Insurance requirements within a construction contract will generally require a builder’s risk insurance policy to be purchased. Frequently, that requirement falls to the owner; but regardless of who makes the placement, the builder’s risk insurance policy is a valuable tool in your risk transfer protocols. While there is no standard builder’s risk coverage form, the contract will generally stipulate certain coverages, forms, and extensions that minimally are required to be provided. As always, the devil is in the details.
A builder’s risk policy covers multiple parties as insureds under one policy: the owner, the general contractor, the lender’s interest, and extending to each subcontractor to ensure the project can be completed on time and on budget. All parties are stakeholders in the insurance protection, and coverage should reflect that.
A builder’s risk policy should therefore be considered the primary insurance to pay for such losses on behalf of all respective parties. It is not intended as a vehicle to turn to subcontractors or the general contractor to subrogate and try to recoup costs against their insurance programs. Waivers of subrogation, favoring, benefiting all the parties, are usually included in the contract language. Under a builder’s risk policy, finding the faulty party is not coverage critical; causation is.
THE RIGHT POLICY FOR YOUR PROJECT
As previously stated, builder’s risk policy forms differ, so while a policy might meet the specifications required in the contract technically, the actual policy limits, terms, conditions, and deductibles applicable might not be optimal for your project. In some cases, the sublimit provided might be incredibly insignificant relative to the overall project size, or simply inadequate to cover the exposures presented by water, wind, or some other peril or event. Therefore, time and thought should go into determining the proper sublimits of liability for your project.
One approach might be to include a list of items for which a specific sublimit of liability at a minimum should be provided on your project. Critical coverage extensions/sublimited perils to consider include:
- Professional Services Fees
- Loss Adjustment Expenses
- Ordinance or Law-Increased Cost of Construction
- Materials in Transit
- Temporary Offsite Storage
- Debris Removal
- Fire or Police Department Service Charges
- Pollutant Cleanup and Removal
- Fungus, Wet or Dry Rot, or Bacteria
- Expediting and Extra Expenses
- Cold Testing/Boiler and Machinery Exclusions Deleted
Limits of liability for catastrophic perils like flood, earthquake, and named windstorms might be limited by availability, cost, and deductibles, depending upon the type of project, location, and time of year of your project.
Builder’s risk requirements in your contracts vary and are subject to change and negotiation. They require a minimum of coverage on forms that vary by carrier and therefore may not be optimal for your project. In general, AIA documents require the owner to provide builder’s risk coverage. Unamended, contractors are insureds; however, your agreement might be amended to state that only your interests are insured. It may include testing, or it may not. Pay close attention to your agreement to understand the coverage being afforded to you on each project. Consider carefully how the policy treats water damage: Is it sublimited, excluded, or covered with a significant deductible? Is backup of sewers and drains sublimit the only water damage coverage provided by the policy, or is it a part of the flood sublimit and subject to the flood deductible?
You may have the right to review the policy and ask the owner to provide certain additional coverages, and they can consider whether they would (a) pay for the coverage themselves or (b) charge back the coverage parts that the contractor requested at whatever the cost might be. It may be possible to get additional coverage included for a nominal additional cost.
CONTRACTOR’S BUILDER’S RISK CHECKLIST
A specialized construction insurance and risk management expert can advise you of what should be included in a builder’s risk policy as well as important questions to ask to help protect your firm, including:
- Does the policy include an automatic extension for at least 60-90 days at a pro-rated premium if you need to extend the policy?
- Am I an insured party under the builder’s risk policy with the right to file a claim?
- Do I have the right to review and comment on the owner’s Proof of Loss in the event of a claim?
- Does the policy include at least a 5 percent value escalation clause?
- Does the policy include coverage for faulty workmanship, design, plans, or specifications if damage results from a peril not otherwise excluded?
- Request to be notified in the event the policy is cancelled or non-renewed.
- Beware of coverage warrantees or protective safeguards endorsements.
- Confirm you have full water damage coverage, or if limited, that the limit is acceptable for the risk inherent in your project.
The builder’s risk insurance marketplace is constantly evolving. While coverage forms continue to change in reaction to coverage litigation outcomes, there is a stable marketplace for most builder’s risk clients who are looking for adequate coverage and not just focusing on price. While price is important, you should not neglect the broadest possible coverage grant, including evolving risks such as severe convective storms in Tornado Alley, wildfire/brushfire risks in the Southwest, and the seemingly endless threat of 100-year flood events.
About the Author:
Matt Walsh is managing director and Jim Janic is senior vice president of Alliant Construction Services Group, Alliant Insurance Services. For more, visit www.alliant.com.
Modern Contractor Solutions, April 2024
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