The Value of Owner-Purchased Builder’s Risk Insurance Over a General Contractor-Purchased Policy

Builder’s risk insurance covers buildings, materials and equipment during the course of construction. Coverage applies at the project site, with sublimits applying to property stored temporarily off-site and while in transit. The type of construction projects covered range from new buildings and structures to additions and renovations to existing buildings and structures. The placement of builder’s risk insurance entails tailoring coverage to address the following:

• Specific exposures.
• The potential causes of loss.
• Insurable interests to be covered.
• Insurance requirements of lending institutions.
• The contract documents.

While the contractual terms underlying a construction project can vary, responsibilities for the purchase of coverage, payment of the deductible amounts, scope of coverage and waiver of subrogation rights should be clearly stated. The insurance requirements of a construction loan may or may not coincide with the insurance requirements in the construction contract.

The policy form for builder’s risk insurance can vary among insurance carriers, whether coverage is purchased as a stand-alone policy or as part of a master property policy. For this reason, the builder’s risk coverage form needs to be examined carefully for compliance with the insurance provisions from the contract documents and the lender's insurance requirements. The policy form also needs to be reviewed for the application of coverage to the exposures of the construction project.

The Disadvantages of General Contractor-Purchased Builder’s Risk Insurance

Responsibility for obtaining builder’s risk insurance is sometimes delegated to the general contractor. An owner should proceed with caution if the general contractor furnishes the builder’s risk insurance for the following reasons:

• A builder’s risk policy form may be purchased on the basis of the lowest price. The lowest cost policy may not necessarily address the owner's needs for scope of coverage.
• A general contractor could add a markup to the builder’s risk premium included in their bid.
• Uninsured or underinsured exposures could result in a delayed opening.
• Payments of deductibles are only as good as the financial resources of the general contractor. Depending on the peril involved and the location of the project, the deductible can be sizable, such as 7% of the property value at the time of loss for earthquake coverage in California.
• The policy provision for permission to occupy may not necessarily coincide with the owner’s schedule for occupancy.
• Coverage is normally covered for hard costs and not soft costs.
• Typically, the policy does not include equipment breakdown coverage. This coverage is essential if a building needs to be occupied before construction is completed. Additionally, the policy may exclude coverage for payrolls and extra expenses.

The Benefits of Owner-Purchased Builder’s Risk Insurance

The purchase of builder’s risk coverage by the owner allows for control of the following items:

• Control of the policy.
• Compliance with the insurance requirements of the contract documents and lending institutions.
• Perils insured, including catastrophic perils, such as flood, earthquake, wind and terrorism.
• Deductibles for named perils, all other perils, soft costs¹ and delays in opening.
• Sublimit applicable to off-site temporary storage, transit, delays in opening, building ordinance and soft costs.
• Coverage for cold² and hot testing³
• Coverage for any other specific exposures unique to the construction project.
• Price: The insured’s insurance broker will market the builder’s risk policy to a few carriers looking for the most comprehensive coverage at the most cost-effective price.
• Coverage for loss of use on the business interruption side.

Furthermore, controlling the terms, conditions and exclusions of the builder’s risk policy form helps mitigate property damage claims that would otherwise result in lawsuits and liability claims.

How to Secure Owner-Controlled Builder’s Risk Insurance

Arranging for broad insurance protection during the course of construction is important. A partially completed structure is more susceptible to damage than a completed structure because of the increased hazards arising from construction activities, such as welding and the storage of volatile materials. At Alliant Public Entity, our specialists bring decades of experience placing competitive, cost-effective owner-controlled builder’s risk insurance solutions for new builds and renovations. We bridge together an understanding of the public sector with construction insurance expertise to protect organizations’ budgets and project timelines, ensuring they can better serve their communities. For more information on how your public entity can protect new project builds and renovations from unforeseen risks, contact your representative from Alliant Public Entity today.