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 volcanos, (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 of Insurance to be certain if you are a named insured.
Question: What if the Builder's Risk coverage does not include subcontractors as named insureds?
Answer: If subcontractors are not named insureds they are not covered. Subcontractors will need to purchase their own coverage known as an "Installation Floater". Because that additional insurance will add to the overall cost of performance, it makes more sense for the owner to require subcontractors be included under the Builder's Risk policy.
Question: When does coverage begin and end?
Answer: Normally contract general conditions require Builder's Risk coverage from the time construction begins until the Project is complete and occupied. However, Builder's Risk policies sometimes provide coverage for a specific duration rather than wire to wire construction. If construction continues beyond the date of coverage stated in the policy, it is the responsibility of the party obtaining Builder's Risk coverage to renew the policy. It is a good idea for all named insureds to check the policy period and make sure the policy is renewed as needed.
Question: Who buys the policy?
Answer: This is generally governed by the construction contract documents. Most (including the AIA forms) provide for the owner to purchase the policy, but they occasionally provide for it to be purchased by the general contractor.
Question: What happens if the party required by contract to obtain the Builder's Risk policy fails to obtain it?
Answer: An unexcused failure to obtain Builder's Risk insurance is a breach of contract. The breaching party in effect becomes the insurer for those who would have been protected under the Builder's Risk policy had it been obtained. The problem, of course, is that the breaching party may not have the money to make good on the loss.
Question: How can I know if the policy is in place?
Answer: Anyone who expects to be covered by the Builder's Risk policy should not simply assume that it has been obtained in accordance with the contract. Even if one has been purchased, the policy may not cover everybody it is supposed to cover. You should request a copy of the policy so that any problems can be corrected prior to a loss. At a minimum, a Certificate of Insurance should be obtained. This Certificate, however, contains a limited amount of information and although it is usually adequate with regard to Workman's Compensation and General Liability coverage, it will not reveal important Builder's Risk information that varies from policy to policy.
Question: What happens if there is a covered loss?
Answer: Most construction contracts (including the AIA forms) provide for the loss to be adjusted with the owner who obtained the policy and payment to be made to the owner for the various insureds. Any repair or restoration work is then performed pursuant to a Change Order to the construction contract and funded by the insurance proceeds. However, any named insured whose property is damaged should immediately provide notice to the insurer, the owner and the party with whom it has its contract.
Question: Can I be sued for causing damage that falls within Builder's Risk coverage?
Answer: That depends largely on the construction contract and whether you are a named insured in the policy. If you are a named insured, most jurisdictions would bar any claim against you by other parties to the policy. If you are not a named insured, but the construction contract contains a waiver of subrogation provision that extends to your tier of contract, then you still cannot be sued for damage covered by Builder's Risk insurance. The AIA general conditions contain such a waiver provision. If you are not a named insured and the contract contains no waiver of subrogation provision, then you are open to a law suit where your company's negligence caused the loss. Normally, it is the Builder's Risk insurer who will sue because it is the insurer who ultimately suffers the loss.
Question: Who is responsible for any deductible?
Answer: This should be governed by the construction contract documents. However, some contracts are unclear or silent. Since deductibles vary from policy to policy, it is important to determine prior to the contract the amount of the deductible and who will absorb it. If the amount is small, the party who bears the risk will likely choose to absorb it as a business expense. But if the deductible is large, that party will more likely choose to insure against that loss either through existing insurance or a small installation floater for that amount.
This
newsletter is intended to provide general information of interest to the
construction industry. It is not intended to provide specific legal advice or
to address fact specific issues. For that you should consult your legal
counsel. Corwin & Corwin LLP assumes no liability in connection with the
use of this newsletter. The Supreme Judicial Court may consider this material
advertising.
©1992-2000 Corwin & Corwin LLP. All rights reserved.