After re-reading today’s blog posting, Ruminations became more convinced than ever that its only real purpose is to scare all of us out of thinking we agreement writers know about how to write insurance provisions that really work. For people who don’t “do” insurance every day, reading about how to “do” insurance is like reading about how to juggle swords. Unless you really, really, deeply, deeply understand what can and can’t be done with insurance policies, leave it for professionals. That’s not to say that, working with insurance professionals, one can’t get some pretty decent “stock” provisions, but those are rarely the ones one finds in almost anyone’s form lease, mortgage or other agreement. Also, if a person who writes a lease, mortgage or other agreement doesn’t understand the insurance provisions in their own document, why are they putting them in there?
What particular “insurance” topic provoked those less than charitable thoughts? Answer: “Builder’s Risk” coverage. How can Ruminations Ruminate about this type of coverage when all that our documents ever say is “X must also carry builder’s risk insurance”? So, read on. Today, we begin with “Part 1.” If the Creek (Tribe) don’t rise, we’ll conclude next week.
As we’ve written before, the overwhelming common form of commercial property insurance coverage is promulgated by the Insurance Services Office, Inc. That organization is owned by insurance companies and it has more forms than Samuel J. Carter had little liver pills. Everyone refers to those as the “ISO” forms.
Some of the special risks encountered during a construction project (new work or renovations) can be covered through use of the basic ISO “building and personal property coverage form.” If used at all, that policy form should be limited to small projects. The ISO “approach” does not afford appropriate coverage to an owner’s contractors and subcontractors, does not cover very much in the way of materials off-premises or in transit, doesn’t give the contractors and subcontractors direct coverage, and has many exclusions.
There is no comprehensive stand-alone ISO form of builder’s risk insurance policy. For that reason, true builder’s risk policies are written on each individual carrier’s form and thus coverage varies in more than minor ways from company to company. And, that’s true even though many of those carrier’s forms are based on those promulgated by the Association of Insurance Services (AAIS).
We’re pretty sure that some readers think that because they have gotten pretty familiar with the workings of a commercial property insurance policy, they think their knowledge applies to builder’s risk coverage. Although it does, it mostly doesn’t. One reason is that a builder’s risk policy is not a form of a commercial property insurance policy. It is a form of an “Inland Marine” policy. Such policy forms generally afford greater coverage than the common commercial property insurance forms. They cover materials in transit; they cover certain property types that are excluded in commercial property insurance forms; and, they can cover one’s legal liability for property being held for others. Because inland marine policies are not site-specific, such policies are sometimes called “floater” policies.
Today, we intend to tell readers enough about the way builder’s risk coverage works and doesn’t work so as to allow readers to participate in intelligent discussions. Those discussions would be with the counterparty (the folks on the other side of the deal) and with those who live and breathe this insurance coverage (most property insurance consultants and a small subset of insurance brokers).
Construction projects face different risks than do “static” properties. The activities incident to construction projects are inherently more risky. Incomplete buildings invite water, fire, theft, vandalism, etc. For those and “other good and sufficient” reasons, the underwriting of a builder’s risk policy is more involved, the price is more variable, and the need to tailor specific coverages to the project are all factors to be dealt with.
Builder’s risk coverage can be bought by the owner (e.g., a landlord), the party responsible for the construction (e.g., a tenant) or the contractor. Often, the insured property will not be entirely owned by the policy purchaser. For example, a policy purchased by a property owner might cover the bulldozer owned (or leased) by the contractor. A policy bought by a contractor will cover property belonging to the property owner (or a tenant). Basically, a builder’s risk policy contemplates that it will cover the property’s owner, specific tenants (where applicable), contractors, subcontractors, and often construction managers. The principle is that if an agreement requires builder’s risk insurance coverage, it should require that the policy cover everyone with an insurable interest in the project or with liability for damage to the project by reason of the governing agreement(s). For example, that could include a design professional. Stop and think ̶ how often have you seen a lease or other agreement spell out who “should be covered”? Covering all of the related parties under one policy is cost efficient and eliminates the pointing of fingers that occurs when different elements of a project are covered by different insurance policies carried by different parties. Basically, being an “insured” under a builder’s risk insurance policy has certain benefits not otherwise available.
By reason of builder’s risk insurance policies not following a common form, it would be wise to call for a policy that will cover all the “innocent” insureds if another of the insureds made misrepresentations at the time the policy was obtained. Although this is pretty standard in commercial property insurance policies and in builder’s risk policies, the applicable provision in a builder’s risk policy might allow for voiding coverage if the “named insured” was the “guilty” party. That’s one example of what a document craftsperson has to know if the document will call for builder’s risk insurance.
Builder’s risk policies generally list what constitutes “Covered Property” and then whittle away from that list by way of exclusions. Of course, the actual building under construction will be covered. That’s the core reason for the policy. Some of the “exclusions” could include scaffolding, fencing, office trailers, and other things like that. Add foundations and underground utility lines and pipes to the list. While true that these (and other excluded items) are left uncovered in the normal commercial property insurance policy, they can be (and often are) included in a builder’s risk policy if you know what to look for and to ask for. Again, an insurance professional, after understanding the nature of the project, can help the agreement-writer with those details.
There are a passel of other commonly excluded items in a basic builder’s risk policy, though most of them can be covered if requested (money may not buy you happiness, though you can rent it). That means a thorough insurance requirement in a lease, mortgage or other agreement should list these items that are above and beyond the building under construction. With a qualified insurance professional, think about the following:
The common exclusion for existing property is very important to understand. It may mean nothing if construction is taking place on vacant land. But, if doing a renovation or working in proximity to other buildings or structures, the existing improvements must be insured. This can be done in several ways and the best choice might be based on whether existing buildings are occupied or not. Again, few of us, if any, understand this at all, yet we draft and negotiate as if we do.
There are other “strange” considerations to keep in mind, such as if building materials or (possibly expensive) equipment is coming from outside the country. Generally, policies only cover property while in the States. That’s not a consideration with a commercial property insurance policy because such policies, unlike inland marine types, are site specific.
Very often, document draftspeople know to require certain endorsements to a commercial property insurance policy, such as one for Debris Removal or for an increase in cost by reason of a change in Ordinances or Laws. Those are relevant to a builder’s risk policy as well. Some endorsements of interest might be:
Expediting Expenses (to speed up repairs)
Valuable Papers (for the blueprints, etc.)
Preservation of Property (to relocate property for protection purposes)
Site Preparation (to redo the original work)
Fire Protection Equipment (to refill or reset fire protection equipment)
Contract Penalties (to pay them if caused by a covered loss)
Paved Surfaces (sidewalks, parking lots, etc.)
That’s hardly a complete list. There are other coverages available. Negotiators will need to decide which of these (and others) should be written into their agreements.
That’s an awful lot to absorb in a single sitting, especially because our treatment of builder’s risk insurance, thus far and eventually, is far from complete. This isn’t a treatise. It is a shot across the bow of all of us who merely write: “X must also carry builder’s risk insurance.” If Ruminations has done its job today, every reader will be reaching out to build a relationship with a competent insurance professional and will cast aside any arrogance she or he may have when it comes to builder’s risk insurance (and probably when it comes to any form of insurance).
Undeterred by all of that, we’ll continue next week. Look for our scribblings about which perils are covered and which ones are often excluded (before buying them back in). We’ll also be Ruminating about when a switch to ordinary commercial property insurance needs to take place. Get ready for a little about “protective safeguards” and how those affect coverage. Get ready for subrogation waivers as well. How does one set the amount of coverage on a project that grows in value as construction progresses? Will there be more than that? As we heard on Rowan & Martin, “You can bet your (sweet) bippy.” Will Ruminations utilize other euphemisms next time? Tune in and see.