While a construction project is underway, who should be responsible for the property insurance on it — the project owner or the general contractor? Often, the contract puts this responsibility on the owner. However, some courts have decided that the contractor actually bears the risk of damage to the property before the owner accepts the completed project. The owner’s policy may not cover some significant perils, such as flood and earth movement, leaving the contractor uninsured for losses they cause. It therefore makes sense for the contractor to obtain builders risk insurance with the broadest coverage possible.
Many contractors carry master builders risk policies that provide automatic coverage for all their projects. The insurance company bases the premium on the values of the projects the policy covers. For the contractor, this has several benefits. The master policy can act as a viable alternative to the owner’s policy, making the contractor’s services more attractive to potential clients. Also, the contractor’s policy may be broader than the owner’s coverage. It may include “differences in conditions” coverage to fill in gaps left by the owner’s policy. For example, the contractor’s policy may cover losses from floods and earth movements such as mudflows. Finally, buying one policy to cover all projects may be more cost-effective than buying individual policies for each job.
Common features of master builders risk policies include:
* Coverage for all projects that begin during the policy term, even if they continue past the term’s end. Depending on the policy, coverage may extend for up to 36 months past expiration.
* The contractor must report the values of all jobs in progress periodically during the policy term. Reports may be due semi-annually, quarterly or monthly. The insurance company calculates the final premium based on the average of the values reported.
* The company may offer the contractor a variety of premium rates, coverages, deductibles, and limits for certain coverages. The company bases these choices on several factors, including the type of construction (wood, steel, concrete, etc.), the fire protection in each project’s location, the intended use of the building (manufacturing, retail, office, etc.), exposure to flood and earthquake, and others.
* Coverage options such as insurance for systems testing, extra expenses and project delays, and reduced deductibles.
While the policy may automatically insure most projects, the insurance company may reserve the right to approve some projects before it will provide coverage. For example, the policy may automatically cover all projects with values of $10 million or less and require pre-approval for more expensive jobs. It may require pre-approval of jobs above a certain limit based on the type of construction — for example, all wood frame structures with values exceeding $5 million. It may also require pre-approval for flood coverage for all projects located in special flood hazard areas or earth movement coverage for jobs in locations susceptible to earthquakes. In addition, pre-approval may be required at different times of the year for jobs in certain locations, such as projects in the southeast during hurricane season.
If a project owner is going to rely on the contractor’s builders risk policy, she should review it in advance to ensure that the terms and coverages meet her needs. The contractor should work with his insurance agent to answer any questions about the coverage and to address any deficiencies. Should the owner decide to accept the contractor’s policy, each side must adjust to new responsibilities for things like premium payments, amending the construction contract, providing acceptable evidence of coverage, and reporting values. If handled properly, this arrangement can be advantageous and cost-effective for both owner and contractor.