Authors: Attorney John C. Mitby & Attorney Elizabeth L. Spencer

Phone: 608-575-4077

Email: jmitby@hbslawfirm.com, espencer@hbslawfirm.com

When entering into construction contracts a project’s insurance requirements are often overlooked leading to the parties accepting impersonal form provisions without addressing project specifications. This quick acceptance of standard industry forms often occurs with builder’s risk insurance (“BRI” or “BARI”) to the detriment of the parties. BRI is insurance purchased for the course of construction to cover the gap before the typical commercial property insurance policy will cover the completed project. As a key part of many risk management plans, parties beginning construction projects should review whether a standard form policy or a more personalized BRI policy is the right fit. The purpose of this article is to provide a brief review of the basics of BRI that any construction project owner should consider prior to obtaining a policy or signing an agreement with a general contractor.

BRI protects those participating in construction against the risk of loss to their own property during construction. BRI typically insures the value of the project during its construction. It is designed to insure the improvements that will become permanent features of the completed project. Property that is covered may include: temporary structures; materials and supplies that will be a permanent part of the project; property in offsite storage or in transit; underground features; plans and documents; and trees, shrubs and plants. The property covered can vary based on the type of policy.

Numerous factors can affect the scope of coverage. First, BRI’s are typically written on two bases: “all-risk” and “named peril.” All-risk policies provide the broadest available coverage by covering all causes of loss except those expressly excluded in the policy’s terms. This type of BRI is defined by its exclusions and exceptions. Alternatively, named peril policies are more limited and insure against losses caused by an event that is specifically listed in the policy. Either type of policy must be carefully examined to ensure that the coverage is sufficient for the needs of the project and is properly coordinated with other insurance policies.

Second, the scope may vary through the addition of coverage add-ons to broaden the coverage. While all BRI’s vary to some extent because insurers do not rely on standard forms, there are many typical add-ons to coverage. For example, a term may be added for testing of new equipment to determine whether it functions correctly and meets the applicable standard. This sort of testing is considered hazardous as if the equipment has not been properly assembled it may have catastrophic consequences. Another add-on may be coverage for a delay in completion of the project as the result of a direct physical loss or damage. If a project goes off its intended timeline, contractors and project owners may face increased costs and loss of revenue.

Third, there are also common exclusions in BRIs limiting the scope of protection. Policies often exclude the land on which the project is being built, existing structures, and any tools or equipment used by contractors. Faulty workmanship and design is virtually always excluded from coverage. However, this exclusion does not prevent recovering from ensuing damage from the defective work. Further, coverage almost always excludes existing structures. This may include exclusions of renovations and remodeling. If a project is a renovation, an owner should consult their commercial property policy or see if the BRI policy could be modified to include the existing structure.

In the event of a loss, the damage is generally valued by determining either the cost of repairing or replacing the damaged property with similar materials or the actual cash value of the property. Valuation of a loss should include the cost of labor and materials as well as the contractor’s reasonable overhead and profit. If both covered perils and uncovered perils cause the loss or damage, coverage will depend on how the policy addresses multiple causes of loss, the cause’s contribution to the loss, and applicable law. The applicable laws will result in variations from state to state.

The party that obtains the BRI also affects its scope. Traditionally, the owner of the project purchases the policy as it is the owner’s project that needs protection and the owner would know which risks are most important to protect against. More recently, it has become common for general contractors to obtain the policy, particularly if they are volume purchasers of BRI policies. A party may prefer to be the purchaser as they can then control the scope, limits, price and claims process of the policy. However, the party that obtains the insurance has the risk of being accused of failing to satisfy the contractual insurance requirements or providing a broad enough scopes or limits.

BRI coverage is “first party” property insurance meaning it only covers the insured when they suffer a loss. In contrast, project liability insurance covers third party losses. For example, if a neighboring property owner’s building is damaged during construction, the liability insurance will cover the loss but the BRI policy will not. BRI does not require the insurer to defend the insured against claims. The owner is usually always protected as they are most often the named insured. Other participants are included by being named insured, additional named insureds, or loss payees. Typically all participants in the construction of the project, including the owner, general contractors, subcontractors, and lenders, are protected in some way by the BRI.

The party that obtains the insurance will also control its length. BRI varies in that policies may be for a fixed period of time in which construction will take place or for just a specified project terminating when construction is complete. When obtaining coverage the owner should review the specific start and end dates. Some policies may simply state the date when coverage commences while others may not start until construction actually begins. While the policies are intended to be individual per project, larger construction industry policyholders may have “rolling” or “master” coverage. This variation allows larger general contractors or construction managers to provide coverage for all of their projects as opposed to individual policies for each project. They may add new projects to the coverage as they arise. These large policyholders often have greater negotiating power and, as such, are able to obtain better coverage than those insuring just a single project.

BRI is a vital part of a construction project’s risk management plan to help protect assets, preserve limits of insurance, and control insurance costs. There are many moving pieces to BRI that should be carefully considered in each construction project. The party that purchases the policy may negotiate who will be covered by the policy, the scope of the policy, any potential add-ons. When negotiating a construction contract, parties should carefully review their BRI and consider having it reviewed by their lawyer so that they may better understand the risks they are assuming and what incidents may actually be covered.