Michael Iakovou and Olivia Piluso | KL Legal
What is builder’s risk insurance? Builder’s risk insurance covers accidental losses, damages and destruction to property damages during construction operations. Under typical construction industry standards, either the owner or the contractor purchases builder’s risk coverage. The party that purchases the policy depends on who has the greater buying power in the insurance market. Coverage is usually available for the following types of projects:
- new construction;
- renovations or repairs; and
- materials, property, and equipment at the construction site
This type of insurance coverage is only in effect during the construction period. Once the construction is at the stage of substantial completion, then permanent property coverage commences – though not automatically. To avoid gaps in coverage, since the transition to permanent coverage is not automatic, the party procuring the builder’s risk insurance should:
- Ensure their insurance policies contain coverage starting before construction begins;
- Confirm that coverage continues if the project is suspended or abandoned;
- Confirm that the owner may occupy the project or a portion of the project before the event triggering termination of coverage; and
- Confirm that the policy’s termination date can be extended if construction is delayed beyond the original contractual completion date.
The owner or contractor extends coverage to anyone it must insure under the terms of the construction contract and any party that has a potential risk of loss for property damage during the construction. Some individuals who may be covered under this type of policy are:
- A lessee of the property;
- The prime or general contractor;
- Any construction manager performing work at the project;
- Subcontractors;
- Material suppliers; and
- Design professionals
First party property insurance typically provides policyholders with coverage for losses incurred – from physical damage to the policyholder’s own property – including real property and personal property. First party policies do not protect policyholders against liability to third parties, including liability for personal injury, wrongful death, and property damage.
Builder risk policies come in one of two categories: (1) all risk policies or (2) named perils policies. What are all risk policies? All risk policies, sometimes referred to as open perils policies, insure covered property against any risk or instances of physical loss or damage except for those causes expressly excluded. What are named perils policies? Named perils policies insure specifically covered property against physical loss or damage to that property unless the policy expressly states that the particular cause of the loss or damage is covered. All risk policies provide a broader range of coverage than named perils policies but are also more expensive than named perils policies. A policyholder can make a prima facie claim much easier under an all risk policy than under a named perils policy. Under an all risk policy, the burden is on the insurer to prove the peril that caused the loss is expressly excluded from the policy’s coverage; a policyholder need only prove the existence of the policy and the loss or damage to covered property. Conversely, under a named perils policy, the burden is on the insured to prove the existence of the policy, the loss or damage to covered property, and that one of the named perils caused the loss or damage.
Extended coverage options that the owner may require are the following:
- Loss of use, business interruption and delay in completion;
- Costs to repair the project consistent with changed building codes or ordinances regulating demolition, construction, repair, replacement or use;
- Expediting cost;
- Extra expenses incurred during the period of damage and repair over the above costs that would ordinarily have been incurred;
- Costs incurred as the result of condemnation;
- Business interruption losses causes when a company cannot access its own property as a direct result of physical damage;
- Delays in completion costs like financing costs, leasing and marketing expenses; and
- Losses due to data and security breaches
Extended coverage options that the contractor should consider are:
- Railroad protective liability;
- Asbestos abatement;
- Physical damage to property stored or in transit; and
- Physical damage to the contractor’s property
When considering purchasing insurance for a construction project, it is vital that you understand the various insurance policies to choose from, and who should be covered under said policies.
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.