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Course of Construction Insurance

Builders risk insurance is designed to insure construction projects, and it covers buildings and other structures while being built, including building materials and equipment intended to become part of the building or structure. Coverage applies to property while at the job site, off site in storage, and in transit. (Coverage for construction equipment, i.e., forklifts, bulldozers, mobile tools, and so on, would be provided by contractors equipment insurance.)

The many risks inherent in a construction project, whether a large or moderate undertaking, require that insurance coverage be selected with the utmost care. Generally, the builders risk (or course of construction) exposure may be insured under either a commercial property or an inland marine policy. Forms and rates associated with commercial property builders risk coverage ordinarily are filed with state insurance regulators. Forms and rates of inland marine builders risk policies, however, are not subject to filing requirements and thus are referred to as "non-filed" forms. Insurers have more flexibility in underwriting non-filed classes because they can create their own coverage provisions and rates, which can be tailored to the particular risk exposure. The subject of this article is the more preferred non-filed inland marine builders risk coverage, including the factors that must be considered in properly writing this insurance.

Generally, the policy must provide:

  • "all-risk" or comparable coverage;

  • coverage for material stored off site and in transit;

  • coverage for all parties to the contract: owner, contractors, subcontractors;

  • permission for waivers of subrogation among the parties; and

  • coverage for the duration of the project.

The project owner may add the construction project to its regular commercial property policy, making sure there is compliance with the above five criteria, or purchase separate builders risk coverage.

The advantage of the builders risk approach is that the coverage is considerably broader than that provided in standard commercial property insurance. For example, many builders risk policies cover flood, earthquake, and testing, and provide broader transit and off-premises coverage. Builders risk policies also usually contain fewer exclusions.

A potential problem with a separate builders risk policy, however, is getting permanent coverage in place when the builders risk policy expires. Builders risk policies contain a provision stating when coverage will end, but the provisions vary by policy. This can cause problems if the permanent commercial property insurance is not placed in a timely manner.

The owner also has the option not to purchase builders risk coverage, but rather delegate the responsibility for obtaining insurance to the GC. This is fairly common with larger contractors because the latter may be more familiar with the needed coverage and market and prefer to have some control over who the insurer of the project will be.

It is important to note that if the owner does not intend to purchase the builders risk insurance, it must inform the GC in writing prior to the start of the project. The contractor may then obtain the necessary insurance, including protecting the interests of all parties, and charge the cost to the owner.

Potential coverage issues/deficiencies:

  • Negligence of contractors/ waiver of subrogation:
    Damage caused by the negligence of a contractor can lead to claims or lawsuits between parties involved in the construction project. A comprehensive builders risk policy, including provisions for waivers of subrogation, would reduce or eliminate the potential for such claims or lawsuits. In other words, first-party coverage would be available to all parties, if named as insureds under the policy, and pressing a liability claim would not be necessary.

Although it seems that a clear waiver of subrogation provision in the policy would be sufficient to block subrogation by the insurer, this is not necessarily the case. Builders risk insurers have been successful in subrogating against negligent contractors, even when the policy contained a waiver of subrogation provision. One precaution recommended is to add a specific waiver of subrogation endorsement in favor of all contractors and subcontractors.

  • All-risk coverage vs. named perils:
    All-risk coverage is required by AIA and AGC documents. All-risk or "open perils" builders risk coverage is usually available and is the preferred form of coverage.


  • Replacement cost vs. actual cash value:
    AIA and AGC documents also require replacement cost coverage. The term "actual cash value" usually is not defined in the policy and may be subject to various meanings, depending on the state in which the loss occurs. Replacement cost coverage should be sought whenever possible.

    Keep in mind also that sub-limits are ordinarily imposed on many of the additional or supplemental coverages provided in builders risk forms, such as testing, ordinance or law, transit, etc. When sub-limits apply, the requirement of full replacement cost coverage is not met. It may be necessary, under such circumstances, to amend the AIA or AGC document to change this requirement.


  • Earthquake, flood, collapse:
    Builders risk insurers will occasionally provide earthquake and flood coverage for an additional premium, and with substantially higher deductibles than those applying to other coverages in the policy. The each-occurrence limit may be considerably less than the general policy limit. It may not be possible to obtain earthquake insurance for the full replacement cost of the project. In certain areas, like California, coverage will be extremely expensive, if available at all.

    If a project is located in a flood prone area, flood insurance may not be available through private insurers, but some protection may be available from the National Flood Insurance Program.

    Collapse coverage availability, including the scope of coverage, will vary among insurers. The AIA and AGC documents require collapse coverage. Some forms include sub-limits for collapse coverage, so complying with AIA and AGC requirements for full replacement cost may require negotiations with the insurer or special amendments to the documents. Exposure to loss by collapse is greater with a building or structure in the course of construction than a completed building or structure. Faulty construction or windstorm could lead to a collapse loss of a partially completed building or structure.


  • Debris removal:
    Builders risk policies usually cover debris removal but may exclude pollution cleanup. Both should be covered in the builders risk form. Again, sub-limits usually apply.


  • Loss of income coverage:
    Loss of revenue, loss of rents, and extra expense coverage, separate from soft costs coverage for delayed opening, may be needed by the insured. Such coverage is sometimes available as an endorsement for an additional premium charge. Insurance consultants or advisors should be familiar with the endorsements available with a particular builders risk policy. It is also noteworthy that as a matter of practice, some insurance practitioners view soft costs as including loss of income. It is imperative that the particular endorsement in use be carefully reviewed to determine if that is the case.


  • Exception to faulty work, or defects, errors, and omissions exclusion:
    Faulty work is typically excluded in builders risk policies, but some policies will provide coverage for ensuing loss, or certain types of losses resulting from faulty work. The covered perils may be broad or limited, but it is important that some coverage for ensuing loss be provided.


  • Change orders:
    Changes that increase contract construction costs need to be reflected in policies written on a completed value basis. To avoid or at least reduce the chances that the policy limit will be insufficient to cover a loss, the person responsible for the insurance and risk management role should: assume that contract changes that increase values are likely; and require that notice of changes in contract value be in writing with the warning that failure to do so may result in a coverage deficit.2 This problem is less likely to occur with coverage written on a reporting basis, unless change orders are overlooked.

Conclusion:

Obtaining sufficient builders risk insurance is no simple matter. Insurance consultants must be familiar with the construction contract, particularly the responsibility for procuring required insurance. Because this is a non-filed class, coverage may vary significantly among insurers. It is incumbent on consultants to know not only what coverages are required by the construction contract, but also what coverages are available in the marketplace, so that their insureds have the necessary protection to meet the many exposures they will face.

Basic insurance for homeowners does not cover construction costs. Course of construction insurance provides coverage beyond what is normally offered to homeowners. So, the extra coverage can cover you against any bodily injuries or property damages that may occur in your construction efforts. Construction can sometimes be dangerous, as you know, so you should really look around for the best insurance rates and take the company that offers cheap yet comprehensive cover. Sometimes the general contractor pays the premiums; it just depends on the terms of the course of construction contract that you negotiate.

Some factors influencing the premium levels include:

  • Location and relative safety of the construction site

  • Square footage of the building


  • Whether or not the construction site is within 1000 feet of tidal waters (which could flood)

  • Is the project a remodeling or a new construction?


Choose your insurer carefully. Generally, course of construction insurers can set their own coverage options and rates without much state regulation. So just be aware of all the conditions of the contract that you sign. Of course, a benefit is that this type of coverage applies to any and all property at the he site construction site as well as to equipment kept in storage offsite. It even covers materials while they are being transported! If you've ever learned about construction equipment, you know how many thousands of dollars huge pieces of equipment can cost.

Other coverage options for construction insurance may include:

  • Coverage for job site vehicles, trailers and offices


  • Construction site contents


  • Model homes and their contents


  • Inventory of construction vehicles


  • Protection against natural disasters such as earthquakes


  • Builder's risk insurance

Finally, remember that this type of insurance is temporary. Remember exactly when the coverage ends! You don't want to be caught one day without permanent insurance on the property that was just constructed.


For more information please call us at (415) 876-5440.  You can request a free quote here.

 

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