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Coverage Concerns Buildings under construction The construction process requires insurance protection for owner, contractor and mortgagee alike By Roy C. McCormick
Coverage concerns over property insurance for buildings under construction have existed since protection for the exposure became available. The current building boom has magnified these concerns. The potential for property damage during the course of construction and the financial risk on the part of the owner, contractor and mortgagee require the utmost care in insurance arrangements. A written contract should spell out the responsibility for insurance procurement. The days are gone when a handshake sealed an agreement. Our focus is on the construction of a single-family dwelling. Commercial and industrial construction usually involve parties with experience in the legal ramifications and proper procedures. Not so with the construction of many single-family homes, usually a first-time and perhaps only experience of the kind for the owner. Underwriting and loss experience demonstrate the importance of clarity in the construction contract regarding the obligation to secure insurance; care in making certain that the several interests are fully covered; and securing permanent insurance promptly when builders risk insurance is terminated. Each of the parties with an investment in the project has an insurable interest that must be protected. There is a community of interests that can be covered cooperatively by insurance, avoiding adversarial situations. The parties with substantial interests in construction of a single-family dwelling are the owner, contractor and, invariably, a mortgagee. Responsibility for securing builders risk insurance must be firmly established in writing. Numerous court decisions attest to this. Contractors who are experienced in dwelling construction use tested contract forms that cover the essentials, or have their attorneys modify basic provisions for a specific construction project. An agent’s insurance expertise and guidance are needed for single-family dwelling construction projects. Whether the client is the owner or the contractor, agents are well advised to: •Verify, from the contract, which party is required to secure builders risk insurance. •Make certain that the interests of the owner, contractor and mortgagee(s) are covered, preferably under a single builders risk policy when practical. •Review “when coverage ceases” conditions in applicable forms and stress the need for securing permanent insurance for the owner and mortgagee. A builders risk coverage form is designed to provide direct damage coverage to dwellings under construction. The structures may be new or may be older dwellings being renovated. The ISO Builders Risk Coverage Form CP 00 20 is standardized. Inland marine coverage forms are flexible and subject to underwriting judgment. The AAIS form is a good example. ISO Builders Risk Coverage Form CP 00 20 is a policy developed to cover a building from start to finish of construction. Its provisions are “built in.” The following description applies specifically to the special property coverage form because of its widespread use and depth of coverage, and it also applies in general to the several other optional forms that cover more limited perils. Insured persons are identified in the declarations page. It is essential that all insureds be specifically identified. Covered property must be at the premises listed in the declarations, and any loss or damage must be caused by or result from a covered cause of loss. A covered building under construction, subject to a limit of insurance shown in the declarations, includes: foundations; items that are going to be a permanent part of the building but that are not yet attached, provided they are within 100 feet of the premises (for example, fixtures, machinery, equipment to service the building and other building materials and supplies a named insured will use in construc-tion); and temporary structures built on the premises such as trailers for the storage of tools, scaffolding and the like. The insured(s) can choose the covered causes of loss. The familiar causes of loss forms that are available include: Basic CP 10 10; Broad CP 10 20; and Special CP 10 30. ISO’s Builders Risk Coverage Form CP 00 20, a part of its Commercial Property Program, is a standardized filed form that may be used for its basic coverage or modified with a variety of endorsements. An inland marine builders risk form is a non-controlled form that can vary considerably depending on the insurer providing coverage. The AAIS versions are prime examples because of their flexibility. These inland marine coverage forms are used in whole or in part by member and subscribing companies. Each insurer designs its own policy with its own unique coverages. Any builder or contractor, owner or purchaser with a financial interest in the building or structure under construction, renovation or repair is eligible for coverage using scheduled location or jobsite forms. Numerous modifying forms are available as needed. The mortgagee is usually aggressive in making certain that insurance covering its loan is made effective by or on behalf of its borrower. Most lending institutions carry coverage applicable to mortgaged property for which required insurance has not been arranged due to their own lack of oversight. This Mortgageholders Errors and Omissions coverage applies only when the lender has failed to initiate purchase of property insurance by the borrower. Agents should note “when coverage ceases conditions” in applicable builders risk forms and stress the need for dovetailing permanent protection with the termination of coverage confined to the building process. By and large, coverage under builders risk forms ceases upon completion. Insurance protection problems need not occur during the course of construction of a single-family dwelling. An agent’s expertise and guidance can help avoid them. * The author |
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