Is Builders Risk Insurance Necessary?
Updated: Jan 13, 2018
When building construction occurs as either ground-up new or renovation of an existing structure, most risk management professionals assume that the exposure requires a builders risk policy. Is this assumption correct? It depends on the details—the information necessary for the risk management professional to decide whether the construction exposure needs a builders risk insurance policy or another property policy that can or does provide same, similar, or better coverage than a builders risk insurance policy. The devil is in the details as the correct insurance response to the construction exposure may not be obvious. The exposure review starts with the insurable interest of the various parties to the construction contract to build the new building.
The first step to determine the appropriate first-party (property) insurance policy for an individual or organization is to establish the party's insurable interest. Insurable interest is the legal concept that an insured (i.e., first named insured and any other insured) on a property insurance policy must have a financial interest in an object (building) and will suffer some degree of financial loss if the object is damaged or destroyed. The named insured may be one or more parties depending on how construction will be conducted such as the owner, the owner's general contractor ("GC") when the owner does not act as GC itself, and any subcontractor(s) ("sub") hired by the owner or GC. The construction contract will identify the various parties involved in the building construction.
The owner that builds for itself will have an insurable interest throughout the course of construction. The GC will likely have an insurable interest from beginning of construction until final acceptance and payment by the owner. Subs, when hired to do portions of construction, will have a period of insurable interest from inception of their work for the GC until final payment and acceptance of the work by the GC. How can these three unrelated interests all have an insurable interest in the same building? The owner has a direct damage exposure during the time of construction equal to (1) its funds expended for any of its own labor and supplies and (2) for payments made to the GC and/or subs. In turn, the GC and sub have a direct damage exposure equal to their labor, supplies, and profit. The named insured in this example may be ACME Building (ACME) as owner, ABC General Contractor as GC, and any subs hired by the owner or GC.