Enter the Builder's Risk Dragon
Builder’s risk insurance (course of construction insurance) is critical to contractors. It is also highly unpredictable and dangerous . . . just like dragons.
It’s unpredictable because:
there is no standard form – coverage varies widely;
it can be owner or contractor provided;
it may be part of a regular reporting form BR program or a stand alone; and
BR policies are rarely reviewed prior to signing the contract documents.
BR policies are dangerous because they can have extremely large deductibles, coverage gaps abound, and the exclusions vary widely.
John Prince and Andy Adams presented “Enter the Builder’s Risk Dragon” at Adams Insurance’s “Kung Fu Risk Management Seminar.” In addition, to having great pictures of Bruce Lee and Chuck Norris, Prince and Adams presented the “Triangle of Risk” as the key to mastering the Builder’s Risk Dragon. The triangle can help contractors understand what risks are in play in the builder’s risk insurance covering their projects. It can also help those purchasing the builder’s risk policy better understand the coverages provided by the policy.
The triangle examines the builder’s risk from three angles: the builder’s risk policy itself, the contract documents, and the contractor’s own insurance coverage that may apply to the project under construction (general liability, installation floaters, etc.). Five elements should be considered from each angle: deductibles, sublimits, exclusions, warranties, and reimbursements.
Builder’s Risk Angle:
Deductibles – Are there special deductibles applying to particular perils? For example, what are the flood and wind deductibles? These can vary widely depending on the location of the project (is it coastal? Tier 1 or Tier 2?).
Sublimits – Are there sublimits that limit the coverage of the policy depending on the peril? These are common on earth movement or even theft.
Exclusions – The lack of a standard form for Builder’s Risk policies makes exclusions sometimes hard to spot. Moreover, the type of construction can make exclusions more or less significant depending on their nature. Make sure you review a policy specimen before you accept the coverage provided.
Warranties – Your breach of a policy warranty can jeopardize your insurance coverage. What warranties does the policy obligate you to keep? Make sure you know.
Reimbursements – Who is an insured under the builder’s risk policy? Who can collect the claim dollars?
Contract Documents Angle:
Deductibles – Who does the contract make responsible for deductibles? Is there a shared responsibility?
Sublimits – Who was obligated to purchase the builder’s risk policy by the contract documents? Did it set out certain minimum requirements?
Exclusions - Who was obligated to purchase the builder’s risk policy by the contract documents? Did it set out certain minimum coverages?
Warranties – The entity obligated to purchase the builder’s risk may not be the same entity responsible for maintaining security on the site or controlling the site conditions. What if warranties apply?
Reimbursements – Do the contract documents assess claim reimbursements? Probably not. They probably do address deductible payments. Will you be required to pay the deductible months before you are reimbursed for any damages?
Deductibles – Know you own deductibles and how they will apply to the course of construction. Your installation floater may deductibles that apply to the claim. It might also help you pay the deductibles under the Builders’ Risk policy.
Sublimits – What are your installation floater’s sublimits?
Exclusions – What exclusions in your general liability (care, custody, and control?) policy apply to the work performed at the project site? What exclusions are present in your installation floater? This can be dependent on your location.
Warranties – Will your insurance cover your loss in the event a warranty under a builder’s risk policy is violated?
Reimbursements – Who pays and how quickly you receive reimbursement can change depending on your coverage.