Choosing an Insurer for Builder's Risk

In assisting a client evaluate alternative proposals for providing builder's risk coverage recently, I prepared a sort of "checklist" of issues to be considered when comparing the policy forms of two different insurers (builder's risk policy forms are not standard, thus each insurer's policy form needs to be reviewed and evaluated). Here are ten items from the checklist:

1. Is the policy "all-risk"? If so, be sure to review carefully the exclusions to coverage to determine what may need to be added back by endorsement.
2. Is the policy written on a "completed value" form or a "reporting form" (reporting forms impose significant penalties for late or under-reporting the increasing value of the project).
3. What, exactly, is the description of "Covered Property"? It should be something like "all property that is used in, or incidental to the construction project" as opposed to "property that will ultimately become part of the completed structure". The former provides more expansive coverage.
4. Is there flood damage coverage? If so, is there a sublimit to the coverage? Is there a separate deducible applied to this, and if so, how is the deductible figured --- on percentage of loss (better) or percentage of value?
5. Is there wind/hurricane damage coverage? If so, what is the sublimit and deductible and how is it figured? Is there different coverage/deductible for a "named storm"?
6. Is there an exclusion for losses covered by a guarantee, warranty or other obligation? If so, make sure that this exclusion does not apply to a contractor's warranty.
7. Is there an exclusion for loss arising out of professional services? If so, get the exclusion deleted or add coverage back by endorsement.
8. What are the policy provisions on owner occupancy? Are there any restrictions? Be sure to understand if/when partial occupancy will cause the coverage to terminate.
9. Federal law mandates that insurers provide terrorism coverage, confirm that this applies to domestic as well as international terrorism.
10. Does the policy give you the right to make pre-loss waivers of subrogation rights? Many standard form construction contracts (including AIA forms) include this pre-loss waiver, and you need to confirm that the policy allows for this if you have already entered into a construction contract.

These are only some of the items that need to be reviewed and evaluated before deciding on a builder's risk insurer. It is worth taking some time to review with your insurance agent or broker how these and other important items are handled under different builder's risk policies. (This entry posted by Karen Estelle Carey, member of the Construction and Real Estate Group at Womble Carlyle).