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:

  • Most carriers will provide free advisory visits to offer recommendations to prevent problems. “I encourage design/builders to take advantage of these services as much as possible,” Edgewater’s Craig suggests.

  • If a design/builder is building six to 12 homes or more, they usually can get a direct reporting form from the insurance company. “The insurance company sends them a form every month, and the design/builder breaks down his starts, does the math with the rates, and mails that to the insurance carrier with a check,” Miller explains.

  • Finally, consider switching from wood framing to steel framing for significant premium savings — at least with one insurance carrier. “When insurance classifications were created over 80 years ago, steel framing wasn’t even in existence,” explains Larry Williams, president of the Steel Framing Alliance in Washington. “When it finally came into existence, it was lumped in with wood framing for insurance purposes.” 

Now, as a result of an arrangement between the Steel Framing Alliance and Zurich Insurance Services, builders may be able to reduce their builder’s risk premiums by as much as 75 percent by switching from wood framing to steel framing, as a result of the framing being classified as “non-combustible” construction. Rates can be cut from between 65 cents to 80 cents per $100 of construction value for wood, to as low as 12 to 15 cents per $100 for steel.

According to Williams, even with the recent increases in the price of steel, the insurance savings still offset the additional cost of steel framing compared to that of wood framing.

Contractors do not have to be members of the Steel Framing Alliance to qualify for this coverage. Any broker who is registered to write a Zurich policy can write this policy. Contact a broker, or go to, and fill out the form online, according to Williams.

Workers’ compensation
Just as the question can be asked whether the contractor or owner should carry builder’s risk insurance, the question arises in the workers’ compensation category as to whether the general contractor or the subcontractors should carry the coverage.

In most cases, general contractors carry the workers’ comp coverage they are required to for their own employees, then make sure the subs have their own policies in place for their employees. If going this route, it is important to get a certificate of insurance from all of the subcontractors for workers’ comp as well as general liability, according to Diversified’s Miller.

Lockton’s Gregoire agrees. “Make sure you get the proper contract wording with subcontractors and also get certificates of insurance from them on a timely basis,” he says. “Also make sure their carriers are A-rated and that the subcontractors have adequate liability limits.”

There can be drawbacks to allowing subs to carry their own coverage, however. For example, in some states, if a subcontractor’s employee is injured on a project, he can’t sue his employer, but he may be able to sue you. “It may be a situation where his workers’ comp payments are about to run out three years down the road,” Craig explains. 

Without adequate information, a person might not be able to protect oneself from such suits. Craig’s recommendation: “If subs carry their own workers’ comp insurance, require them to provide accident reports to you, so you know the facts when the accidents happen, instead of having to try to learn them three years later,” he suggests. “Then retain these records for at least three years. Even seemingly small incidents can turn into big claims years later.”

In addition, keep good records in general. “In one instance, an employee working for a roofing subcontractor claimed he fell off the roof and injured himself on a project,” Craig says. “We didn’t hear about this until almost three years later. However, we were dismissed from the suit when we were able to produce photos showing that there was no roof on the building on the date he said the injury occurred.”

Other general contractors prefer to carry workers’ comp coverage for themselves and all subs. “Design/build projects are more likely to have a contractor-controlled insurance program (CCIP), because there is a larger set of duties in the hands of the design/build team than there would be in the hands of a traditional contractor,” Friedlander explains. “It is a bit easier for the design/builder to control the insurance program and consolidate the various workers’ comp policies that the subs may have into one controlled program, which may save costs.”

Other ways to control costs are to make sure that safety becomes and remains a priority on the job. “For example, make sure subcontractors have good safety policies and programs in place,” Miller says. “Design/builders should also have their own safety programs that they can pass on to the subcontractors. The subcontractors should sign off on these programs, agreeing to comply with the programs.”

It is important to conduct safety training and auditing/inspections in order to protect oneself as much as possible, adds Edgewater’s Craig.

The Steel Framing Institute also is looking into ways to help members reduce workers’ comp costs. “Because of the unique characteristics of steel framing, it may be possible to reduce rates,” Williams suggests. One reason is that a wood stud weighs about three times as much as steel. “When you compare the weight of a wood frame wall to a steel frame wall, it is obvious there is an opportunity to reduce back injuries and other strains,” he notes. 

In a lake-view corner with a picture window, the homeowner wanted as much glass as possible. More steel — a 6- by 6-ft. post covered with wood — was needed to minimize trim to accomplish this goal. 

While bringing the home up to date and remodeling it to take better advantage of lake views, its historical integrity also needed to be maintained. Craftsmen were brought in to match the stucco on the outside and woodwork on the inside to preserve the home’s hard-to-replicate character. In keeping with the elegance of the home and the owner’s tastes, many personal touches were incorporated early on to hide the family’s “toys.” 

“The fact that we had the homeowners, the designer, builder and engineer on board, we could do things like hiding a plasma TV or creating the underground a/c,” Dunleavy says. “It wasn’t just a set of plans we handed out (and said), ‘Now you figure out how to do the a/c or hide a large TV in a formal room.’ We didn’t waste design time redrawing the plan.” In addition to plentiful built-in cabinetry, the television was hidden behind cupboard doors that matched the home’s original woodwork style.

The homeowner’s willingness to share ideas paid off in the master bedroom, where the suggestion to reverse the location of the bathroom and walk-in closet late in the planning stage opened up the room. A genuinely original idea of removing the back of an armoire and placing it at the opening of the closet was also incorporated. The front doors open as intended to expose the interior of an armoire, but with the back of the furniture missing, one walks directly through it and into the closet.

The homeowners’ personal flair, desire to stay true to the home’s elegance and insistence on making their vision clear while allowing the designer and builder to do what they do best, produced an addition that fit seamlessly into the home and historic area. Such creativity surfaced while preserving the area’s natural environment according to careful regulations.

“I believe you have to stay back 100 feet from the water, which is the conservation zone,” Dunleavy explains. “We had to put up hay bales and a siltation fence near the water, and not even a coffee cup was allowed between the bales and the lake.” No vehicles were allowed to be parked over night and an arborist was required to certify that an unhealthy old oak tree needed to come down. Not only did this process preserve the surrounding natural areas, but the local flavor as well. 

“In 50 or 60 years, hopefully people will say, ‘Look what a great job they did in 2004,’” Dunleavy says. “It looks like it always belonged yet looks like we were never there. They really restored and brought back an old home to today’s living standards.” These standards include all the newest smart-home features such as remote Internet control of the home’s functions, and customized lighting and music from the touch of a garage door opener.

What stands out in this project for Dellanno are the homeowners, which he says are not typical. “We wanted to give them our best. Their ability to work within the design/build system and take advantage of the craftsmanship really stands out.” This produced an end product that can only be the result of sharing many good ideas, and a listener who was able to pick up on the best ones and turn them into reality.