Is there a risk in Builder's Risk Insurance?

One of the many, many things that makes construction different than other industries is that the product being paid for generally isn't just handed over at one time in exchange for a check. Most of the time, it is paid for weekly, monthly or just in one lump-sum. As a result, different people own and have an interest in the work at the same time: the contractor may have already paid for the pipe and owns it; the supply house may have furnished insulation and billed, but not been paid yet by the contractor; the customer may have paid for part of the installation, been billed but not yet paid for another part, and not even been billed for the most recent part.

Aside from all the financial complications that result (such as someone in this chain filing bankruptcy), this way of doing business creates a need for a different approach to insurance. We are all familiar with the concept of property insurance, in case of a fire or flood or vandalism of your business or inventory. Generally, insurance companies will issue policies to people who have an "insurable interest" in the property covered by the insurance. In construction, this gets complicated, because who owns what on any given date is not always so easy to determine (particularly after a fire when it is all reduced to ashes). If everyone — the customer, the general contractor, the subcontractor, the sub-subcontractor, the supplier — buys property insurance on "the work," there will very likely be a lot of overlap (which the owner is paying for, ultimately) and in the event of a loss, there could be a lot of confusion and delay if eight or 10 adjusters have to hash it all out.

To deal with these issues, the construction insurance industry has developed the concept of a "Builder's Risk" policy, which covers all the work in process, regardless of who happens to own it at the time of the occurrence. The Builder's Risk insurer will generally collect all the claims, and settle them all up to the policy limits and subject to the policy terms. This sounds like a good thing, and generally is, but as a contractor or vendor who has labor and/or equipment and/or materials tied up in this claim, there are things that you care about.

Who's providing the Builder's Risk Insurance? If you are in a position to purchase it and be reimbursed, you stand the best chance of making sure that the coverage will be adequate to cover all your losses. Often, the customer will tell you that he is providing it, but in this situation, you have no control over the terms of the policy he buys, yet the terms of your contract may say that you agree to accept whatever the insurer pays as full and final payment for your loss. If this is going to be the case, you have a right to see what is being purchased, including all the terms and conditions.

What kind of coverage is being bought? Many owners will tell you that they are covering the Builder's Risk through their existing property insurance. This may or may not be adequate. First, it will generally only apply to existing facilities that they are already insuring, and the policy language (and the law) may not be entirely clear as to where "existing" stops and "new construction" begins. Second, there may be a dollar limitation on how much the coverage will be under this approach, where a stand-alone Builder's Risk policy is generally in the amount of the contract.

What is the deductible, and who pays it? The standard AIA forms state that if the owner is going to require the contractor to absorb any of the deductible on Builder's Risk, it has to state the amount in the contract. Subcontracts often say that each sub absorbs its share of any deductible, but don't tell the sub what that amount is. Obviously, insurance can cost a lot less if the buyer agrees to a really high deductible, so it is definitely in your interest to (a) know what the deductible is; (b) know if the owner expects you to absorb it; and (c) cover your interests accordingly.

Will there be any uninsured exposure? What you want, bottom-line, is all the insurance necessary to cover the risks you will have. Your contract may require you to cover the owner's lost revenue due to down-time, and in this case you want insurance coverage for that exposure. You will want coverage for lost deposits, price escalation, goods in transit, etc.

No one is going to look out for your interests as well as you are. You have a right to know who is covering you, and what that coverage will be, so that you can protect yourself.

Susan McGreevy is a partner at Stinson, Morrison, Hecker LLP, Kansas City, Mo., 816/842-4800, e-mail to: [email protected].