Are you insured? Hidden parties in builder’s risk policies
Whatever your role on a project, always be sure to read the Course of Construction policy. It is surprising how often parties overlook potential coverage for a loss by assuming they are not insured.
Knowing who is covered by the policy can significantly alter your approach to any losses and prevent you from unnecessarily shouldering those costs. For pyramid structure multi-tier projects in particular, insurance can flow down from the owner — so owners, contractors, subcontractors, trades, and suppliers alike can benefit from this basic practice.
PURPOSE OF THE POLICY
Course of Construction insurance (CoC), also known as Builder’s Risk insurance, is one of the broadest policies in the construction world. These policies will generally cover the costs of repair or replacement in the event of an accident. While the kind of coverage offered by a CoC policy is particularly valuable on projects that face extreme weather and hazardous conditions, the greatest utility of such policies come from the coverage of a broad range of insured parties.
The prime contract will usually stipulate who is responsible for obtaining CoC coverage. Owners and general contractors are the most common purchasers of the policy, as both benefit from knowing that the contractors will have the funds to rebuild in the event of a loss. The insured party, however, is not usually limited to the signatories of the prime contract.
WHERE TO FIND THE INSUREDS
Check the following sections of the policy to determine whether you are insured:
- Declarations — At the beginning of the policy, you will often see the title “Named Insured” and “Insured.” The Named Insured is usually listed by its corporate name, and is limited to the purchaser of the policy. “Insured” in a CoC policy usually covers all contractors, subcontractors and consultants, like engineers and architects.
- Definitions — This section is where parties other than traditional contractors and subcontractors might be surprised to find they are covered. In many policies, the definitions particularize the term “Insured” further than the declarations. The most common example of this particularization is when “Insured” is defined to include “Additional Insured.” This category will then have its own definition. That definition, of course, varies by policy, but it is common to find that trades and suppliers who do work on the project are listed under “Additional Insured”
- Endorsements — This section is usually at the end of a policy and can alter any of its terms. Always check to see if there are relevant endorsements.
Simply by looking closely at the policy, trades and suppliers can save themselves a lot of money.
It prevents them from absorbing losses for which they can rightfully claim coverage. This rule extends to any party that has agreed to indemnify those unexpected insureds, so it is in everyone’s best interest to read the policy thoroughly.
Owners likewise benefit from encouraging this practice. Projects can suffer disruption if an unexpected loss burdens a subcontractor, trade, or supplier to the point of insolvency. The problem is magnified if that party is somewhere in the middle of pyramid and can no longer pay its subtrades. Insurance is intended to protect the project from these cash flow issues, but the policy can only help if the relevant parties take advantage of that protection. All parties need to be aware of the protection available to capitalize on it.
In the event of an accident that burdens a supplier, for example, an owner who is aware of full coverage can call on its insurer to cover the loss of the additional insured. This approach is highly preferable to relying on the supplier to pick up a potentially ruinous tab and hoping that it won’t slow production. If the policy is properly utilized, owners can take comfort that project financing is operating as designed.
Make sure you aren’t paying out of pocket for a loss that is covered. Read the policy.
This column originally appeared in the February 2019 issue of On-Site. You can read through the full issue here.
Siobhan Small practices construction law at Borden Ladner Gervais LLP. This article is for information purposes only and may not be relied on for legal advice. Please send any comments to firstname.lastname@example.org.