In the wake of increasingly frequent natural disasters, construction insurance has become more critical than ever. While many stakeholders view insurance as just another project cost, it is actually your first line of defense against catastrophic losses from wildfires, tornados, or hurricanes. Understanding your insurance options and obligations is not just good business—it is essential for project survival.
Builder’s Risk Insurance
Purpose and Coverage
Builder’s Risk Insurance serves as a fundamental protection mechanism for construction projects, providing essential coverage for:
- Work in progress against various casualty losses
- Materials stored on-site and in transit
- Temporary structures and equipment
- Debris removal after a covered loss
This type of insurance typically provides coverage based on the replacement cost value of the project, making it an imperative tool for both property owners and contractors involved in the construction process. Builder’s risk insurance is like a homeowner’s or commercial property owner’s insurance policy but specifically designed to cover losses during the building process.
Risk Allocation
In the absence of specific contractual provisions, contractors generally assume the burden of casualty loss risk on construction projects. Builder’s Risk Insurance effectively transfers this substantial risk to insurance carriers, providing a vital safety net for project stakeholders. Common risk allocation considerations include:
- Responsibility for policy procurement
- Payment of deductibles
- Allocation of coverage limits
- Subcontractor obligations
To ensure adequate protection, coverage limits should be carefully calculated to match the total project value, including both materials and labor costs.
Key Considerations
When selecting a Builder’s Risk policy, stakeholders must evaluate several critical factors, including policy exclusions and regional risk factors.
There are policy exclusions and limitations to watch for, including:
- Earth movement and subsidence
- Flood damage and/or water intrusion
- Mold and pollution
- Wind damage in coastal areas
- Defective workmanship
- Design errors
- Delay or loss of use
- Coverage for consequential and other damages contractually limited by the parties
Regional Risk Factors to consider:
- Hurricane exposure in coastal regions
- Earthquake zones
- Flood-prone areas
- Wildfire risk zones
- Severe weather patterns
Additional Insurance Considerations
Commercial General Liability
Commercial General Liability insurance provides essential coverage for third-party claims that may arise during construction projects. Key aspects include:
Coverage Areas:
- Bodily injury to third parties
- Property damage to adjacent structures or work done by others on the same structure
- Personal and advertising injury
- Products-completed operations
Common Exclusions:
- Expected or intended injury
- Contractual liability
- Workers’ compensation claims
- Professional services
- Business Risk exclusions (damage to the insured’s work and products or impaired property or recalls)
Professional Liability
Professional Liability insurance plays a crucial role for design professionals (for example, architects and engineers) involved in construction projects. This coverage generally covers claims relating to:
- Design errors and omissions
- Professional negligence
- Project management failures
- Construction administration mistakes
Insurance Best Practices
To maximize insurance protection, implement these essential practices:
Documentation Requirements:
- Detailed incident reports
- Photographs of damage
- Weather records
- Communication logs
- Witness statements
Communication Protocol:
- Immediate notification to carriers
- Immediate notification to subcontractors, design professionals and/or others who may be involved or have risk transfer obligations
- Regular updates to stakeholders
- Documentation of all conversations
- Written confirmation of verbal discussions
Policy Management:
- Regular coverage reviews
- Annual limit assessments
- Deductible evaluations
- Coverage gap analysis
There are also other ways to manage risk, including:
- Performing regular peer reviews
- Keeping detailed documentation practices
- Establishing clear communication protocols
- Continuous professional education
Weathering the Storm: Key Takeaways
The right insurance coverage can mean the difference between project recovery and financial disaster. Take time to review your insurance policies regularly and ensure they provide adequate protection for your specific risks. Remember that insurance is an investment in your project’s future, not just another cost to minimize it. Work closely with your insurance professionals and legal counsel to develop a comprehensive risk management strategy that protects your interests when natural disasters strike.
Pre-Disaster Checklist:
- Review all insurance policies
- Review all contracts, particularly for risk transfer obligations and related insurance
- Update coverage limits as needed
- Document existing conditions
- Establish emergency protocols
- Create communication plans