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Builder’s risk insurance

| May 11, 2021 | Construction And Development |

Today, we want to talk about builder’s risk insurance. We previously talked generally about commercial general liability insurance policies, noting that they typically afford coverage for bodily injury and property damage to third parties. Builder’s risk is usually a first party coverage, meaning that it affords coverage for damage to the property of the insureds. In fact, builder’s risk policies are a type of property insurance.  Its purpose is to afford coverage for the increased risks of property damage that exist during construction of the covered project.

Why is a builder’s risk policy necessary?

There are several reasons why builder’s risk policies are an important tool in mitigating risk associated with a particular construction project.

For one, as we noted previously, wrap ups are an increasingly common (if not requisite tool) to affording commercial general liability coverage for a particular project, covering all participants in the active construction—owner, general contractor, and subcontractors of all tiers. Such policies, however, usually exclude property damage to the project, which occurs during construction. Many CGL carriers consider such risks to be more appropriately covered by a builder’s risk policy and these exclusions are sometimes even called builder’s risk exclusions. (Similar exclusions are sometimes included in traditional CGL policies.)

For another, as already mentioned, CGL policies afford coverage for property damage to another’s property, whereas the builder’s risk policies afford coverage for damage to the insured’s own property.  This distinction can be especially important for the project owner.

Builder’s risk policies, because they are primarily a first party coverage, do not require a lawsuit to trigger coverage. For property losses that occur during construction, trying to get coverage under a CGL policy can be practically and legally challenging, especially given the suit requirement that can so often be judicially-imposed to trigger the CGL coverage. Also, builder’s risk policies can afford a broader scope of coverage for different types of losses than is typically afforded by CGL policies.

It is not just the project owner that can significantly benefit from a builder’s risk policy. If a loss occurs and arises out of some act or omission of a subcontractor, that subcontractor could likely have an obligation to indemnify the owner for the resulting damages. However, if those losses are covered by a builder’s risk policy, such coverage may reduce or even eliminate the subcontractor’s liability.

For all these reasons, and many more, builder’s risk policies are a very important tool in mitigating risk for construction projects of all types. Also, when losses do occur during construction, it is always important to identify any builder’s risk coverage and tender the loss to the carrier.

Potential builder’s risk coverage enhancements

Builder’s risk policies can afford certain specialized coverages that are unique to such policies. The following are just a couple of examples of some of the more common additional coverages that can be added to builder’s risk policies.

Debris removal typically covers the costs to remove debris resulting from the loss. In certain losses, like fire and storm-related losses, removal of debris can be a significant part of the total loss. Debris removal coverage is included in most builder’s risk policies.

Extra Expense usually covers costs that are incurred above the total costs that would have been incurred had the loss not occurred. Oftentimes this can include costs for labor, supervision, and administration costs, as well as equipment rental costs. It also frequently includes costs to demobilize and remobilize. Sometimes it can include delay-type costs (though such costs are sometimes captured through a separate time element coverage). It can also include construction loan interest, property taxes, professional fees (architectural, engineering, consultant, legal and accounting are some of the more common), insurance premiums and advertising and promotional expenses. The types of fees and costs included within the Extra Expense coverage is usually delineated in the coverage form and should be carefully considered during the marketing and placement of the policy.

Lost rental income (where the subject project will generate such income after completion) may also be covered by builder’s risk policies, sometimes as part of Extra Expense coverage and sometimes as a stand-alone “time element” coverage.

Expediting Expense can afford cover for costs incurred to make temporary repairs or for extra costs to expedite permanent repairs.

There are many different types of additional coverages that can be added to builder’s risk policies, some of which are specific to the nature of the project. For this reason, careful consideration should be given to the project type and the risks associated therewith for purposes of identifying additional coverages that might be particularly helpful.

Placement and claim submission

Builder’s risk coverage is a very important risk mitigation component for any construction project. The marketing and placement of the coverage can be more complicated because the terms and conditions of builder’s risk policies often vary significantly from carrier to carrier, far more than CGL policies, for example. Furthermore, there are several coverage enhancements that can be requested.

When losses do occur, the builder’s risk coverage can be a far more effective tool than other insurance vehicles for addressing the loss and maximizing coverage therefor.

McLeod Law Group has substantial experience in assisting clients in the design and placement of builder’s risk programs, as well as the design and implementation of other risk-management tools. We have handled numerous losses under builder’s risk policies, including filing many bad faith claims against builder’s risk carriers. Contact us for your newest construction project or if you have suffered a loss at one of your on-going projects and we will aggressively protect your interests.