Why Contractor need Builders Risk Insurance?

The construction contract should clearly delineate four key elements of builder risk coverage.

• First, it should specify who will be responsible for purchasing insurance for the property under construction.
• Second, it should stipulate who is covered under the policy for their interest in the property.
• Third, because builders risk insurance is written primarily on nonstandard coverage forms, it should dictate a minimum scope of coverage the policy must provide.
• Finally, the contract should stipulate who is responsible for any policy deductibles. Each of these topics is addressed in more detail below.

Who Buys the Insurance?

Builders risk insurance can be purchased by either the project owner or the general contractor. Some owners prefer to purchase the builders risk coverage, but unless an owner has an ongoing construction program, the contractor can often obtain broader coverage at a comparable (or lower) price through Its established markets. Since they generally bear the risk of loss, most contractors prefer to provide the insurance so they have more control over the coverage terms. Because they buy this coverage year in and year out can take advantage of long-term relationships with underwriters and claims adjusters, including favorable negotiated rates. If the benefits of contractor-provided coverage are explained, owners will often agree to allow the contractor to provide this coverage.

Who is covered?

Since construction work is performed in stages and often involves one or more subcontractors, it is possible—even likely—that a single covered event will cause damage to various types of property owned by various parties to the project. If each party insured its property (e.g., building materials) separately, it would be necessary to determine who owned each damaged item at the time of the loss to allocate the loss among the various insurers. These insurers would then likely attempt to collect from other negligent parties for all or part of the amounts paid. The potential for disputes over who owned which property and who was responsible for the damage would almost certainly delay the completion of the project.

A better approach to insuring the property under construction, including materials and equipment that will eventually become part of the completed project, is to include all parties with an insurable interest in the project as insureds under a single builders risk policy. That is, the owner, general contractor, at least two tiers of subcontractors (more if the lower tier subcontractors have an insurable interest in the property), and sometimes suppliers would all be named insureds under the builders risk policy. Because all parties are insured under one policy, there is no need to ascertain who owned which portions of damaged property. Further, as first-party coverage, builders risk insurance applies without regard to fault; therefore, delays and disruptions will be minimized.

Minimum Scope of Coverage

Because builders risk insurance is generally written on nonstandard policies, the construction contract will typically dictate some minimum coverage specifications as a way of providing assurance to all parties regarding the scope of coverage. For example, most contracts require that the builders risk policy will provide “all risks” coverage on a “replacement cost basis.” “All risks” coverage, which covers all causes of loss except those that are specifically excluded, is broader than its “named perils” counterpart. However, because “all risks” coverage can vary from one form to another, coverage for certain categories of property and causes of loss are specifically required in the contract. For example, many contracts stipulate that the policy must provide coverage for property stored off-site and Property in transit and that earthquake, flood, windstorm, false work, testing, and startup must be covered causes of loss.

Deductibles

The construction contract should stipulate who is responsible for paying any applicable deductibles under the builders risk policy. Sometimes owners will try to make contractors responsible for paying deductibles under the theory that it provides an incentive to exercise a higher degree of care. The problem with that rationale is that the owner often buys the policy and decides what deductible to select. The owner may choose a higher deductible to reduce the premium and, in the process, expose the contractor to an unmanageably large uninsured loss. This presents a situation where all of the benefits of a higher deductible are reaped by the owner, while much of the cost is borne by the contractor. One way of addressing this issue is to require the owner to be responsible for paying any deductible amounts. Another reasonable option is to share the responsibility for the deductible—with the contractor and subcontractors being responsible for a small portion of the deductible, and the owner responsible for the remainder.