The most prevalent family of documents used in construction projects are those produced by the American Institute of Architects (AIA). Portions of Article 11.2 Owners Insurance (taken from A201-2017 General Conditions of the Contract for Construction) and Article A.2 Owners Insurance (taken from A101-2017 Exhibit A) are referenced throughout this article. The A201-2017 and A101-2017 Exhibit A are available at this link.  

As part of the overall project risk assessment, standardized exposure/insurance checklists can and should be used, such as those appearing in The Builders Risk Book (International Risk Management Institute, 2019). Reviewing the contracts and completing a risk assessment checklist are an excellent foundation to match the coverage to contractual requirements, loss exposures and the needs of the stakeholders.   

Identifying the parties to be protected is a straightforward process as they will be identified in the contract requirements. Generally, the owner and contractors of all tiers are to be protected. In some cases, the contract documents may require additional parties to be protected, such as material suppliers; designers, engineers, and/or architects, and their directors, officers, members, employees, partners, agents, consultants and subcontractors; lending institutions or other parties. Expect push back from insurers if there is a desire to protect material suppliers or the design team for other than their on-site activities. An exception to this is protecting the design team for design-build type projects where they are also the builder. Insurers want to be able to preserve subrogation opportunities against parties that are not actually constructing the project.  

The method of protecting parties can vary in builders risk policies. The standard requirements in model agreements differ on how to protect the parties. These include protecting the insureds, the additional insureds or the named insureds.  

Regardless of what these model contracts stipulate, it is usually best for those involved in the actual construction to be covered in the same manner as the first named insured (the first named insured is the policy sponsor, typically the owner). An exception to this recommendation relates to the delay coverages, such as soft costs and loss of revenue, which usually cover only the owners exposures.  

The method for providing coverage for all those involved depends on the policy form. The named insured is listed on the declarations page, and in many policies, the named insured is then referred to as you or your. When other parties, such as contractors or subcontractors, are included as additional insureds rather than named insureds in those policies, those coverages and extensions that apply only to you or your may arguably be limited to only the identified named insured. This is a potential problem that must be carefully resolved to assure that everyone has the proper coverage.  

By insuring contractors and subcontractors at the same level as the owner, their interests will be better protected. Keep in mind that these parties have effectively paid a premium to be insureds, as they have reduced their construction bids by an amount that they would have paid as a premium for their own builders risk or installation floater policy. This approach also minimizes the possibility of the builders risk insurer paying a loss and then subrogating back against a party that was supposed to be protected in the first place. This has occurred many times, most commonly when the insurance is limited to the interests of or as their interests may appear for specified parties. While not the rule by any means, insurers have successfully argued that the protection afforded to each subcontractor is limited only to their work and not the project itself.   

It is entirely permissible, and actually preferable, that each and every contractor is not individually named in the policy. They should be insured as a group, using such language as and contractors of all tiers. If the general contractor secures and maintains the builders risk insurance, the owner should be listed as a named insured. Further, the owner may have contractors working in close proximity or on the same project, unrelated to the construction manager/general contractor. These contractors may need to be insured by the policy, depending on the contract requirements, the scope of work performed and intent of the parties.  

Protecting the interests of owners or contractors as loss payees should be avoided. Being a loss payee does not grant the same rights as being an insured. For example, a loss payee is exposed to subrogation actions, where an insured would not normally be. Loss payee status, therefore, should be reserved to solely personal property. 

Loan agreements prescribe how lenders will be protected be protected. Generally, they require a mortgagee endorsement. Lenders interests will not be properly protected via a loss payee endorsement, which applies solely to personal property. A loss payees rights are limited to whatever rights the named insured has at the time of loss. A mortgagee clause applies even if the named insured commits an act to invalidate coverage.  

It is implied that the cost of the work includes profit and overhead for the contractors, although some builders risk policies may attempt to limit coverage in this area. The AIA construction contract wording also requires coverage for reasonable compensation for the Architects and Contractors services and expenses required because of insured loss, including claims preparation expenses (Part A.2.3.1.2, A101-2017 Exhibit A). This same Part also requires coverage for damage caused by testing and startup of building systems.  

As part of the overall risk assessment, the different types of property involved in the project should be identified. Then it should be determined what property is to be the subject of the builders risk insurance.   

Many builders risk policies refer to buildings or structures as the principal property. The term structures is a broad term, as it could encompass many types of property, such as telephone poles, billboards, underground tunnels or vaults, swimming pools, dams, windmills, water towers, and bridges. Other policies may avoid references to buildings or structures and simply cover property in the course of construction.  

Materials, supplies, equipment, fixtures and any property that is destined to eventually become part of the building or structure is likely to be considered as covered property. However, some policies require that the property be owned by the named insured or be property for which the named insured is legally responsible. This reinforces the earlier recommendation for covering contractors as named insureds. Likewise, there is sometimes a fine line between what constitutes temporary structures and contractors equipment, and what should be insured. Some policies define temporary structures to include office trailers, tool trailers, fencing, construction forms and scaffolding. However, these items may not be covered by other builders risk policies, as they are not destined to be a permanent part of the project.   

Property commonly not covered by builders risk insurance includes land, water, existing buildings/structures, contractors equipment, aircraft, watercraft, motor vehicles, accounts, bills, currency, securities, deeds and evidences of debt. Less commonly excluded property are antennas, trees and plants, valuable papers.  

If the contemplated project includes remodeling of an existing structure or constructing an addition to an existing structure, the owner must maintain all-risk property insurance on a replacement cost basis that insures the existing structure(s) (Part A.2.3.3, A101-2017 Exhibit A). This insurance must minimally include the same causes of loss that are required to be maintained on the project, and insurance must be maintained throughout the warranty period.   

When evaluating a builders risk policy form, the types of property on which insurance is sought must be compared to the types of property actually covered. Where differences exist, modifications should be made to the policy. Underwriters are generally amenable to making changes after they underwrite and charge for the additional exposure.  

For example, it may be appropriate to insure specific pieces of contractors equipment if such equipment is an integral part of construction. (e.g., tunnel boring machines (TBM), horizontal directional drilling equipment or tower cranes). This also impacts the delay coverages, as such protection is triggered only when there is damage to insured property. Also, if a project includes land improvements (such as gravel roads or berms), the definition of covered property may need to be amended.  

All policies have a section showing the project address and description. This sometimes is a detail that does not receive adequate attention. It is important that they be accurate and complete. If specific documents need to be referenced in the description, this is acceptable. For instance, a project description may be 12-story hotel, 4-story convention center, 3-story parking garage, and related structures, as described in the contract documents between ABC and XYZ.    As an example of how problems can occur, consider a description of the same project as Hotel and parking. A claims adjuster may think twice before paying a claim involving the convention center portion.  

Some projects involve off-site supporting work areas, such as laydown areas, staging areas, utility areas, fabrication facilities, batch plants, warehouses or adjacent areas. Including such items in the project description is appropriate in most situations.  

Some policies have limitations as to how far away from away from the site coverage will apply. For instance, a policy may state that coverage for property and fixtures applies only within 100 feet of the project. Depending on how the project is described in the policy, there may not be coverage for, for example, pallets of air conditioning equipment stored in a fenced staging area 300 feet away.  

In addition, each policy has a definition relating to where the insurance applies (coverage territory). While these definitions vary, coverage is often limited to the USA, its territories and possessions, and Puerto Rico. Typically, there is no coverage for waterborne shipments, which is an issue if materials or equipment are imported. This is especially important when there are overseas sole source suppliers of key components or when there is a long lead time for key overseas manufacturers.  

There is often a disconnect between what the contract documents require (assuming the end date being the conclusion of the warranty period) and what is typically provided in a builders risk policy. Builders risk policies have a provision, commonly titled When Coverage Ends or When Coverage Applies, which defines when coverage will end. While the provision is variable among policies, coverage generally ends at the earliest of:  

The disconnect is that these provisions will cause the builders risk policy to expire before the end of the warranty period, thereby putting the sponsor of the policy in breach of contract. To comply with the contract provisions, the sponsor of the policy would need to extend the builders risk insurance and modify the policy by endorsement. This might entail significant additional premium, and frankly, builders risk underwriters do not like to insure occupied/operating locations. The alternative is to replace the builders risk policy at substantial completion with permanent property insurance. A possible glitch here is that the replacement property policy must comply with all the contractual requirements, which can be difficult. For instance, property underwriters may not agree to add the general contractor or subcontractors as insureds.  

Using the AIA agreements as an example, the Owner is responsible for:  

These provisions are often modified in the contracts. In particular, deductible responsibilities are often partially shifted to the contractor and/or subcontractors. However, while an owner may contractually require a contractor to be responsible for some portion of the deductible(s), this is not binding on the insurer. The insurer will typically remit the proceeds, after application of the deductible(s), to the first named insured or to a fiduciary designated in the contract. It is then up to the policy sponsor to charge it back to the contractors.  

This issue is not limited to the standard AIA contracts. Similar omissions are found in all the others.  

Since some of these coverages may be included in a particular insurers basic policy, a careful review of the form is required to identify any gaps that need to be closed for a particular project or situation.  

Ordinance or law coverage is becoming more important as changes in building ordinances and laws are increasing with frequency and scop, particularly with properties in locations susceptible to windstorms, floods and earthquakes, and with green construction. Hundreds of new ordinances, laws, executive orders, regulations and policies have been adopted. AAIS and some insurers have developed new coverages and forms to address emerging loss exposures from green construction. The additional ancillary coverages offered largely relate to additional expenses associated with restoration of indoor air quality, debris removal, project recertification and expansion of the delay insurance.  

Be aware that the delay coverages apply only if the loss is caused by insured accidental physical damage to the project. If the accident is not covered by the physical damage coverage portion of the policy, the delay coverages will not respond.  

The policy conditions in builders risk policies are similar to other forms of property insurance. One condition that goes to the soul of builders risk insurance is the subrogation condition. Most builders risk policies automatically recognize waivers of subrogation contained in the contract documents. However, a minority of policies do not. There is also a trend afoot by some insurers to not recognize waivers involving architects, engineers and other design professionals.   

Since contract documents almost always include waivers of subrogation, and they are needed to assure proper protection of the various stakeholders, a restrictive provision should be modified to allow them. Many contracts will also specifically require that the builders risk insurance include such waivers by endorsement or otherwise (AIA Part 11.3.1, A201-2017), which is also a subject to discuss with the underwriter.