Builder's Risk: Are You and Your Client on the Same Page?

By: Paul E. Walters,
Utica E&O Claims Manager

Builder’s Risk coverage is available to both contractors and owners of real property. This type of coverage provides protection against physical damage to an insured structure during the course of construction. Coverage also extends to construction materials on the job site that will become a permanent part of the structure. This article will cover the potential liabilities an agency faces when securing coverage for property owners.

   There are two basic premises regarding the applicability of Builder’s Risk coverage: it only covers unoccupied structures and does not cover existing structures. Within those parameters, however, is where an agency can be vulnerable.  As with all coverages secured for an agency’s customers, discussions with the client concerning their expectations of coverage are key. This is especially true when discussing Builder’s Risk coverage. While most contractors have a good working knowledge of what is covered under Builder’s Risk, there’s a good chance that property owners do not. Claims can arise from a misunderstanding of the two Builder’s Risk premises referenced above. If there is an existing structure involved, speak to clients about what coverage is in place for it. If there is no coverage in place for an existing structure, explain that there needs to be – and document your discussions in writing. Regarding occupancy, make sure the client understands that they must let the agency know when the work has been completed so a property policy can be written. Document those discussions in writing, too. Again, a misunderstanding between the agency and the client on those issues can expose your agency to a claim.

Payment of Nearly $700,000
A property owner who purchased an expensive home was having major renovations done to it before it was to be occupied. A Builder’s Risk policy was in place and a loss arose from a fire. Following the blaze, the Builder’s Risk carrier only paid for the work that had been completed up to the date of the loss, plus materials that were on-site that were to be part of the structure. The policy did not cover any damage to the existing structure because there was no policy in place for the existing structure. The client, a long time customer of the agency, claimed $1.8 million in damages to the existing structure. The agent admitted at his deposition he thought Builder’s Risk also covered the existing structure. Yet the policy clearly excluded it and coverage for the existing structure should have been added by endorsement. This misunderstanding of Builder’s Risk coverage resulted in a payment of almost $700,000 to settle the claim against the agent.

Verdict in Excess of $2 Million
Another example involved the major renovation of a former school and gymnasium being converted into apartments. The work was to be done in two stages: demolition, followed by renovations. Builder’s Risk coverage, secured by the contractor, was in place. When the agent and the client (the owner of the premises) spoke, the client gave the agent a rough estimate as to when the work would be completed. Both had an understanding that when the work was completed, a property policy covering the apartment complex would be secured. At the end of the demolition phase, the owner/client secured additional financing to complete the project and asked for proof of insurance from the agent. The agent misunderstood the communication, thinking the entire project was completed. Knowing Builder’s Risk would not protect the client for an occupied building, the agent secured a Commercial Property policy for what were actually gutted, unoccupied buildings. The agent already knew the estimated time for the project completion and should have realized that the project was nowhere near complete. However, the property carrier wrote the policy requested by the agent and within weeks the buildings were destroyed by fire.Naturally, the Builder’s Risk policy only covered materials and tools that were on the site, as no real renovations had begun. The property carrier attempted to deny the claim because the buildings were unoccupied, but eventually was forced to pay $2.6 million. In turn, the property carrier sued the agent, claiming the agent wrongfully bound them to a policy for a risk that the agent knew – or should have known – should not have been written. Following a trial against the agent, a verdict in excess of $2 million was rendered and paid.Simply stated, better communication and understanding of the construction phases by the agent would have saved the agent from being sued.

Better Service, Avoiding Claims
All agents need to understand the important differences between Builder’s Risk and standard Property coverages, and clearly comprehend timeframes and the status of buildings under construction or having major renovations made to them. Clients will be given better service and claims will be avoided.