Question: Should I rely on my current policy or contractors insurance for my construction project? Builders Risk coverage may be the best option.
Inadequately insuring property under construction, renovation, or expansion by relying on the commercial property insurance form instead of a Builders Risk may be a mistake.
Property insurance forms provide limited coverage for property under construction. Unless a project is very small, it is usually not desirable to rely on the project owner’s commercial property insurance program to cover a construction project.
One reason is the lack of adequate coverage under property forms for property located off premises and while in transit. An all risks commercial property policy written on current standard forms (using the building and personal property coverage form, CP 00 10, and the causes of loss—special form, CP 10 30) provides $250,000 in coverage for new buildings under construction but only if they are built on the described premises. These forms provide only $10,000 of coverage on property away from the insured’s premises and only $5,000 on property in transit. The transit coverage applies only to loss from a few specified perils.
Also problematic is the fact that commercial property policies typically have more exclusions than builders risk policies that are written on inland marine forms. Another issue relates to contractors; if the owner’s permanent property insurance is used to cover property under construction, contractors do not have insured status under the policy. Lack of insured status denies contractors some significant rights and protections under the policy. In addition, many of the coverage extensions afforded under the property policy are available only to the named insured.
Finally, any adverse loss experience on the construction project will impact the project owner’s entire property insurance program. Consequently, the project owner may have a disincentive to file claims for certain covered losses, especially for damage to a contractor’s property. If the project owner fails to file claims for damage to contractors’ property, this can destroy the relationship between the project owner and the contractors covered by the policy and interfere with the successful completion of the project.
Builders Risk forms are specifically designed to cover construction, renovation, or expansion projects. While ISO and the American Association of Insurance Services (AAIS) have each published a standard Builders risk form, these forms are rarely used. Both contain some serious coverage limitations, such as little or no coverage for property in transit and at off-site storage locations, which make them undesirable compared with inland-marine-type Builders risk forms.
In many states, insurers are not required to file their builders risk forms or rates for regulatory approval. Thus, forms vary widely in scope of coverage, terms, and provisions. Either the project owner or the general contractor can purchase the builders risk policy. No matter who buys the policy, it should cover the project owner, general contractor, and all subcontractors as insureds. "Covered property" normally includes all fixtures, materials, supplies, machinery, and equipment that will be used in the construction.
Most builders risk forms provide coverage for property of others for which the insured may be liable on the same basis that they cover property of the insured. For more information on this feel free to contact me at Steve@ThumannAgency.com or call me at (972)991-9100.
Insuring Families and Businesses in Dallas for over 20 years.