Will S. Bennett adn Jeremiah M. Welch | Saxe Doernberger & Vita
Builder’s risk policies are manuscript and complex, and many contractors don’t fully understand the nuances of how and where the coverages they need come from in the policy. Time and again we see contractors taking risk contractually that builder’s risk insurance could have supported, but the policies fall short for reasons identified in the checklist. Most contracts that mention builder’s risk at all talk only about insured status, duration, and possibly responsibility for the deductible. Construction contracts almost never address different available coverages and extensions, sublimits, or how a claim is made and paid. By getting language addressing the concepts in this checklist into the first draft of a prime contract, you create the opportunity for an educated conversation about important policy considerations. We know each placement is different and we know there are plenty of good reasons why everything on this list may not be available (or even reasonable) in a given situation. The point is to start the negotiation better informed. The point is not to “stick it” to the owners.
I. Contract Terms Specifying Builder’s Risk Policy Requirements
| Contract Term | Notes | Verified |
|---|---|---|
| “All Risk” coverage form | “All Risk” means all perils are covered unless excluded, versus “specified peril” coverage – “all risk” is the broadest and industry-standard. | |
| All contractors should be named insureds | Naming and insuring all stakeholders helps avoid disputes and project delay due to liability/contractual entitlement fights. | |
| Insured status shall not be limited “as their interest may appear” | This language has been used to deny coverage based on interpretations of which party has an “interest” in which discrete components of the covered project and to support efforts to subrogate against insureds. | |
| Waiver of subrogation in favor of all insureds | Several states allow property insurers to subrogate against their own insureds. | |
| No insured shall be the sole agent and/or loss payee for and other insureds | Each insured shall have the unlimited right to submit claims and work directly with the insurer for the adjustment and payment of such claims. Owner as sole agent/loss payee can lead to disputes over whether to submit a claim and how to divvy up claim proceeds. | |
| Coverage may not be provided through commercial property insurance | Commercial property insurance often excludes construction risk, structural work, etc. and may not have sufficient limits. It may be a permissible alternative for certain renovation work, but the policy must be reviewed to ensure adequate coverage before allowing. | |
| Coverage shall be maintained until final completion | Owner property insurance usually does not cover construction risk. Many liability policies exclude damage during construction. Punch list work is usually completion of original scope (i.e. not completed operations under CGL insurance) and therefore needs BR coverage. | |
| Deductibles/waiting periods shall not exceed $___, or ___ days, and cannot be a percentage of value in place at the time of loss if such percentage value could exceed the amount specified herein. | The larger the deductible, the more likely the owner is to be disinclined to submit a claim and try to push the risk to other insureds. For waiting periods, especially with soft costs/delay in completion coverage, the contract should shift the risk of loss associated with an extended waiting period (i.e. greater than 14 days) or an insufficient soft costs sublimit to the owner. Other insureds should not be an excess insurer to the Owner’s insufficient soft costs/delay in completion limits or overly long waiting period, as those are deliberate choices by the Owner regarding how much coverage to purchase. | |
| Coverage must include damage to the work resulting from faulty work, design or materials, and such coverage may not be conditioned on the existence of an ensuing or independent peril/cause of loss | This is designed to steer coverage toward LEG 2/LEG 3 forms, or domestic “cost of making good” forms that do not have an “ensuing loss” requirement. Seek advice from your broker on this topic as changes in the marketplace and commercial availability impact decisions. | |
| Coverage for increased costs due to disruption/increased cost of completing undamaged work, with a sublimit, if any, not less than ______. Coverage shall be for actual costs incurred and not limited by contract rates. | Policies refer to this coverage in different ways, but it relates to the increased cost due to disruption of the project – the “ripple effect” on the continuation of undamaged work (i.e. Critical path delay, sub idle costs, increased material costs, etc.) Some markets require a sublimit. Coverage should not be limited to contractual daily rates for excusable delay (these are often negotiated rates that do not reflect actual). Coverage should extend to impacts to trades beyond the completion of repairs for the direct loss. | |
| Coverage must include general conditions/extended general conditions, and contractors’ profit and overhead with respect to all repair work. | These are necessary components of repair work which some insurers exclude or try to avoid paying. In many policies, general conditions are not expressly addressed. Coverage must be evaluated as a component of other policy provisions, often including the main insuring agreement, valuation provision, extra and expediting expense provisions, and softs costs/delay in completion coverages. | |
| Coverage must include costs to expedite repairs and to mitigate delay to repairs and the overall project schedule. Sublimits, if any, shall not be less than _____. | Policies refer to these costs in different ways, but this would include resequencing, night and weekend work, expediting expenses, etc. Consideration should be given, in particular, to such costs that may be incurred beyond the completion of direct repair work for impacted follow-on trades. | |
| Coverage must include owner’s costs resulting from delay in opening including soft costs and income loss. Sublimits, if any, shall not exceed _____. Waiting period deductible, if any, shall not be more than ___ days. Maximum period of loss, if any, shall not be less than ____. | As applicable, this should also apply to owner income loss due to impact on existing operations. Pair this requirement with a limitation of liability/waiver of claim tied to the owner’s failure to procure sufficient coverage for delay impacts. | |
| Coverage must include debris removal, including any cost to demolish and remove undamaged property necessary to effect repairs. | Many insurers say debris removal does not include demolition cost unless specified. | |
| Exclusions, if any, for corrosion, decay, deterioration, erosion, evaporation, leakage, loss of weight, rust, shrinkage, wear and tear, settling, shrinking, cracking, expansion, contraction, dryness or dampness of atmosphere, changes of temperature, heat, humidity or condensation shall not apply where they are unexpected, sudden, the result of an otherwise covered peril including defective work, design or material if such damage would otherwise be covered. | These exclusions are borrowed from property policies where they are designed to prevent coverage for deferred maintenance or the natural effects of time. They should not be applied where these events are caused by an insured peril (e.g. CLT is not properly covered during installation and swells and deforms due to rain/moisture). | |
| Coverage for design/engineering/professional fees incurred as part of repair. Sublimits, if any, shall be no less than _____. | ||
| Coverage for claim preparation costs including costs and fees paid to brokers for such services. Sublimits, if any, shall be no less than ____. | ||
| Coverage for increased costs due to building code changes impacting repair. Sublimits, if any, shall be no less than _____. | ||
| Coverage for loss prevention/mitigation (a.k.a. “sue and labor”). Sublimits, if any, shall be no less than _____. | ||
| Coverage must continue for the term of the policy notwithstanding completion, occupancy or operation of the project or any portion of it. | Some policies terminate coverage automatically in the event an asset is occupied or put to use. | |
| The policy shall not limit the time in which a suit for coverage must be brought. | Many policies significantly reduce the time for bringing suits as compared to applicable law. One year limitation of suit provisions, in particular, may not allow sufficient time for the claim to be prepared and adjusted to accomplish resolution before policy dictates the insured must sue, forcing litigation on a claim otherwise still in progress. | |
| The policy shall not include a provision requiring dispute resolution through arbitration. | Insurers do not fear arbitration the way they fear civil trials and juries. Arbitration provisions embolden insurers to take and hold more aggressive positions limiting and denying coverage. | |
| If liquidated damages are excluded, there must be an exception to the extent of actual damages. | Most policies cover the types of damage contemplated by liquidated damage clauses (e.g. delay in opening, lost income, soft costs, increased cost of construction). | |
| If mold or fungus is excluded, the exclusion may only apply to costs solely incurred because of mold or fungus. | Many policies attempt to exclude all loss if any portion of damage or repair involves mold/fungus. | |
| Exclusions for criminal/dishonest conduct may only apply if the insured seeking coverage committed such conduct. | Many policies attempt to apply the exclusion if the conduct was wrongful, even if committed by a different insured or by a third party. | |
| Disputes under the policy must be subject to the law of the place where the project is located and must be allowed to proceed in the jurisdiction where the project is located. | Some policies have choice of law or forum clauses for unfavorable locations such as New York or foreign countries. These are often coupled with arbitration provisions. | |
| A complete copy of the policy must be provided to each insured not later than ______. | ||
| Coverage for property in transit. Sublimits, if any, shall not be less than _____. | Depends on project | |
| Coverage for damage to owner’s existing property. Sublimits, if any, shall not be less than _____. | Depends on project | |
| Coverage for project-specific off-site storage/staging/pre-fabrication. Sublimits, if any, shall not be less than _____. | Depends on project | |
| Coverage for improvements to land. Sublimits, if any, shall not be less than _____. | Depends on project | |
| Coverage for fire protection services. Sublimits, if any, shall not be less than _____. | Depends on project | |
| Coverage for office and construction trailers and contents. | Depends on project | |
| Coverage for testing (hot & cold). Sublimits, if any, shall not be less than _____. | Depends on project | |
| Coverage for business personal property. Sublimits, if any, shall not be less than _____. | Depends on project | |
| Pollution/contamination clean up. Sublimits, if any, shall not be less than _____. | Depends on project. Mold may be a distinct coverage extension. |
II. Builder’s Risk-Related Contract Terms
| Contract Term | Notes | Verified |
|---|---|---|
| Mutual waiver of claims to the extent of available builder’s risk insurance. | BR insurance should be the first recourse for covered claims. | |
| Liquidated damages, if any, should be reduced to the extent of available BR insurance. | Owners soft cost and income loss coverage should offset or replace LDs. |
III. Additional Contract Term Considerations
- Depending on the risks, the following potential coverages should be considered:
- Land/landscaping/improvements – “horizontal work”
- Property in transit
- Pollution clean-up (including mold)
- Hot testing/start up
- Nuclear risk
- Will the project involve a crane, boilers, turbines or other high value/risk equipment which is not normally covered by BR?
- Crane/equipment floaters/policies are also variable – they may or may not cover damage to property caused by the equipment and/or consequential loss resulting from loss of the equipment
- Will the project involve operations on or involving existing owner property/assets?
- Can/should the BR extend to existing property?
- Is a subrogation waiver from existing owner insurance appropriate?
- What is the risk transfer plan for damages resulting from loss of use of the owner’s existing/adjacent property?
- Does the project involve modular or similar off-project fabrication risk, significant/unusually high product risk, etc. which is likely not covered by traditional BR? What is the risk transfer plan for such property?
- Does the project involve off-site storage, laydown, or similar sites where property to be installed will be stored?
- Can these be added to the BR or is an alternative plan needed?
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.