Insurance policies can vary from carrier to carrier, sometimes in ways that might surprise. That’s especially true when it comes to builder’s risk policies, with terms and conditions that can differ wildly.
These policies also can be unexpectedly narrow, leaving contractors without the coverage they thought they had.
A 2014 court case pitting a Denver-area construction company against its insurer illustrates this point all too well.
The company was hired to build a wastewater pumping facility. Before construction could begin, it installed four wells and pumps to remove excess water from the site. Above-average rainfall, however, caused its “dewatering” system to fail, and soil got into its pumps because of erosion caused by the rains. The company then replaced its system and added shoring, among other steps, to get the job done.
It filed a claim to recover the extra costs it incurred, but the insurance company declined to pay. The construction company then filed a lawsuit. After losing, it appealed, which prompted the insurer to cross-appeal.
Before we get any further, let me just quickly describe builder’s risk insurance, which is also known as “course of construction” coverage. Builder’s risk, to keep things simple, covers a building while it’s under construction. It also can cover the materials on site waiting to be installed or transported to the job.
At any rate, the appeals court found that the construction company’s original wells and pumps were, in fact, covered by the policy, because they were “temporary structures” and, moreover, did not fall within the policy exclusions.
That was the good news.
However, the court determined that the policy did not cover the cost of the second dewatering system.
“Construing the policy (as the construction company would have preferred) would encourage a builder to economize on an initial dewatering plan and later require the insurer to pay for a more elaborate plan. This would misallocate the construction expense between the construction company and the insurer,” the court found.
There’s more to the ruling but that’s the meat of it, making it clear that builder’s risk policies can be invaluable but also have their limits.
That said, assuming your broker has helped you make sure you’ve added the correct “endorsements,” a builder’s risk policy can:
- Cover you in case of loss of revenue or rental income due to a delay in start-up. That includes coverage for operating profit, fixed costs and expenses incurred to reduce or avoid a delay in the opening.
- Cover existing structures, for builders renovating or adding to an office building or even doing just a home remodel.
- Cover mechanical breakdowns and testing during the life of the project.
- Cover flood and earthquake damage, depending on the location of the project.
Finally, these policies won’t cover the cost of design flaws or faulty work. That risk will typically fall squarely on the design professionals or contractors.
Scott Carlson is a Vice President at CCIG and leads the firm’s construction practice. Reach him at ScottC@thinkccig.com or 720-330-7925.
CCIG is a Denver-area insurance brokerage with the full-service capabilities of a national brokerage. We do more than make sure you have the right policy. We also help you manage your long-term cost of insurance with our risk and claims management expertise and a commitment to service excellence.
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