Builders risk coverage insures against risk
of loss from damage to property under construction, whether new construction
or renovation of existing buildings. Builders risk coverage presents issues
not normally associated with property coverage for existing buildings in use.
This article will address some of these issues.1
by Jay M.
Before deciding on the scope of builders risk coverage, the risk manager
or other person responsible for obtaining the coverage must review the construction
documents. There is an important interrelationship between the construction
documents and insurance coverage. For example, and as a baseline, the documents
will set out certain requirements for insurance coverage, along with indemnity
provisions, waivers of subrogation, identifying who is to be insured under the
policies, and, in some cases, limitations on liability. These must be carefully
reviewed to make sure that the correct coverage is obtained.
In addition, do not rely on certificates of insurance. By their terms, they
do not even purport to accurately describe the policies in force, much less
guarantee that the specific terms and conditions required by the construction
documents are in place. Instead, the construction documents' insurance requirements
should be compared to quotes, binders, and, when issued, the policy. Any discrepancies
should be addressed immediately with the insurance company. If certain insurance
requirements cannot be met at commercially reasonable prices, that should
be raised promptly with the parties to the construction contracts and, if necessary,
the construction documents should be modified accordingly.
A primary consideration is what property to insure. On renovation projects,
this is particularly important because the policy should insure both the existing
structures and the new construction. For example, many recent development projects
involve converting industrial or warehouse space into residential and/or retail
space. This usually requires the existing building to be gutted, and all new
systems and interiors constructed. The existing exterior envelope is a key component
of the project, and coverage for damage to that envelope is very important to
the success of the project.
However, many builders risk policies provide only actual cash value coverage
for existing structures, not replacement cost coverage. Therefore, in the event
of, for example, a fire on site, only the depreciated cost to repair the exterior
envelope will be covered, which could be a 30-50 percent shortfall. If the project
has a tight budget, that shortfall could be enough to sink the project, particularly
if additional construction funding is not available. This last possibility is
a very real concern when credit is tight, as it is in today's market.
For new construction, it is very important to have coverage for foundations,
underground pipes, site preparation, excavations, temporary structures, scaffolding,
construction forms, etc. Each of these can be very expensive to replace if there
is no coverage in the event of a loss. The parties should consider whether off-site
materials which will be incorporated into the building should be covered under
the builders risk policy. In addition, coverage for contractors' tools and equipment,
or materials which will not ultimately become part of the structure, must be
The next consideration is who should be insured. The construction documents
will usually require that the owner and the general contractor be covered by
the same builders risk policy. All subcontractors of whatever level frequently
are also covered. This will usually obviate the need for waivers of subrogation
among the contractors and subcontractors, because the rule in most states is
that a property insurer may not subrogate against its own insured.
Some builders risk programs insure certain material suppliers, others do
not. If the material suppliers are not insureds under the builders risk policy,
contingent business interruption coverage should be obtained which will cover
any loss to a key supplier's facility. Otherwise, the project could be completely
halted if, for example, the steel delivery is delayed for 3 weeks because of
the fire at the steel plant, but there will be no coverage for the costs resulting
from that delay.
The interrelationship between construction documents and insurance policies
is also particularly acute when considering certain common policy exclusions,
such as those for faulty design, faulty materials, and faulty workmanship. Most
builders risk insurers will not provide coverage for the cost of making good
defective design, workmanship, or materials. However, policy forms should be
carefully reviewed to make sure that ensuing loss is covered. The law on ensuing
loss in each state should be carefully checked to see whether an entirely new
peril must result from the faulty workmanship, i.e., if faulty welding causes
a fire, the fire is a new peril which is insured under the ensuing loss exception.
Alternatively, if the roofers do not properly install the flashing, and water
leaks through the roof and destroys interior walls, the insured should know
before construction starts whether that will be considered an ensuing loss under
the governing law, or whether it will be excluded as the direct result of the
faulty workmanship. In this regard, construction document provisions on indemnity,
consequential loss, and allocation of responsibility should be drafted with
this type of situation in mind and should reflect the availability of ensuing
Once the property to be insured has been identified, the insured locations
can be determined. Of course, the construction site itself should be an insured
location. Important decisions should be made concerning property in transit
(including whether all modes of transportation are covered), and, as noted above,
whether property off-site, such as at the supplier's plant before it is delivered,
will also be covered. This last can be very helpful because a fire at a manufacturing
plant which destroys materials already manufactured for the project will trigger
business interruption and soft costs coverage if property off-site is specifically
Two of the most important considerations in a builders risk policy are the
type of time element coverage which is included and the deductibles. Time element
coverage includes business interruption, extra expense, expediting expense,
and "soft costs." This article will only address the last of these four, although
that by no mean diminishes the importance of having appropriate terms, conditions,
limits, and deductibles for the other three.
The purpose of soft costs coverage is to insure the economic risks caused
by project delays resulting from a covered peril. The cost of repairing or replacing
the damaged property will usually be covered by the property insurance and will
include the cost of removing the debris of the damaged property, purchasing
new materials, and the labor involved in replacing the damaged property with
the new property. However, depending on the precise policy language, traditional
business interruption coverage, including extra expense and expediting expense,
may not pay for certain economic losses, such as advertising and promotional
expenses, commissions or fees for the renegotiation of leases, additional insurance
premiums for the necessary property and liability coverage to be in force for
the additional time it will take to finish the project, interest on construction
loans, taxes, and rental of construction equipment not specifically involved
in repairing the damaged property.
Each of these items can be covered under a soft costs endorsement and will
provide extra protection to the owner. Contractors may also incur substantial
uncovered soft costs without the proper endorsement. For example, if the project
is delayed 3 months because of a fire, general conditions will continue, sometimes
at the rate of $10,000 or more per month. This may not be covered under the
property coverage or the business interruption coverage. If it is a large project,
subcontractors may require substantial additional fees to keep their men on
site, as opposed to sending them to another job. Workers and equipment idled
between the date of loss and the date reconstruction begins are most likely
to be covered under soft costs endorsements, if at all. Storage, increases in
labor wages, and building materials are other examples of soft costs incurred
Policyholders should make sure that the soft costs endorsement includes the
soft costs which will be incurred by all insured parties. Some endorsements,
particularly if the policies are obtained by owners, will focus on the owner's
soft costs, and may ignore the contractors' soft costs. If the general contractor
obtains the policy, the reverse may be true. Therefore, the scope of the soft
costs coverage should be specifically discussed by all the insureds. Another
key issue is deductibles. Many soft costs coverages have deductibles expressed
in waiting periods of days or weeks as opposed to dollar amounts. This can have
the affect of wiping out a significant proportion of a soft costs claim, especially
if adjustments to critical paths are practicable, even though costly.
In conclusion, builders risk coverage presents unique issues which should
be addressed before construction begins. Policy forms are different and the
precise terms and conditions necessary should be reflected in the construction
documents and reviewed in detail by all concerned. If the parties involved in
a construction project pay attention to detail up-front, it will minimize uninsured
loss and help prevent unnecessary disputes between policyholders and insurers,
and even among the policyholders themselves.
1For a more comprehensive
list of issues to consider when purchasing builders risk coverage, see the Builders
Risk Coverage Checklist (2008 ed.) in the
Insurance Checklists 2008 manual.
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