All builder's risk insurance policies are not created equal

Most construction contracts require project leaders to obtain builder’s risk insurance — in fact, it’s become standard practice within the industry over the years. However, the reality is that many owners and contractors fail to comply with this provision, and either do not obtain any builder’s risk coverage whatsoever or obtain coverage that is inadequate to protect the project and those involved in its construction.

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The following article will explore the basic tenets of builder’s risk insurance and provide guidance for owners, contractors and attorneys tasked with procuring and evaluating such policies.

What is builder’s risk insurance?

In a general sense, builder’s risk insurance (also known as course of construction insurance) is coverage that protects an organization’s insurable materials, equipment or other assets during a construction project. Typical policies cover a range of projects, including new construction, renovations and installations.

While most owners and contractors know they need to purchase builder’s risk insurance, many do not understand what provisions should be included in the policy. And to make the process even more challenging, not all builder’s risk policies are the same.

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Most insurance carriers use their own manuscript policy forms with their own specific terms and conditions, thus making it even more critical to adequately review each policy to ensure appropriate coverage.

Who is responsible for obtaining builder’s risk coverage?

As a best practice, owners, contractors and their attorneys should all play a role in securing builder’s risk coverage. Although each individual serves a unique function in the process, the parties should work together, in concert with an insurance broker, to ensure that the interests of all project participants are being adequately protected.

Owners and contractors: Though standard contracts typically charge owners with the responsibility of obtaining builder’s risk insurance, both owners and contractors should be familiar with policy terminology as it relates to the specific needs of the project. Occasionally, it may be more appropriate for a contractor to control the purchase of the builder’s risk policy, due to their familiarity with the course of construction exposures, as well as the builder’s risk marketplace. Further, preferable terms and conditions may be achieved due to economies of scale and market leverage via a contractor’s master builder’s risk policy.

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Unfortunately, project leaders often do not realize that builder’s risk insurance was never purchased for a project until an issue arises. To avoid this scenario, owners and contractors should dedicate one team to secure such coverage with oversight from all involved on the project. In addition, the purchasing party should provide the other party with certificates of insurance, detailing policy terms and conditions, as contractually required. This ensures that coverages are not overlooked and provides everyone — including the owner — proof that such insurance has been procured. It may also be prudent to add this provision to the prime contract.

Attorneys: From a contractual standpoint, attorneys should first and foremost make sure that builder’s risk insurance is required. Contracts do not always require builder’s risk insurance, or this section may be removed completely during various review stages. Moreover, builder’s risk is often not listed in the general insurance section and when it is it includes very few details about what the actual policy should include.

Upon legal review, it is recommended to include an addendum to the contract outlining specific requirements that must be in the builder’s risk policy. By way of example, builder’s risk insurance should be made the primary policy in the event of a loss. This is especially important to make sure the policy performs as it’s intended, which is to insure everyone against risk during the construction process. When builder’s risk functions as planned, issues can be resolved quickly, so the project can get back on schedule with minimal delays.

What should be covered?

At a minimum, builder’s risk policies should include blanket additional insured coverage for all project participants, including owners, general contractors, subcontractors, etc., as well as a blanket waiver of subrogation. The coverage should last throughout the duration of the project. Though each of these may seem like standard policy requirements, some carriers do not include them as part of their standard policy language.

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These provisions are critical to ensuring the insurance works as anticipated — allocating risk up front and avoiding lengthy legal battles over who is at fault for purposes of paying for the loss. For instance, if there is a fire midway through a construction project, and the owner acquired builder’s risk coverage before work began but the policy did not include a waiver of subrogation, the insurer could conduct its own investigation and attempt to allocate responsibility to one or more of the project participants, thereby nullifying the very purpose of builder’s risk insurance.

Recommended requirements

In addition, there are a host of recommended requirements that also can be included within a builder’s risk policy. Some of these requirements include:

• Coverage for the contractor’s overhead and profit;
• A minimum 30 days advanced written notice of cancellation to all additional insureds, including the contractor; and
• Coverage for testing.

It’s also important to identify what exclusions are included within the policy form, such as a cessation of work exclusion and water damage exclusions and/or limitations.

Avoid a gap in coverage

As the construction industry continues to experience steady growth, it’s more important than ever for companies to maintain their competitive edge. One small gap in coverage could open up a host of liabilities, costing owners and contractors time and money.

When selecting any insurance for a new project, be sure to consult with a knowledgeable insurance broker who is well versed in construction-related policies — especially builder’s risk. Pay particular attention to language in construction contracts to be sure all parties are appropriately protected.

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Joshua Lorenz is an attorney at Pittsburgh-based law firm Meyer, Unkovic & Scott. He focuses his practice on construction law and litigation. He can be reached at jrl@muslaw.com. Craig Ream is an executive vice president for Willis Towers Watson, where he focuses on construction brokerage and consulting. He can be reached at Craig.Ream@WillisTowersWatson.com.