Builder's Risk - Who Needs It?

While most participants in the construction process are familiar with Liability Insurance and Workman's Compensation Insurance, fewer understand Builder's Risk Insurance. As a result, this essential coverage is often overlooked by those who need it most. Any construction project in progress is exposed to the risk of property damage from fire, wind, flood, collapse, theft, vandalism and other unexpected perils. As a general rule, contractors, subcontractors and suppliers are responsible for their work and materials until they complete performance. That means they must replace what is damaged or lost. Consequently, they bear a great risk of loss should damage occur before completion. So does the owner who may have already paid for the work damaged. Builder's Risk Insurance, often referred to as "All Risk Property Insurance", is the form of property insurance designed to protect everybody against this loss by shifting the risk to an insurer.

Like most forms of insurance, Builder's Risk varies from policy to policy. The following provides answers that apply to most Builder's Risk policies.

Question: What property does it cover?
Answer: In general, the Builder's Risk policy insures the building under construction and all its component parts, whether or not installed, although it may not cover material in transit. It does not usually cover tools, equipment or property that are not to become a permanent part of the construction, but it can cover scaffolding. It never covers landscaping, such as trees, shrubs or lawns.

Question: What risks does it cover?
Answer: Some Builder's Risk policies specifically describe the risks that are covered; e.g. fire, wind, flood, theft, vandalism. But it is more common for Builder's Risk policies to cover "all risks" except those risks specifically excluded. The risks commonly excluded involve (a) catastrophic natural phenomena such as earthquakes and volcanoes, (b) certain types of water damage and building collapse except from named causes, and (c) faulty workmanship, material or design. It is important to carefully analyze a loss before concluding there is no coverage no matter what the exclusion says. For example, if an earthquake causes a fire, the damage caused by the fire may be covered even though the damage caused by the earthquake may not be covered. Similarly, if faulty electrical work causes a fire, the property damage caused by the fire may be covered even though replacement of the electrical work may not be covered.

Question: Who does it protect?
Answer: Like all insurance, Builder's Risk only protects those named as insureds in the policy. Usually, this is done by designating those insured by their function rather than name, such as "Owner", "Contractor", "Subcontractor", etc.

Question: How do I know if I am covered?
Answer: First, look to the contract general conditions. The provision governing insurance will tell you who is required to be covered by Builder's Risk insurance. You still must obtain a copy of the policy or a Certificate.