Don't Gamble with Insurance

Most everyone in the design/build profession focuses — or should — on property and liability insurance when it comes to protecting themselves and their businesses. However, attention to less-considered coverages can reap big savings, too. Two such coverages are builder’s risk insurance and workers’ compensation.

Builder’s risk insurance, also known as course of construction insurance, provides coverage for loss and damage while structures are being built. “This is insurance that protects the project while it is being constructed,” explains Mark Friedlander, attorney, partner and chair of the construction law group Schiff Hardin LLP in Chicago. 

"For example, if a windstorm blows the structure over during construction, builder’s risk insurance pays to rebuild it,” Friedlander says. Builder’s risk insurance also might include payments for operating losses, such as lost profits from the failure of an industrial plant to be put into operation on time. “For example, during the construction of a power plant, a fire in a turbine ended up requiring another year to complete the plant,” Friedlander notes. “The policy paid off on the lost revenue.”

According to Joel Gregoire, vice president, Lockton Co., an insurance broker in Chicago, the builder’s risk and the overall property market have softened during the past six months. “Other than frame construction, rates have gone down a bit,” he says. “Frame construction rates still remain high.”

Builder’s risk coverage is readily available and has been a highly profitable area for major carriers such as Zurich and Chubb, reports Don Miller, partner with Diversified Insurance Services, Waukesha, Wis. “It is not difficult to get coverage at all, and rates have held for the past couple of years.”

There are exceptions, however, according to Jeff Traeger, senior vice president, Hardin Construction in Atlanta. “It is becoming more difficult to get coverage in some locations, such as along the coastal areas in Florida, because of the hurricanes,” he explains. “Each project is being individually underwritten in a large amount of detail.” Also, basic builder’s risk policies generally exclude wind and flood coverage, which must be purchased separately, he adds. “In addition, although we don’t do any work out West, I know that there are similar exclusions for things like earthquakes.”

Who is responsible?
Who should carry the coverage? The design/builder or the owner? According to Gary Craig, president of Edgewater Services Co., Liverpool, N.Y., a design/build construction management firm, there can be gaps in coverage if both entities carry it. “If you are a contractor in a situation where the owner is self-insured for builder’s risk, you may find out he has a very high deductible that he expects you to cover before his insurance kicks in.”

Diversified’s Miller strongly recommends contractors carry their own coverage. “In many cases, the design/builder will rely on the owner to provide builder’s risk coverage,” he says. “Some, though, insist on insuring the project themselves until it is done. At that time, the owner takes over with owner’s insurance.” Miller says he believes this is the correct choice. “There is no advantage at all for the design/builder to have the owner provide the builder’s risk insurance.”

There are several problems that can occur when the owner provides his own builder’s risk coverage. First, the design/builder doesn’t know if the correct coverage is in place. “Second, if there is a claim, the builder has to deal with an adjuster he doesn’t know. Third, when the claims are adjusted by the owner’s insurance carrier, they may try to screw the builder down as tight as possible in terms of the replacement costs of material.” Many times, they also will try to negotiate down the design/builder’s normal profit on the job. “The design/builder shouldn’t be penalized like this,” he notes.

Following are some additional suggestions and ideas to help make the most of insurance coverage: