By: Joseph C. Smith, CIC, CPIA, CBIA
Georgetown Insurance Service, Inc.
Frederick, MD
One undeniable fact about the construction industry is that there is always the presence of risk. While contractors do have control over many factors, they simply cannot control them all. Even the most careful companies or observant property owners can find themselves on the losing end of employee carelessness, theft from a job site, or natural disaster.
Why Builders’ Risk
While Workers’ Compensation and liability coverage will provide protection for employee injuries or accidents, it is imperative to have additional coverage to protect any other insurable interests such as building materials, fixtures, and equipment that could be physically damaged during construction. A lender is certainly going to require evidence of this coverage in place prior to the construction loan closing. This is where a Builders’ Risk policy comes into play. The most comprehensive policy forms have been developed as “Inland Marine” policy forms.
Not only will the policy cover physical damage or theft, a well-designed Builders’ Risk policy will also cover “soft costs” that could result from delayed construction. These costs could include fees, interest, and administrative costs. Furthermore, the inclusion of business interruption coverage with a Builders’ Risk policy helps alleviate the burden of lost revenue or additional expenses that could result from any type of construction interruption, including the havoc that winter weather can bring. It is not necessary to have signed leases for rental space, just the ability to establish that the property owner would have likely rented the space had the loss not occurred. There are a number of ways to establish this. Pre-lease agreements, patterns for similar properties, and possibly something like a waiting list for units or retail & office space could serve as support for a proof of loss.
Coverage in Action
One common risk that is often overlooked by property owners and contractors is earth movement. This type of risk is usually not covered by a standard property policy. It is significantly broader than “Earthquake” alone. All construction, especially if excavation and drilling are involved, has the potential to cause man-made earth movement, which can then result in a catastrophic chain reaction. Even a slight one-foot shift of sheeting can cause significant delays and costly damage. This is just an example of one potential peril that contractors face on a daily basis that Builders’ Risk coverage can protect them from. Flood perils are also a special area of coverage that must be addressed, and are never covered by the standard unendorsed policy.
Who Needs It
While this insurance coverage can be purchased by a number of affected parties, there are two groups who simply shouldn’t risk going without it.
Property Owners – While it may be tempting to just trust that the general contractor on a project will purchase a sufficient Builders’ Risk policy…that is not recommended. Most experts will actually advise clients that the property owners themselves should be the ones to purchase the policy. The property owner is the one who has the most to lose, so logically they should be the ones in control of the policy. This ensures that adequate limits are selected and that the estimates for “soft costs,” property, and interruption are accurate. A comprehensive Builders’ Risk policy should be sufficient to cover both the interests of the property owners as well as the contractors. Attention to how the named insured is written is absolutely critical!
Contractors – While it is recommended that property owners purchase the Builders’ Risk coverage, there is always the outlier who could refuse, or fail to properly protect the contractor interests. If that situation were to occur, it is never advisable for a contractor to work on a remodeling or construction project without a Builders’ Risk policy in place. While the contractor doesn’t stand to lose quite as much as the property owner, they can still be affected and potentially held responsible for issues or damage that may arise. The issue of who has responsibility is especially true for property delivered to the site, but not yet installed. In such cases, an “Installation Floater” is a type of Builders’ Risk policy that can address the insurable interests of the Contractor.
It is imperative that both parties communicate clearly from the outset of negotiation and discussion who will purchase and maintain the Builders’ Risk policy. As stated before, it is strongly advised that both contractors and property owners push for the property owner to assume responsibility. A comprehensive Builders’ Risk policy can and should cover the interests of the property owner, general contractor, and subcontractors.
As always, working with a knowledgeable insurance agent who understands both the development and construction industry is also important. Contractors face unique perils every day and it is essential to work with someone who understands industry risks.