As described by my colleague Sean McChristian in Part 1 of this two-part blog series, planning for hurricane season in Texas is a critical part of mitigating risk in the construction industry. In addition to reviewing force majeure provisions, owners and contractors need to have an understanding of the insurance available to cover property damage to a project arising from a hurricane. Parties to construction contracts primarily insure this type of risk through a builders risk insurance policy. Many issues can arise regarding the policy in the construction contract that should be carefully negotiated.
Basic Builders Risk Questions
Builders risk policies are sometimes provided by the owner and sometimes provided by the contractor. The contract negotiation relating to builders risk should include a discussion of the following:
- Who will procure the builders risk policy?
- Who will pay for the policy?
- What does the policy insure?
- If no builders risk policy will be provided, how will the owner’s and contractor’s interests in the structure be insured while the project is under construction?
- Will the contractors and subcontractors be additional insureds on an owner-provided policy?
- Are there any perils (i.e. named storms or floods) that are excluded from coverage?
Construction contracts should address owner and contractor responsibility for the deductible associated with the builders risk policy. Owners often elect to procure the builders risk policy as part of an overall insurance strategy. Many large owners choose to have large deductibles to lower the price of a policy. Negotiation of a provision relating to a deductible should include a discussion of the following:
- Who will be responsible for the deductible when no one is at fault? Or when one party is negligent?
- Whether the deductible will be capped at a certain amount.
Taking some time now to review provisions or properly negotiate provisions for projects just beginning can save everyone time and money during a natural disaster.
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