What is Builders’ Risk and Who and What Does it Protect on a Construction Project?
Frequently when negotiating construction contracts the focus is on the timing of payments, the scope and duration of the work and the associated risk transfer provisions. The project’s insurance requirements usually take the backseat.
In fact, when using industry forms these provisions oftentimes are left untouched. One such type of project insurance is builders’ risk, also sometimes referred to as an “all risk” policy or BRI. Builders’ risk insurance is a type of property insurance that provides coverage during the construction phase of the project. Coverage is dictated by the terms of the policy but typically extends to physical loss or damage to the insured’s property including the “work” being performed.
Typically, an owner’s commercial property insurance policy contains an exclusion for partially constructed or unfinished buildings or structures. As such, BRI policies are tailored to provide coverage for active construction projects and coverage typically lapses upon substantial completion or occupancy by the owner; which is when coverage under the owner’s commercial property insurance would become effective. Some insurers do offer endorsements to an owner’s commercial property insurance providing coverage similar to a BRI policy, thereby avoiding the necessity of purchasing a separate policy. However, these endorsements are typically only available for small renovation or maintenance projects.
Commercial property insurance and BRI policies are “first party” property insurance providing coverage to the insured who actually suffers the loss. These policies are distinguishable from project liability insurance, such as a contractor’s commercial general liability policy or an architect’s professional liability policy, which provides third party coverage (coverage against liability for losses suffered by third parties.)
Because BRI policies oftentimes include several different insureds (the contractor, subcontractors, owner, etc.) who are all participating in designing and building the project, these policies can indirectly provide coverage for third party claims. For example, if the drywall subcontractor damages a fire sprinkler head while installing a ceiling and floods the building, short circuiting electrical or other equipment, the owner may have a claim against the contractor or subcontractor. However, instead of pursuing that claim, the owner may be able to simply assert a claim against the BRI policy as an additional insured. Depending upon the terms of the policy and contract, the BRI insurer may later assert a subrogation claim against the subcontractor; in which case the subcontractor’s commercial general liability policy may provide coverage.
Builders risk coverage or other property insurance is a necessary part of every construction project’s risk management plan. When negotiating a construction contract, there are several issues surrounding BRI that must be decided. Which project participant is going to pay for and procure BRI? Who will be insured under BRI? Who will be responsible for deductibles under the BRI policy? In the context of these discussions the parties must also decide what coverages the BRI policy will actually provide – since there are many variations in policy forms and the scope of available coverages. Project participants must take their contractual insurance requirements seriously and analyze and negotiate the requirements before signing their agreements and before starting work.