As a part of any construction project requiring a builders risk policy, the construction agreement helps outline expectations between the general contractor (GC) and the project owner. The construction agreement, or construction contract, is typically used to specify how and when compensation is distributed. It is in the best interest of both the owner and the GC (or builder) of a project to make this document as detailed as possible to ensure expectations are met on both sides. That can include information about the builders risk insurance policy.
Typically, the owner of the project purchases the builders risk policy, but depending on the project, it might make more sense for the GC to obtain the policy. In some cases, the GC is able to secure a policy with better coverage and a more competitive premium. The project owner has the ability to write it into the construction agreement that the GC is responsible for placement of the policy. This applies more so with a new construction project. When the owner is building on an existing location or the project is a renovation that already has a property policy, it might make sense to add the exposure to an existing policy.
The first step is to establish insurable interest for each party, i.e., the owner, the GC and any sub-contractors potentially involved. What exposures do each of them have? An owner would likely have interest from the time of purchase throughout the course of construction; the GC would have interest from the start of construction until final payment is received for work completed; the subcontractors’ interest would be for the duration of time they are involved. Each has direct damage exposure but for varying amounts and varying activities. For example, the GC’s interest includes expenses related to labor, equipment and profits. The owner has similar interests, plus payments made to the GC. It’s possible for the owner to have business income exposure to loss of rents if the building was intended to quickly produce revenue. Any incident that puts the project on hold will delay business income.
Each parties’ exposure and interest should be detailed in the construction agreement. So who is the first named insured? This needs to be carefully discussed between the GC and owner to ensure policy notices are received and deductible responsibility is understood. First named insured can make decisions regarding the policy and receive returned premiums, but is also responsible for deductibles. If the policy deductible will be split between parties in the case of a claim, how much is each party’s responsibility? Doing homework and creating the plan upfront can prevent headaches, disputes and potential lawsuits down the road. The construction agreement is a legal document that can save either side from financial distress.