Builders Risk – Are you sure you don’t need it?
Sometimes the contractor omits procuring Builders Risk coverage, due to a number of reasons, such as:
- The Insurance Specifications do not specifically call for it
- They don’t see the risk in it and think they can “get away without buying it”
- They don’t see the risk in it and decide to ride it out, and purchase it only if and when the owner finds out they don’t have it’…
Sometimes, the contractor will note the absence of Builders Risk as a contract specification at the tender stage, and may be uncertain as to how to proceed: If they are risk-averse, and carry a premium in their bid just in case, they may be affecting their tender competitiveness if other bidders are not so conservative or diligent. On the other hand, if they decide not to carry anything, they may have a battle with the owner getting the owner to pay for the policy upon award.
- What happens if there is no Builders Risk policy requested in the documents?
- What is the contractor’s risk?
- Is it best to let sleeping dogs lie and hope for the best, or highlight the omission to the Owner?
The Need For Builders Risk Insurance is Two-Fold
1. The first need is due to a contractual requirement, where the Builders Risk policy is part of the insurance specification in the contract. Failure to carry the mandatory insurance would constitute a breach of contract, and if the Owner discovered that there was no coverage in place, they may require this remedied immediately in accordance with the default provisions within the contract.
- Buying builders risk coverage on a project already underway is very difficult; in fact, very few Insurers will do so, and those who might, will do so only on select cases and will price the policy at 2 or 3 times the normal premium. So there is a financial and contractual risk in not procuring such policy if required.
2. The second need is to insure against a real risk of loss or damage: Even in the absence of the builders risk being a contractual requirement, there is a financial risk to the contractor that materials and equipment brought on site could be stolen, vandalized, damaged by a wind-storm, injured in a fire, or another insured peril. Even once the material or equipment has been installed and paid for in a progress draw (and even if the contractor has no right to remove any such property from the site), it would be the contractor’s responsibility (virtue of their contract) until the project is complete.
SO; Just because the insurance contract does not make mention of the need for the contractor to procure a builders risk policy (or just because the owner does not follow up to ensure one has been placed by way of a certificate) does not mean the contractor does not have a meaningful risk on their jobsite that is going un-insured.
In cases where damage is sustained at the jobsite, the Owner would look to the contractor to complete the project at its fixed tendered price and would expect that the contractor (or the contractor’s Builders Risk policy) pays for these costs. Given that the Owner has agreed to pay a lump sum for the completed work, they would likely refuse to pay anything over and above such lump-sum price, including such repair and rebuilding costs arising from a claim on the project. Simply put, if the Owner has a fixed price, they won’t want to pay twice for the same material or work.