and contractor wrap-up programs](https://mycontractorsinsurancequote.com/wrap-up-insurance).

## Contract Surety and Bonding Terms

Surety is not insurance. A bond is a three-party promise in which the surety backs the principal's obligation to the obligee, and the principal and its indemnitors owe the surety for every dollar it pays out. Underwriting therefore looks like credit review: financial statements, work in progress, backlog and the people who will sign. The terms below are the ones a CFO meets in a first bond request or a capacity review.

- Contract surety: The branch of suretyship that guarantees construction contracts, mainly through bid, performance, payment and maintenance bonds.
- Principal: The contractor or developer whose obligation the bond backs. The principal remains responsible for the work and for repaying the surety.
- Obligee: The owner, public agency or city the bond protects. The obligee can make a claim when the principal defaults on the bonded obligation.
- Surety: The company that issues the bond and promises the obligee that the principal will perform or pay, while relying on indemnity from the principal.
- Penal sum: The maximum amount the surety can owe under a bond, stated on its face. It is usually set by the contract or by statute as a percentage of the contract price.
- Bid bond: A bond submitted with a bid that protects the owner if the low bidder refuses to sign the contract or provide the required bonds.
- Performance bond: A bond that protects the obligee if the principal fails to complete the contract. The surety may finance the principal, tender a new contractor or take over the work, depending on the bond form.
- Payment bond: A bond that protects certain subcontractors and suppliers when the principal fails to pay them. California's Civil Code §9550 requires one before work starts on public works contracts over the statutory threshold.
- Maintenance bond: A bond that backs the principal's promise to correct defects for a set period after acceptance. Some obligees fold this warranty into the performance bond instead of issuing a separate one.
- Indemnity agreement: The contract in which the principal, its affiliates and often its owners personally agree to repay the surety for losses, fees and costs. Many forms also let the surety demand collateral once a claim is made.
- WIP schedule: A work-in-progress report that lists each open contract with its price, costs to date, billings and estimated gross profit. Sureties read it to spot underbilling, fade and jobs that are losing money.
- Backlog: The value of contracted work not yet performed. Sureties compare it with working capital and net worth when they decide how much more work a principal can take on.
- Bonding capacity: The single-job and aggregate amounts a surety is prepared to support for a principal. It is a working limit set by underwriting, not a promise to bond any particular project.
- Retainage: A share of each progress payment the owner holds until completion. Arizona public contracts, under A.R.S. §34-221, generally hold 10 percent of each estimate and may cut that in half once the job is half complete, subject to the statute's conditions.

How sureties set capacity and which bonds a project needs is laid out in [construction bonds and surety underwriting](https://mycontractorsinsurancequote.com/construction-surety-bonds).

## Subdivision and Developer Security Terms

Developers and subdividers meet a separate vocabulary when a city or county approves a map. The public improvements, including streets, storm drain, water, sewer and grading, are secured by an agreement and by security the local agency accepts. In California the Subdivision Map Act, at Gov. Code §66499.3, sets the ranges for performance and payment security and allows warranty security after acceptance.

- Subdivision improvement agreement: The contract between a developer and a city or county that lists the public improvements, the completion deadline and the security the developer must post before the map records.
- Improvement security: The bond, letter of credit, cash deposit or other instrument that backs the subdivision improvement agreement. The local agency, not the developer, decides which forms it will accept.
- Faithful performance security: The part of the improvement security that guarantees completion of the improvements. California's Map Act sets it at 50 to 100 percent of the estimated cost.
- Labor and materials security: The part that protects those who furnish labor or materials for the public improvements. Under California's Map Act it is likewise set as a percentage of estimated cost.
- Warranty security: Security that remains in place for a period after the agency accepts the improvements, to back correction of defects. It is often held back from the performance security when the rest is released.
- Acceptance: The agency's formal decision that the improvements are complete. It usually starts the warranty period and the process for reducing or releasing security.
- Off-site improvements: Work outside the tract boundary, such as an arterial road widening or a sewer extension, that the approval requires. It can carry its own bond and its own liability exposure for the developer.

[subdivision improvement security for developers](https://mycontractorsinsurancequote.com/construction-surety-bonds/subdivision-improvement-bonds).

## Captive and Alternative Risk Terms

These terms come up when an established contractor or developer studies a captive, a risk retention group or a large deductible program. Each one describes a structure to evaluate, and how it applies depends on the domicile, the program and the carriers involved.

- Captive insurer: A licensed insurance company owned by the business or businesses it insures, used to finance part of their own risk.
- Pure or single-parent captive: A captive that insures the risks of one owner and its affiliates, and in some states controlled unaffiliated businesses.
- Group or association captive: A captive owned by several businesses, often in one industry, that share part of each other's losses under common rules.
- Protected cell: A segregated account inside a sponsor's captive whose assets and liabilities are kept separate from the other cells.
- Fronting insurer: A licensed insurer that issues the policy and certificates and cedes an agreed layer of the risk to a captive or reinsurer, usually against collateral.
- Collateral: Security, such as a letter of credit or trust, that a fronting insurer or reinsurer holds against the losses a captive may owe it.
- Risk retention group: A member-owned liability insurer formed under the federal Liability Risk Retention Act, chartered in one state and registered in others.
- Domicile: The state or country whose insurance regulator licenses and supervises a captive.
- Independently procured insurance tax: A state tax a home-state insured pays on coverage bought directly from an insurer not authorized in that state.

For how these structures fit together, see our overview of [construction captive programs](https://mycontractorsinsurancequote.com/construction-captive-insurance-programs).

## Pollution and Environmental Terms

Sitework, demolition, underground utilities, horizontal drilling and dewatering create pollution exposures that most general liability forms push aside through a broad exclusion. Civil and infrastructure contractors and developers buying land with prior uses meet these terms first in the environmental section of the contract and again in the lender's due diligence.

- Pollution exclusion: The provision in most commercial liability forms that removes injury or damage from the release of pollutants, with narrow exceptions. It is the reason contractors buy separate pollution coverage.
- Contractors pollution liability: A policy that may respond to pollution conditions caused or made worse by the contractor's operations, such as a ruptured fuel line, disturbed contaminated soil or drilling fluid reaching a waterway.
- Pollution legal liability: A site-based policy, usually bought by an owner or developer, that may respond to pre-existing contamination and cleanup costs at a scheduled location, subject to its terms and known-conditions provisions.
- Known conditions: Contamination the insured knew about before the policy began. Site policies often exclude it unless it is disclosed and specifically scheduled.
- Non-owned disposal site: A landfill or facility the contractor sends waste to but does not own. Some pollution forms address liability at these sites, while others leave it out.
- Transportation pollution: Pollution released while the contractor hauls materials or waste. It may sit between the auto policy and the pollution policy, so both forms need to be read together.

[pollution liability for sitework contractors](https://mycontractorsinsurancequote.com/contractors-pollution-liability-insurance).

## Questions Buyers Ask

### What changes if I'm an additional insured rather than a named insured on someone else's policy?

A named insured bought the policy and controls it, while an additional insured gets only the protection the endorsement grants. That protection may be limited to claims caused by the named insured's work, to ongoing rather than completed operations or to the limits the contract requires. Read the endorsement form and the contract together before assuming you share the full policy.

### Does primary and noncontributory wording mean my own policy never pays?

Not necessarily. The wording asks the other party's insurer to respond first and not seek a share from your policy, but it depends on how both policies' other insurance clauses are drafted and on whether you qualify as an additional insured for that claim. Your own insurer may still need to respond if the other policy's limits run out or it denies the tender.

### Is a maintenance bond the same thing as my warranty to the owner?

No. Your warranty is your own promise under the contract. A maintenance bond is a separate promise by a surety to the owner that the warranty will be honored, and if the surety pays, you and your indemnitors owe it reimbursement. Some owners accept the performance bond as covering the warranty period instead of asking for a separate bond.

### Why does a subdivision bond need my personal signature when the project is in an LLC?

Sureties underwrite the people and balance sheets behind a single-purpose entity, because the LLC often has little capital of its own. The indemnity agreement usually asks the parent company and the principal owners to sign so the surety can recover a loss from them. Have counsel review which entities and individuals sign and how far the agreement reaches.

### What does LEG 3 mean when it shows up on a builders risk quote?

It refers to the broadest of three London Engineering Group defects clauses. Compared with the first two levels, it typically gives back more of the damage that flows from a defect and part of the cost of improving the defective component, while still excluding the cost of simply replacing it. Whether it is offered, and at what deductible, depends on the project and the market.

## Official Sources

1. [About Surety Bonding](https://www.nasbp.org/about/about-surety/), National Association of Surety Bond Producers. Three-party structure of principal, obligee and surety; bid, performance and payment bond purposes. Verified 2026-10-23.
2. [Cal. Civ. Code §9550 (public works payment bonds)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CIV&sectionNum=9550), California Legislative Information. Payment bond required before work on California public works contracts above the statutory threshold. Verified 2026-10-23.
3. [Cal. Gov. Code §66499.3 (amounts of improvement security)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=GOV&sectionNum=66499.3), California Legislative Information. Faithful performance and labor and materials security of 50 to 100 percent of estimated cost; warranty security after acceptance. Verified 2026-10-23.
4. [Tex. Ins. Code ch. 151 (consolidated insurance programs)](https://statutes.capitol.texas.gov/Docs/IN/htm/IN.151.htm), Texas Legislature (Texas Constitution and Statutes). Texas regulation of wrap-ups as consolidated insurance programs and limits on additional insured requirements. Verified 2026-10-23.
5. [A.R.S. §34-221 (contract award and progress payments)](https://www.azleg.gov/ars/34/00221.htm), Arizona State Legislature. Ten percent retention on public progress payments, reduction at 50 percent completion and substitute security. Verified 2026-10-23.

## Related Decisions

- [insurance and surety acronyms explained](https://mycontractorsinsurancequote.com/resources/acronyms)
- [pre-bid project insurance checklist](https://mycontractorsinsurancequote.com/resources/project-insurance-checklist)
- [how an OCIP compares with a CCIP](https://mycontractorsinsurancequote.com/wrap-up-insurance/ocip-vs-ccip)
- [performance bonds and contractor default](https://mycontractorsinsurancequote.com/construction-surety-bonds/performance-bonds)
- [construction insurance resources](https://mycontractorsinsurancequote.com/resources)

---

Start a quote request: https://mycontractorsinsurancequote.com/get-a-quote · Call 844-978-7283

Contract and insurance reviews are a courtesy service that may be available at times, depending on our workload and on the size, timing and complexity of the project. A review is not guaranteed and is limited to insurance considerations. It is not legal advice and is not a substitute for advice from your own legal counsel, which you may need before signing a contract or obtaining coverage.

Insurance and surety services are provided through Gleason Insurance Brokers, LLC. Site information is educational and does not constitute legal advice, a binder, an offer of coverage, a guarantee of eligibility or confirmation of policy terms. Insurance conditions are governed by actual issued policies; surety rights and obligations are governed by bond and indemnity documents.