Builder’s Risk insurance policies are there to protect all parties involved in new construction projects. As such, they usually constitute a single source of coverage for owners, contractors, and sub-contractors. If you think sharing the bill after a meal can be complicated, imagine sharing an insurance policy.
In this article, we will look at 5 great tips on sharing this insurance. But before we delve into the detail, here is some groundwork to consider.
What is Builder’s Risk insurance?
Builder’s Risk insurance is a type of insurance that covers policyholders during the construction of new buildings or projects, new additions to buildings, or renovations.
Builder’s Risk is often also referred to as Course of Construction insurance, as the policy only runs for the project’s duration. This can be 3, 6, or 12 months. If your project only finishes after the expiry date, make sure to address this issue before your policy expires. Your insurance company may not issue a new policy if the coverage gap is too long.
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Scope of Coverage
New buildings and renovations fall under the scope of this insurance. The policy will typically be taken out by contractors to cover risks not covered by their General Liability insurance. See more information here.
What items are normally covered by your policy?
- Buildings Structure
- Construction Materials
- And debris removal in the event of loss
What items does this insurance generally not cover?
- Construction material in transit
- Construction trailers
Most insurance companies will allow you to include or exclude types of property and causes for damage. This will enable the party negotiating the contract to get the best coverage for the specific risks associated with the project.
Events for which Builder’s Risk insurance provides coverage
- Wind (may be limited in coastal areas)
- Vehicles or aircraft
What events are not covered on your Builder’s Risk policy?
- Employee theft
- Water damage
- Weather damage to property in the open
- Government action
- Contract penalty
- Voluntary parting
- Mechanical breakdown
Take note of what is excluded in your Builder’s Risk policy. An important exclusion is damage resulting from faulty design, planning, workmanship or materials. In this instance these issues might best be addressed by your liability coverage.
Sharing a Policy?
You should view Builder’s Risk insurance broadly as a policy for covering risks associated with a specific project. Since everyone involved shares the risk, all parties to the project should have the policy’s protection.
Usually, this would include the property owner or the project sponsor. It would also include the contractor or developer. Lastly, it should include all the sub-contractors who will be working on the site.
1. Who gets the coverage?
In most instances, the party responsible for getting the coverage will be specified in the contract. This is why reading the contract for yourself is so important. Understand your policy coverage before you commit to it.
Not only should the responsible party be named, but the scope of risk for which the coverage is sought must also be specified. In reading the contract, you will be able to see if all your project risks are covered.
The party getting the coverage is responsible for paying the premium, setting the terms, and receiving the pay outs. This could become a contentious issue, so know who you are dealing with.
2. Use the insurance as a basis for cooperation and risk mitigation
All contractors involved should read the contract and also the policy before work gets underway.
What should the contract and policy specify?
- The party responsible for negotiating, paying, and administering the policy
- List all parties who will share coverage in terms of the policy
- List all coverage risks sought.
In most circumstances, the party responsible for getting the coverage will be the owner or project sponsor. Their duties should include consultation with all parties to ensure everyone is complying with risk mitigation as detailed in the contract.
Subrogation refers to the right held by insurance companies to institute legal action against the party who caused a loss to their insured client.
But there is a catch.
What if a subcontractor causes a loss to the project and has coverage in terms of the policy? But the project is still not able to recover from the severity of the damage. Who can and can’t sue the subcontractor for damages?
It would help if you read up about subrogation, subrogation waivers, and how subrogation waivers may affect your liability insurance. As they say forewarned is forearmed.
4. Exculpation clause
Usually found in the contract, this clause has to do with providing indemnity from liability should one party to the contract cause damages while executing the contract’s terms. Though this may not appear in the policy, it still forms part of your exposure to risk while under the contract terms.
Suppose claims made against the policy places a specific sub-contractor at a disadvantage or advantage. In that case, they may find themselves either unable to seek damages or pursue legal action.
5. Exclude vague and archaic terms
As Their Interests May Appear (ATATIMA) could be interpreted by some adjusters as only applicable to the area in which a subcontractor works.
Say, for instance, the electrical team on the site causes an accident resulting in water damage. The policy could pay out, but the insurer could institute action against the electrical company, reasoning that their interests within the policy are only related to electrical matters.
Another area to take note of is the terminology used in the contract. Look at the usage of “with whom” which could exclude the principal contractor or subcontractor. Where possible, insist on excluding vague and archaic terms.
Sharing is caring
If done right, sharing Builder’s Risk insurance will protect all parties and ensure that the correct coverage for all your project risks is in place. However, it does remain the responsibility of every contractor and sub-contractor to thoroughly understand the policy to which they are a party to on a project. Read up on your insurance policy and familiarize yourself with its limitations and exclusions.