Travis writes: We are in the planning stages of building a house. We will be paying cash and have gotten quotes from three builders. We have been told by three different insurance agents that as the property owners paying cash, that we should have the Builder’s Risk insurance and the builder should have liability insurance. Two of the builders told us that they are the ones that have the Builder’s Risk insurance. After much discussion and them talking to their agent they came back and told us that we should have Builder’s Risk with both of us being named as co-insures. I disagree with this because if the project is damaged when it is 95% finished and the builder has been paid for the finished work, the insurance would pay the claim proceeds to both the builder and myself. Legally, the builder would be entitled to 50% of the proceeds, but I would be the one that has suffered 100% of the loss. My question is who should get the Builder’s Risk policy?
Steve Bliss of BuildingAdvisor.com responds: Builder’s Risk insurance typically covers physical damage to a project during construction from things like fire, wind, theft, or vandalism of the building or materials during the construction process, including theft or vandalism of the contractor’s equipment. It may cover theft of materials, but may require special security like a gated job site. It is usually the owner who takes out the policy, but it can also be the contractor. In either case, the other party is usually added as a “named insured.”
As with much in life, and especially with construction contracts and insurance policies, the devil is in the details. It’s natural that a contractor would want protection from losses as much as the homeowner. For example, if a fire causes damage during construction and you receive all the money, the contractor would want some assurance that he will get paid for the extra work required to complete the project. Similarly, he would want compensation for damaged or stolen equipment. You, as the owner, want protection from damage caused by wind and fire, but also by the contractor — for example, if roof trusses collapse because they were not properly braced.
To protect both parties and spell out who is compensated for what type of loss, the insurance policy and the construction contract have to work together. Standard industry contracts such as AIA contracts cover these issues to some degree. For example AIA A201 states that the owner “shall purchase and maintain . . . property insurance written on a Builder’s Risk ‘all-risk’ or equivalent policy… This insurance shall include the interests of the Owner, Contractor, and Subcontractors…”
AIA and similar industry-standard contracts also contain “waiver of subrogation” clauses which limit the rights of the parties to sue one another, limiting the potential costs and delays of litigation, and allowing the insurance company to sue the responsible party if necessary to recover its losses.
Builders risk insurance is complicated and each policy is a different, as are the state laws governing construction contracts and insurance. It is worth the effort to get both properly written. The clearer these issues are spelled out in the contract and insurance policy, the quicker things get resolved in the event of a loss and with less risk of litigation — and that benefits all parties involved. Given the complexity, you should definitely discuss this with one or more insurance agents with experience in construction coverage, and maybe with a lawyer as well.
One exception is a situation where you are purchasing the house and land as a package from a developer. In this case, you don’t typically take possession until the house is complete and don’t need Builder’s Risk coverage, which is only in effect during construction.
Bear in mind that the largest potential risk in construction projects is usually your personal liability from an accident at the construction site, so make sure you have adequate coverage through your own or the builder’s general liability insurance, with you as a named insured. It is also important that your contractor have proper Worker’s Comp coverage to protect you if a worker is injured. If you have substantial assets, you should also look into an umbrella policy which wraps around all your other liability insurances and increases the upper limit to $1 million or more. It’s usually pretty cheap and lets you sleep better at night.