C. Builder's Risk (First Party Property)
1. In General
In real life, only the very largest owner can self-insure its own losses. If financing is involved, the lender is going to mandate Builder's Risk. If the building is destroyed in whole or in part by, for example, a fire or a tornado, the cost to rebuild the damaged portion and to pay for the cleanup and all other associated costs will be a total loss in relation to the value of the completed building. In short, someone will have paid twice for a single building. For a premium, the insurer will issue a Builder's Risk policy that will provide the funds to rebuild, and the owner and contractor will end up with the desired building at the price anticipated.
To avoid the risk of loss and to control project costs during the many perils that can threaten a construction project, all property to be incorporated, or actually incorporated, into the construction project can and should be insured against loss. The premium is always a cost of construction and is no different than the bricks and steel. Only in the rarest of circumstances should Builder's Risk not be purchased.
At common law, the contractor bears the risk of loss prior to acceptance by the owner. This remains the law in South Carolina, unless modified by contract. Any party with an insurable interest6 in the property or the materials to be incorporated into the project can insure against loss. Article 11 of the AIA A201-2007 provides that the owner will purchase Builder's Risk "all risks" insurance for the total value of the project on a replacement cost basis. The A201-2007 does not define "replacement cost basis," and obtaining a policy that would cover every expense incurred in replacing a damaged project may be difficult.7 There is some doubt that a policy can actually be purchased that meets the literal definition of the AIA A201-2007, and a qualified insurance professional should be consulted to ensure that what the contract calls for can be obtained. A breach of contract may be inadvertently created if the contract language is not converted into a real policy. Care should also be taken to ensure that all interests the contract represents are to be covered are in fact covered. It is likely that the literal description of what is contractually required in the A201 cannot be obtained in the market. There is considerable merit in determining before a contractual commitment is made exactly what coverage is available.
It is also possible that the contractor or the owner may be able to obtain the same coverage at a lower price. This cost is a cost of construction no matter who buys it, so it makes sense to price options.
In any event, the contractor should not begin work until it is determined that all required coverage is in place.
The AIA approach makes the owner responsible for all property insurance. The owner may be, but is not always, in the best position to provide the Builder's Risk insurance. Even if the contractor pays the premium, the cost will be passed on to the owner. It is not necessary that one policy be purchased to insure this risk, and it is possible for the owner and contractor to each insure its own interests. However, this can lead to adjustment difficulties if there are multiple adjusters looking at a loss as opposed to one adjuster who has the entire loss.
Article 11.3.7 of the AIA A201-2007 requires a waiver of subrogation by the contractor, the owner, the architect and the architect's consultants. Subrogation is an equitable principle that allows a party paying the loss of another to step into that other party's shoes (so to speak) to recover from the party who actually caused the loss. For example, a contractor's negligence causes a fire that destroys a building in progress. The Builder's Risk carrier pays for the repair of the building and all other losses covered by the policy. Without a waiver of subrogation, the Builder's Risk carrier can then sue the contractor for negligence to recover the amount paid to the owner. The contractor's general liability policy may have to respond to the subrogated claim by the Builder's Risk carrier, which is a subject for later discussion.
The waiver of subrogation in Article 11.3.7 precludes the Builder's Risk carrier from obtaining the owner's right to sue the contractor for the loss. This waiver leaves the carrier with the loss. This is generally considered the desired outcome, as it precludes disruptive litigation among all participants over who is to repay the Builder's Risk carrier. The waiver is commonly used, and most Builder's Risk policies contain a standard consent to the waiver so long as it occurs prior to the loss. As a matter of planning, the insurance professional handling the policy should confirm that there is a policy waiver or get the carrier to specifically agree to waive its subrogation rights.
Under Article 11.3.1.2 of the AIA A20l-2007, the contractor is to obtain its own property insurance if the owner does not. In addition, the owner is responsible for the amount of any loss not paid because of the deductible chosen. There is always a deductible, and the premium can be reduced by increasing the amount of the deductible. This will leave someone to pay the deductible, and this should be identified and addressed at contract time. A $250 deductible will not cause any issue in the adjustment and completion of the project. However, a $250,000 deductible not addressed at contract time will cause litigation and delay as well as a significant uninsured loss to someone.
Builder's Risk policies, as do all policies, contain specific grants of coverage and exclusions as well as sub-limits that can cause surprises and disputes if not understood and accounted for. In addition, the specifics of coverage can vary from company to company based on the policy language used. There are also optional coverages that have to be elected and paid for.
Builder's Risk more than any other insurance discussed herein requires the assistance of an experienced and knowledgeable professional to make sure the best coverage is obtained at the best price.
2. Policy Forms
Builder's Risk policies can be written on several forms and must always be read carefully to assure that they meet the requirements of the contract. Unlike liability policies, Builder's Risk policies may be negotiated between the parties and can result in unique "manuscripted" policies. Such policies need to be read very carefully.
3. Coverage
Builder's Risk policies are written on either a "named peril" or an "all risk" basis. The terms describe how the policy identifies the perils insured...
