Chapter 6 - § 6.2 • BUILDER'S RISK COVERAGES

• Jurisdiction: Colorado

§ 6.2 • BUILDER'S RISK COVERAGES

§ 6.2.1-Purpose and Use of Builder's Risk Policies

Builder's risk policies provide first-party coverage for property during the course of construction. Builder's risk policies are most often written on a risk-of-direct-physical-loss basis, which means that the insured is protected against all fortuitous loss of his or her covered property, subject to the policy's exclusions.⁶³ Less common are builder's risk policies written on a specified-perils basis; under these policies, the policyholder must prove that covered property was damaged or destroyed by a peril insured against in the policy.

Builder's risk policies were created because standard commercial property policies do not address exposures faced during a construction project. At one moment in time, the risk of loss to building materials not yet incorporated into the structure is on the vendor or supplier of the materials; soon after delivery to the job site, the risk of loss shifts to a subcontractor or the general contractor. Following incorporation into the structure and payment to the contractor by the owner, the risk of loss may shift to the owner or lender. Moreover, property in the course of construction is exposed to risks of loss that are not common to completed structures - for example, theft of building materials or damage to building materials in transit. Builder's risk policies can handle all of these exposures in one comprehensive policy.

Another difference between a builder's risk policy and a conventional property policy is that a builder's risk policy accounts for the changing value of a construction project. For example, the value at risk in a construction project varies from zero at the start of the project to 100 percent of the completion price at the end of the project. A builder's risk policy recognizes that the value of property and equipment at a site is changing and will base its premium accordingly, whereas a conventional property insurance policy charges the full premium for the value of the completed structure, even where the true risk is far less than the value at completion.

Finally, a builder's risk policy can serve as a method to allocate risk before a project is undertaken. The project owner, contractors, design professionals, and lenders can manage the risk of loss by agreeing ahead of time that any loss is to be covered by the project's builder's risk policy to the benefit of all participants. This helps reduce the post-loss expenses associated with litigating who is responsible for a loss. Most builder's risk insurers will honor waiver of subrogation provisions where they have been entered into prior to any loss. Builder's risk policies offer many optional and additional coverages; it is imperative that an insured have a good broker to assist it in analyzing the project's exposure and putting together the right builder's risk package.

§ 6.2.2-Named Insureds

Builder's risk policies can insure the following types of property: building materials, equipment to be installed, temporary structures, forms, scaffolding, and building materials offsite and in transit. The completed structure itself is ultimately owned by one individual, but since materials not yet incorporated may be owned by contractors and controlled by numerous parties during the construction process, it is appropriate to name multiple classes of "insureds" in the policy. The objective is to name those who have property and insurable interest in the property at the project site. Therefore, named insureds should include, at a minimum, the owner, the general contractor, architects, engineers, subcontractors of every tier, and the lender. If material suppliers are not insured under the builder's risk policy, it may be advisable to acquire "contingent business interruption" coverage, which should cover any loss to a key supplier's facility. For example, if a window supplier experiences a fire that delays delivery of the windows for several weeks, contingent business interruption coverage could cover costs resulting from that delay.

The first named insured in the list of insureds, normally the owner or general contractor, has specific duties and responsibilities per the terms of the policy. The first named insured is designated as the party to receive official notices from the insurance company. The first named insured is typically the party with whom claims are adjusted and...