Savvy contractors understand the key points of workers’ compensation, especially on controlling losses and managing the premiums. They are also likely familiar with commercial auto and general liability insurance, as construction contract issues tend to center around these coverages. But builders’ risk insurance is often a little more daunting for contractors because it’s not top of mind.
Builders’ risk policies cover property during the course of construction and may cover materials in transit to the job site and in temporary storage awaiting installation. When considering the purchase of a builders’ risk policy, a contractor should weigh several factors, including contract requirements, the property and locations in question, the parties who need coverage, and loss exposures that are time-sensitive.
The construction contract should contain the insurance requirements for the project. For example, it may specify that the builders’ risk policy cover certain causes of loss, such as earthquake and flood damage, that the insurer’s standard policy will not cover without modification. It may also require that coverage be on a replacement cost basis and that the insurer must waive subrogation rights against the project owner. The contractor should carefully review the contract and discuss the coverage requirements with his insurance agent.
The contractor must also determine what property he needs to cover. If he is building a new building, he will need insurance on the building materials, foundation, temporary walls and their supports, scaffolding, and other equipment. If the project involves rehabilitation or renovation of an existing building, such as the conversion of an old office building to condominiums, he will need coverage for the old structure as well as the improvements. How the insurance company will determine the existing structure’s value is an important question – some companies may subtract depreciation from the building’s replacement cost which could leave the contractor with a large uninsured exposure. As such, he should negotiate for replacement cost coverage whenever possible.
The construction contract will usually require the policy to cover the project owner, general contractor and even some or all of the subcontractors. The contractor should determine whether the policy covers material suppliers. If not, he should consider additional insurance to cover loss of income in case one of the suppliers shuts down temporarily due to property damage. He should also determine how the policy will respond if faulty work by a subcontractor causes damage to other parts of the building. Not all policies will pay if a sprinkler subcontractor installs a pipe fitting improperly and an entire floor gets flooded.
The last two major considerations are the locations to be covered and coverage for extra costs resulting from a construction delay, which was caused by a covered peril. In addition to the project site, the contractor should inquire about coverage for property in transit to the site and property stored off-site. Building materials could be damaged if a supplier’s location is damaged by fire or if the train carrying them derails. Extra costs resulting from a delay, known as “soft costs,” can be a significant exposure. For example, leases may need to be renegotiated or replaced, construction loans may have to be extended, or additional equipment may have to be rented. If the contract makes the contractor responsible for these costs, this coverage can be critical.
Because builders’ risk insurance has so many unique considerations, contractors should address them before starting work on the project. These policies will differ from one insurer to another, so careful review is essential. Attention to details before work begins will reduce the chances of uninsured losses and contractual disputes.