Contractor Coverage and Builder's Risk Insurance

Contract Options/Problems
While construction contracts vary, attorneys representing project owners or developers commonly rely on the contract documents offered by the American Institute of Architects (AIA). Other organizations whose forms can be used as references are the Associated General Contractors (AGC), ConsensesDOCS, the Engineering Joint Contract Documents Committee (EJCDC) and the Design Build Institute of America (DBIA).

The AIA documents require that if the owner does not want to obtain the builder's risk policy, it must notify the general contractor, who then has the option of purchasing a policy and charging the owner for it. What often seems to happen is that many of the provisions of these contracts are modified to suit the particular project, with the exception of the insurance requirements, which remain intact.

One of the problems with most of these contracts is that they give the party responsible for procuring the builder's risk coverage the option of obtaining a builder's risk policy or an equivalent policy form. What begs the question here is the meaning of "equivalent policy form." Actually, there is no policy form equivalent to a builder's risk policy. Consequently, based on this wording, owners rely on their existing commercial property policies for course of construction coverage instead of purchasing a builder's risk policy.

Is this a bad practice? That depends on how the insurable interests of the contractors are covered. If an owner relies on their own policy, it is not likely that contractors will be added as named insureds. To be without named insured status could invite the chance that an insurer will exercise their right of subrogation against those who are not named insureds. A waiver of subrogation also does not guarantee full protection. It might only apply to the contractor's own work and not for the physical loss of or damage to the property of others involved in the project.

This is not to say that all contractors are covered as named insureds on builder's risk policies. They should be, but this item is frequently overlooked. Of course, what hinders the need is that construction contracts such as the AIA's do not prescribe contractors as named insureds. They merely require that the interests of the parties be covered. As a result, contractors of all tiers do not enjoy the same coverages as the purchasers of the insurance. In fact, when owners rely on their own commercial property policies for coverage, some of these policies might cover contractors' interests, while others do not. It is not unusual, therefore, for owners to be confronted with legal action for failing to fulfill their contractual promises to cover contractors' interests.

As pointed out previously, it is not necessary to list all parties as

named insureds on a builder's risk policy. The owner, for example, could be named and a statement included noting that named insureds also include contractors of all tiers. Considering that many commercial property policies — including builder's risk policies — limit coverage to the named insured, reference to additional insured status should be avoided.

In fact, the use of additional insured status should be limited to liability insurance only. Also, architects and engineers are not commonly added as named insureds on a builder's risk policy. Instead, they usually require a waiver of subrogation — although there is a trend among carriers providing builder's risk coverage to specifically omit architects and engineers as recipients of such waivers.