Builder's Risk Insurance: Specialized Coverage for Construction Projects



Exclusions/Perils Not Insured

As a general rule, the section on exclusions in a builder’s risk policy is divided into two parts. These parts and what they contain will vary, but for our discussion here it is possible to address them in generalities.

The first part consists of specifically mentioned causes that directly or indirectly impact the covered property, regardless of any other cause or event that contributes concurrently or in any sequence to the loss. A concurrent loss comes about when two independent causes converge on a loss, with one covered and the other excluded.

This wording is intended to preclude coverage for concurrent causes that produce a loss, regardless of what those causes are or how they contribute to the loss. Without a concurrent causation exclusion, the entire loss caused by a covered or non-covered peril would be covered. An example of a concurrent cause is damage caused by a landslide (excluded) brought about by negligent construction (covered).

Commonly included in this part and not deemed to be covered losses are those brought about by ordinance or law, earth movement, nuclear hazard, war or military action, flood or other water source, fungus, civil authority or contamination.

The second part of the exclusions precludes coverage for physical loss or damage caused by or resulting from itemized causes, without mentioning concurrent causation. Generally included in this part and not considered to be covered are losses from criminal, fraudulent, dishonest or illegal acts; mechanical breakdown; loss of use and consequential losses; wear and tear; voluntary party; pollution and steam boiler explosion.

Steam boiler explosion is commonly covered by separate equipment breakdown insurance. This will not be needed initially, unless there is an exposure from a nearby source or the project involves extensive renovation work rather than new construction.

Earth movement and flood coverage are generally available by endorsement or in separate policies. Whatever the case, these exposures are severe enough to merit consideration, especially in areas known to have potential exposure to these hazards.

Another common exclusion is loss or damage caused by or resulting from design error, faulty workmanship or defective construction. A consideration in determining the appropriate builder’s risk policy is whether this kind of an exclusion makes an exception for resulting physical loss or damage not otherwise excluded. All else being equal, the more exceptions to exclusions for covered ensuing losses it contains, the better the policy is likely to be.

When Coverage Ceases

Of particular importance in a builder’s risk policy is the “when coverage ceases” provision. Unlike other property policies, the builder’s risk policy is intended to terminate when the work has been completed and the property is ready for use or occupancy, even though some minor finishing work might remain.