At the bid preparation stage, contractors often do not have full information on the builders risk insurance that will be provided by the project owner. The insurance requirements may be unclear or missing altogether. This often results in misunderstandings down the road. But it does not have to be that way.
The clarity and completeness of builders risk insurance requirements can and do vary considerably. I have encountered bid documents that do not contain builders risk requirements at all. I have also seen builders risk insurance addressed by a single sentence. These are actual examples:
- “Owner will provide builders risk coverage.”
- “The Owner shall provide property insurance upon the Work, but Contractor is responsible for all deductibles and uninsured losses.”
- “Intentionally left blank.”
These examples all have one thing in common: The contractors are left to speculate on what, if any, coverage will be provided to them in the event of damage to the project. This is not a good way to start a project.
On the other hand, the insurance requirements may be complete and each contractor knows what risks are transferred to the builders risk insurer. This removes uncertainty … and any time you remove uncertainty, bid pricing is more favorable for the project owner. (Owners, please take heed.)
Insurance requirements may not be clear for two reasons. First, if model contract forms are used (e.g., American Institute of Architects, ConsensusDocs, Engineers Joint Contracts Documents Committee, Design-Build Institute of America), the builders risk provisions may be unclear or lacking to begin with. Many people assume that if a provision is contained in a model contract form, it must be appropriate. This is not true. Depending on circumstances, some provisions may be inappropriate. Other important loss exposures may not be addressed at all.1
For example, the standard builders risk insurance requirement in one model contract form requires coverage on an “all risks” basis. This is desirable, but in the section that lists the causes of loss that must be covered, there is no reference to ensuing loss exceptions. Many say that the most commonly litigated provisions in builders risk policies are the exclusions applicable to faulty design, workmanship, and materials. The breadth of coverage is very different between a policy that has these exclusions and another that has these exclusions followed by ” … unless direct physical loss or damage by an insured cause of loss ensue and then this policy insures only such ensuing loss or damage.” The latter example has an ensuing loss provision, which is very beneficial to all those entities insured by a builders risk policy.
The second reason for unclear insurance requirements is that the drafter may not have the technical or practical experience necessary to properly structure the requirements. We have all reviewed insurance provisions that are poorly conceived and executed. Enough said.
What Can Contractors Do?
The construction bid process generally provides opportunities for a contractor to obtain clarifications or answers to questions. These are set forth in the bid documents and may include pre-bid meetings or procedures for submitting questions. With private work, a contractor may also qualify its bid to include certain assumptions regarding insurance.
Many contractors wisely seek additional information and answers to their questions. Others may know there are potential problems but hope for the best, and still others are not aware of the issues.
It is suggested that contractors compile a builders risk insurance checklist and request the owner to confirm what is contemplated/provided by the builders risk policy. A sample checklist is reproduced below. This template should be customized by the contractor to suit its needs. Regular use of a checklist can minimize uncertainty for all parties and further risk management programs.
|Coverage or Feature||Minimum Requirement/Comments|
|Insurer selection||AM Best “A X” or better|
|Naming of insureds||Owner, general contractor, subcontractors of all tiers|
|Premiums and deductibles||Owner is responsible|
|Policy format||Inland marine policy and forms|
|Provide copy of policy||Within 60 days of project start|
|Policy term||In compliance with the contract|
|Partial occupancy prior to project completion||Secure approval of insurer|
|2||Covered Property||Replacement cost; no coinsurance|
|Work at project site||Full contract value and modifications; owner’s supplied property|
|Property in transit||Limits to be agreed upon|
|Property at off-site locations||Limits to be agreed upon|
|3||Covered Causes of Loss/Other Features|
|“All risks”||Full policy limit|
|Wind||Full policy limit|
|Collapse||Full policy limit|
|Water damage (incl. sewer backup and sprinkler leakage||Full policy limit|
|Collapse||Full policy limit|
|Faulty design, workmanship, materials (resulting damage)||Full policy limit|
|Terrorism||Full policy limit|
|Flood||Limits to be agreed upon|
|Earth movement||Limits to be agreed upon|
|Equipment breakdown||Limits to be agreed upon|
|Hot testing||Limits to be agreed upon|
|Debris removal||Limits to be agreed upon|
|Pollution, mold, fungus||Limits to be agreed upon|
|Additional costs due to building laws||Limits to be agreed upon|
|Extra expense (contractors)||Limits to be agreed upon|
|Waivers of subrogation||In compliance with contracts|
1 For a detailed analysis of builders risk insurance requirements in different standardized contract forms, refer to The Builders Risk Book, by Steven A. Coombs and Donald S. Malecki, published by International Risk Management Institute, Inc., in 2010.