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Why Builder’s Risk Coverage

Construction projects, regardless of their size, can present complex insurance issues. Are you confused about your exposures and policy options? If so, it’s no surprise — there are no standard builder’s risk policy forms covering these types of risks. To help you limit your exposure, here are some helpful builder’s risk policy basics.

Why Builder’s Risk Coverage – By Dan Reith, Reith & Associates

The Basics

Builder’s Risk coverage is a type of property insurance specifically designed to cover property during the course of construction, including renovation and repair. Why do you need it? There are additional risks and responsibilities inherent in this type of work that a typical property policy is not designed to cover. For example, if someone steals contractors’ equipment from the job site or if construction materials are damaged, you could be liable for the loss if you do not have builder’s risk coverage.

Typically the coverage is purchased by either the property owner or the contractor.

Regardless who purchases the coverage, all parties that have property involved in the project should be named in the policy. This may include the owner, contractor, subcontractors, the financial institution funding the project and, in some cases, the architects and engineers. Once the project is completed and/or accepted by the owner, your regular property policy kicks in.

Policy Period

When purchasing builder’s risk coverage, one of the issues often overlooked is the policy period – it may not be clear when the coverage begins and ends. As a result, keep the following in mind:

Commencement of Coverage: Builder’s Risk policies provide coverage for property in the course of construction, renovation or repair. But at what point does construction renovation or repair begin?

  • Typically, contracts require that insurance be provided for the duration of the contract period. This means that the policy inception date would be the date the contracts are signed.
  • The lender may also specify the inception date.
  • However, be sure to review insurance policy provisions to determine whether there are restrictions on when coverage begins. Policies may contain clauses that state coverage begins when construction commences or that the insurance company will pay for losses at the time you become legally responsible for the covered property, either on or after the effective date. Prior to any site preparation, demolition or delivery of materials or equipment, review the policy to ensure there are no restrictions on coverage inception.

Coverage Expiration: Determining when coverage terminates can be equally problematic. Builder’s Risk policies can contain provisions that terminate coverage prior to policy expiration. The provisions typically state that coverage will end at the earliest of the following:

  • The policy expires or is cancelled;
  • The property is accepted by the purchaser;
  • Your interest in the property ceases;
  • You abandon the construction with no intention of completing it;
  • Unless specified otherwise in writing:
    • 90 days after construction is complete, or
    • 60 days after construction is complete and building described in the declaration is:
      • occupied in whole or in part, or
      • put to its intended use.

Problems and Solutions

Problems

  • There is no coverage under the policy if the building is occupied to any extent, for over 60 days, without written consent of the insurance company.
  • The policy only provides coverage for up to 90 days after the completion of construction. In the case where the building is completed only two days before policy expiration, there are only two days of coverage available. There are 90 days of coverage available after completion only if there are at least 90 days remaining in the policy period.
  • Coverage issues can arise at the end of a project, after construction is complete and the structure is occupied, but a “punch list” and final completion work remains.

Solutions

  • Understand the insurance coverage obligations of the project documents and contracts to ensure the policy period, at a minimum, fulfills the requirements.
    • Understand the terms and conditions of the policy and what triggers the coverage to commence and cease.
  • When coverage ends make sure permanent coverage is in place so no gaps in coverage exist.

Careful planning is the foundation for a smooth construction project. Many businesses choose to transfer or accept risk through contracts, purchase orders and lease agreements. However, not all contracts or endorsements are created equal. A broker who understands your business can knowledgeably help you with builder’s risk policy language to meet your individual needs. Contact Reith & Associates Insurance and Financial Services Limited today to learn more about contractual risk transfer and its place in your overall risk management program.

Dan Reith, Principal Broker
Dan Reith, Principal Broker

Dan Reith

Principal Broker
Reith & Associates Insurance and Financial Services Limited
https://reithandassociates.com/

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Wrap-up Insurance Programs for Construction Projects

Wrap-up Insurance Programs for Construction Projects

Insuring all of the risks associated with large-scale constructions projects can be a daunting task for the parties involved. The traditional insurance approach requires each party to procure and maintain separate coverage. Generally, the contractor and subcontractor then include the cost of insurance, plus a mark-up, in their project bids. 

Typically, risk is then pushed downstream—from owners to general contractors, and from general contractors to subcontractors—through contractual indemnifications, contractually mandated minimum insurance requirements and additional insured provisions.

While this approach may be customary for the parties involved, it is not without complications. Due to the number of policies and insurers involved, the traditional approach creates the potential for unforeseen liability gaps to emerge. Some parties may have inadequate limits, gaps in coverage or no insurance at all. Furthermore, because there are various insurance companies covering one project, each claim has the potential to cause costly and time-consuming cross litigation.

As an alternative to having each party obtain separate liability policies, project owners and general contractors can turn to a wrap-up insurance programs to manage their risks.

What is Wrap-up Liability Insurance?

Sometimes referred to as controlled insurance programs (CIP), wrap-up insurance programs are centralized insurance and loss control programs intended to protect the project owner, general contractor and subcontractors under a single insurance policy or set of policies for the construction project.  

Insurers typically offer two types of wrap-up programs based on the party sponsoring the program:

  1. Owner Controlled Insurance Program (OCIP): Under an OCIP, the project owner sponsors and controls the program. Accordingly, the project owner is the first named insured, and the general contractor, subcontractors and other participants are named insureds.
  2. Contractor Controlled Insurance Program (CCIP): Under a CCIP, the general contractor sponsors and controls the program. The general contractor is the first named insured, and the subcontractors and other participants are named insureds. Depending on the program, the project owner is either an additional insured or named insured.

While wrap-up programs are most frequently used for large, single-site projects, a rolling wrap-up can be used to insure multiple projects under one program.

Wrap-up programs are designed to reduce the overall cost of insurance by providing what amounts to volume discounts for the entire project.

What Types of Coverage Do Wrap-up Programs Provide?

Although each wrap-up program is designed to meet the needs of the specific project, most programs insure employer’s liability, general liability and excess liability exposures for claims arising from the construction project at the construction site during the policy period. 

In many instances, builder’s risk, environmental liability, contractor default and other types of insurance can be included under a wrap-up program. Professional liability coverage can also be added to insure architects, engineers and other design professionals working on the project.

Liability occurring away from the project site is generally excluded under wrap-up programs. Accordingly, subcontractors, suppliers and vendors conducting off-site manufacturing or the assembling of building components may be excluded from the program. Claims arising from goods or materials in transit are often also excluded, preventing haulers and truck drivers from being covered under the program.

Wrap-up programs typically do not insure specific operations such as blasting, demolition or other high-risk operations. However, each program is different, and it is critical for program sponsors to be familiar with exactly what is and is not covered.

Benefits of Wrap-up Programs

Wrap-up programs can provide a number of benefits, including the following:

  • Potential cost savings: Wrap-up programs are designed to reduce the overall cost of insurance by providing what amounts to volume discounts for the entire project.
  • Consolidated coverage: Under the traditional approach, by which parties procure their own insurance, the project owner and general contractor can set minimum insurance requirements for downstream participants. However, it can be difficult to determine whether contractors and subcontractors have obtained the correct limits and types of coverage. By contrast, under wrap-up programs, the controlling entity exerts greater control over the types, scope and limits of coverage.  
  • Higher limits: Most wrap-up programs have very high limits. If a major disaster occurs at a project and is not covered by a wrap-up program, the responsible contractors may not have adequate limits to cover the claim. Thus, the owner or general contractor may be on the line for the difference. However, if the project is covered by a wrap-up program, the limit should be sufficient to cover the incident.
  • Centralized safety and risk management: Program sponsors, working in conjunction with their brokers, the insurer and safety professionals, can maintain centralized safety and risk management services. Doing so can reduce the frequency and severity of injury and property damage claims, thereby reducing insurance costs for the project.
  • Efficient claims processing: Because a single insurer is the control point for managing claims, the process tends to be more efficient under wrap-up programs.
  • Reduced disputes among insured parties: By covering all of the parties on a project under one policy, wrap-up programs reduce coverage disputes and subrogation issues between insureds and insurance carriers for covered claims that occur on the job site.
  • Access to projects: For contractors and subcontractors, wrap-up programs can provide them with access to projects that they may not have otherwise been able to properly insure.  

Potential Drawbacks

Because wrap-up programs often offer a broad range of coverage for many entities, they can be expensive to obtain. However, program sponsors are typically able to reduce costs by selecting higher deductibles or by distributing premium costs to all parties covered under the policy.

Since wrap-up programs tend to encompass several types of coverage for a number of different organizations, program sponsors generally inherit administrative tasks. Beyond purchasing the wrap-up program, sponsors may be required to review and approve program documents, meet with underwriters and review claims. To address these issues, plan sponsors can designate or hire individuals to help administrate the programs, which can add to overall costs.

While wrap-up programs often result in cost savings, like any insurance policy, they are subject to market fluctuations. Accordingly, potential cost savings should be carefully considered.

Additional Information

Reith & Associates Insurance and Financial Services Limited understands that implementing a wrap-up program can be a complicated process.  There is no “one size fits all” model, and each program needs to be properly analyzed and tailored to meet a project’s specific needs.

If you are interested in insuring your next construction project with a wrap-up program, contact Reith & Associates Insurance and Financial Services Limited today and we will take the time to walk you through your coverage options.

Dan Reith, Principal Broker
Dan Reith, Principal Broker

Dan Reith
Principal Broker
Reith & Associates Insurance and Financial Services Limited
https://reithandassociates.com/