Insight on The Builder’s Risk Policy

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Insurance Community University

Your Instructor Today

Al Parizo, AFIS, CISCOn Chattauqua Trail, Boulder CO in quest of a good Builder’s Risk

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Objectives1. Exposures to loss2. Insureds to be named on the policy3. Review of Construction Contract4. Methods of writing Builders Risk5. Review of Policy

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Builder’s Risk

Completed value and Beyond


Exposures to Loss and What To Look For

First – review the construction contract

Who purchases the policy – owner or builder

What perils need to be insured• Fire and AOP• Flood / Earthquake / Wind


Exposures to Loss

What kind of building or structure

• Residential• Commercial

Building items

• Underground work• Underground

foundations• Retaining walls• Pavement / paving


Required Property Coverage

Materials and supplies

Equipment to be part of the building

Existing building

Temporary structures

Office trailer

Fencing

Landscaping


Contract Example• 11.4.1.1 “Property insurance shall be on an “all

risk” or equivalent policy form and shall include, without limitation, insurance against the perils of fire (with extended coverage) and physical loss or damage including, without duplication of coverage, theft, vandalism, malicious mischief, collapse, earthquake, flood, windstorm, falsework, testing and startup, temporary buildings and debris removal, including demolition occasioned by enforcement of any applicable legal requirements, and shall cover reasonable compensation for Architect’s and Contractor’s services and expenses required as a result of such insured loss.”


Contract Example

• 11.4.1.4 The Property insurance must cover portions of the work stored off the site and also portions of the work in transit.

• 11.4.1.5 Occupancy is not permitted without getting the consent of the insurance company.

• 11.4.2 Owner shall purchase Boiler and Machinery coverage as required in the contract documents. All of the interests covered shall be insureds, and the Owner and Contractor shall be named insureds.


Available Coverage Forms

Forms for this class of business are un-filed and uncontrolled forms

Most insurance companies create their own forms

The forms have common language but are often unique to that company


Policy Structure

How to Put it Together


Builder’s Risk Coverage

The policy is designed to insure the materials and supplies to be used in the construction as well as the value of the building as it is being

built until the project is completed


Project Specific

This type of policy covers an individual building

project

May be purchased by either Project Owner or

General Contractor

A deductible is used and will apply per loss


Reporting Form - Completed Value

Premium adjustment at end of policy

Reports are provided periodically (Monthly / Quarterly / Annually)Penalties can apply if under-reported

Purchased by the General Contractor

Annual policy – multiple projects


New Construction or Remodel

Either may be covered

Check construction agreement for

requirements to insured existing structure

Policy must be endorsed


InsuredsThe construction agreement typically

requires all parties to the project with an insurable interest in the

project are included for coverage


Named Insured

Often requires the Owner to

Be a named insured

Receive the claim proceeds

Act as fiduciary for all other

parties

Policy purchaser (check the contract)

Owner Contractor


Named Insured

Include as “insureds” to protect their financial interest in the project

• Subcontractors• Sub-subcontractors• Not necessary to include these

parties as Named Insureds


Coverage Locations

Here, there and anywhere!


Coverage Locations

Insurance policy language will vary

among the company forms

It will be important to review the insuring

agreement to determine locations of coverage


What to look for:Materials and supplies

should be covered at the project site, in transit, in

storage or any other temporary location

Include any warehouses or storage sites, even if the warehouse is owned or occupied by the insured

(this is sometimes excluded)


Covered Property

What is it and how much?


The policy description:

The policy should be clear that coverage applies to the materials, supplies, building or structure and includes all fixtures, machinery and equipment that will be included in the completed project



• The construction agreement may require that coverage apply to temporary structures– Fencing (not part of the project itself)– Trailers– Lighting

• If required, send the underwriter the portion of the construction agreement that states the obligation, endorse the policy as needed and adjust the limit of insurance



Scaffolding and forms

• The construction agreement typically requires coverage

• Many forms restrict coverage to $5,000, $10,000 or $25,000


Excluded Property

Why not?


Commonly excluded property:

Landscaping• Or sub-limits

Contractor's tools and equipment

Blueprints, drawings

Damage to existing buildings


Commonly excluded property:

Property located in a permanent warehouse of insured (try to remove)

Property in the open against loss by rain, snow, sleet or hail except while in custody of carriers for hire (not appropriate and should be removed)


When Coverage Begins

At policy inception

At the time the insured becomes

legally liable (according to the

construction contract)


When Coverage Ends

• The policy language will differ• The policy will typically contain at least

three different provisions and will provide an automatic cessation of coverage when one of the provisions first occurs


Examples of common coverage language:

• 30 (60 or 90) days after completion• Once the building is occupied or put to

its intended use– Amend this at time of placement

• On expiration date of policy or cancellation– The policy could be placed on a project

duration basis


Renewability

• When writing the policy on an annual basis, the policy should include a condition that allows the Named Insured to automatically renew for at least 6 months beyond the stated expiration date


Most appropriate:

After no party has any interest in the covered property other than the owner and any mortgagee as

shown in the policy


Typical Limitations

• Debris Removal– 25% of paid loss amount– Subject to deductible– Additional coverage limit may be available


Typical Limitations

• Pollution Clean Up– Many policies have a limitation for

extraction or removal of pollutants from land or water at the coverage location only and will be limited to $10,000 or possibly $25,000

– This is clearly inadequate for most construction sites

– Review the need for Pollution Remediation Coverage(e.g.Contractor’s PLL)


Causes of Loss

Risks of direct physical loss to

covered property unless

excluded


Typical Exclusions

• Equipment breakdown, electrical arcing or steam or pressure explosion– Most construction contracts require either this

coverage form or the perils typically covered under Equipment Breakdown Coverage

• Collapse Coverage– Typically provided for specifically named causes


Collapse

A partial collapse at a casino construction site Friday injured dozens of workers, and police are investigating the cause.


Typical Exclusions

• Earth Movement, volcanic eruption, soil erosion, subsidence requirements in contract– Very difficult exclusions to remove– Underwriter may require soil testing

results, compaction, sloping, grading and existing retaining wall information before considering removal request

– Earthquake coverage


Typical Exclusions

• Testing– Frequently excluded, either by specific

language or by removing any loss caused by Mechanical Breakdown, Explosion, Arcing (Artificially Generated Electrical Current), Steam Boiler or Pressure Vessel explosion


Typical Exclusions

• Flood– Often provided on a separate limit basis

and separate deductibles– Flat deductibles are sometimes used– If the project is in a designated flood zone –

the deductible will likely be a percentage– Check contract requirements and risk

exposure and provide insurance where necessary


Typical Exclusions

• Wind– Tier 1 wind location may require special

coverage– Sometimes a flat deductible is used – may

be a percentage in high frequency / severity exposure areas


Typical Exclusions• Mudslide, mudflow

– Not covered by Flood unless as a result of a covered flood

– Not covered as a result of Earthquake– May need separate endorsement

• Back up of sewer or drains– This may be an important exclusion when writing

an insured who installs any kind of pipe or drainage system

– Negotiate for removal of this exclusion


Typical Exclusions

• Error, omission or deficiency in design, specifications, workmanship or materials as respects the cost of making good such error, omission or deficiency– ALWAYS make sure that the policy contains an

exception to this exclusion, such as:– However, resulting physical loss or damage to the

insured property is covered


Typical Exclusions

• Water pressing, seeping or leaking into, under or on foundations, walls, floors, pavement or underground foundations or basements.– This is typically not found as part of flood

coverage and will have to be separately negotiated


Typical Exclusions

• Ordinance or Law exclusion– Ordinance or Law coverage should be

included or endorsed– Ordinance or Law compliance is an

exposure for new construction– If a loss triggers the tear down ordinance,

then the insured needs coverage for demolishing the undamaged portion of their work and rebuilding the undamaged portion


Typical Exclusions

• Terrorism– The coverage offer needs to be addressed

for both TRIA and other acts of terrorism, such as domestic

– Domestic terrorism could be a significant risk exposure, depending on the geographic siting of the project

– Domestic environmental groups have been known to destroy property while under construction


Poll#4

• The perils required in the construction contract always match the Builders’ Risk policy.

• True?• False?


Coverage Territory

As this is an Inland

Marine form, coverage is

typically restricted to:

• United States, its territories and possessions, Canada or Puerto Rico

• Occasionally the form will restrict coverage to Continental United States


Loss Payment and Valuation Provisions

Who’s on First?


Provisional Limit of Insurance

The form typically requires a limit of insurance to equal

the expected completed value of

the project

Even if the word is not used, this is a

type of coinsurance clause – 100% to

value


Provisional Limit of Insurance

Completed value is not the same as contract value

Change orders

Change orders

Debris removal

Pollution clean up

Ordinance or law

compliance


Valuation clause

The coverage should be written at

Replacement Cost Value

Include labor and profit


Policy Conditions

Another contract


Waiver of subrogation

May be required in the construction contract

May not be allowed in the policy

Negotiate this when placing coverage


Delayed Completion Coverage

Soft Cost Coverage



• Pays the consequences to the insured if the project is delayed

• Coverage triggered by covered loss to covered property– Could be restricted to project location only

• The Owner and the Contractor can both experience additional costs in the aftermath of a direct loss



• Typically written as an endorsement to the Builder’s Risk policy– Specific description of coverage– Specific limits

• When possible, provide Business Income and Extra Expense coverage– Provide Extended Period of Indemnity


Examples

Loss of rental income or loss of income

Additional interest

Additional licensing fees or building permit fees

Additional project management costs

Additional utility or data line installation fees

Architect / engineering fees

Insurance costs


Summary

• Builder’s Risk coverage is different carrier to carrier

• ALWAYS review both the construction contract and the policy– Make sure they match

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Insight on The Builder’s Risk Policy