By Quenda Behler
Builders often buy catastrophic insurance to protect
themselves from unforeseeable disasters such as floods, fires,
and tornados. This type of policy is also called builders' risk
insurance, though in some markets builders' risk refers to a
package that includes catastrophic coverage and general
liability. When I refer to builders' risk policies in this
article, I'm referring to catastrophic insurance alone.
Figuring out what catastrophic insurance protects you from and
for what period of time may not be as straightforward as you
think. First of all, it won't cover damage caused by every
sudden disaster. If a storm destroys the building you're
working on but poor workmanship or an incompetent design made
that possible, your builders' risk policy will not kick in.
(All would not necessarily be lost, however, because
"catastrophes" caused by incompetence are likely to be covered
by someone's comprehensive general liability policy.)
When Coverage Starts
Some catastrophic insurance policies start on specific dates
and end on specific dates, but others are event specific. That
kind of coverage might start when construction on a project
begins and end when the job is complete.
There are reasons you might prefer one type of coverage to
another. You may not want your policy to start on a specific
day, for example, because you don't know exactly when work will
commence and there's no point in paying any sooner than you
have to. And if a flood comes and washes everything away before
your crew is on site, it's not your problem, right? Well, it
might be, because there are multiple ways of defining when a
Some lawsuits have held that insurance coverage begins as soon
as the job is ready to start. For example, even though no one
has put a shovel into the ground, if your material has been
delivered, the job is considered to have started. In other
cases, courts have determined that coverage did not actually
begin until excavation began, or in one case, until the
foundation was being laid. Unfortunately, if there's a dispute
over the start date, the only way to absolutely pin it down is
to go through a lawsuit.
When Coverage Ends
Likewise, there is more than one way for insurance to
terminate, and more than one standard can be applied to a
single policy. Some end upon job completion, no matter how long
it takes, but the most common type of policy terminates on a
specific date or upon job completion, whichever comes first.
And almost all policies are written to terminate upon owner
acceptance or upon owner use or occupancy, which I'll discuss
Termination Upon a Specific
If your insurance is scheduled to end on a specific date, then
your coverage won't last beyond that date, even if you aren't
done with the work. If you want to continue coverage beyond
that date, you will have to pay another premium and ask your
insurance carrier to extend the policy.
On the other hand, coverage that's scheduled to end on a
certain date may not last even that long. Insurance companies
don't want a minute's worth of extra exposure, so even though a
policy is supposed to end on a specific date, the fine print
will allow the company to terminate it the minute the job is
finished, which the company will do.
Termination Upon Job
It can be hard to figure out when coverage starts if the
policy is tied to a specific event, but it's even harder to
figure out when coverage ends. Your policy may say it ends upon
"job completion," but completion can mean one thing in an
insurance policy and another thing in your contract documents.
Insurance companies define completion as "substantial
completion," no matter what your contract says.
Suppose you reach substantial completion, but there are some
items left on the punch list. Whose problem is it if the
structure burns to the ground before that work is finished? The
bad news is that your builders' risk insurance company is going
to say it's not their problem. The good news is that your
liability carrier will probably fight this out with the
homeowner's insurance company. If your client doesn't have a
policy, then you'll be the one fighting it out with the
insurance company. You can avoid this by including a clause in
your contract that requires the homeowner to purchase
insurance. That is a standard feature of American Institute of
Architects (AIA) contracts.
Some policies will automatically renew until the job is done.
Of course, insurance companies don't provide that service for
free. Policies typically include a schedule of what it costs
for additional days of coverage after a certain date.
Regardless of what a particular policy says, pretty much every
policy ends the moment the owner moves in or starts using the
property. This is true even if the job is not complete. The
only time that would not terminate a policy is on a remodeling
job, when the insurance company knew in advance that the client
would be occupying the building during construction.
Letting the property owner use or occupy the building will
terminate your insurance coverage as of the date of usage or
occupancy unless the insurance company specifically consents in
advance to that use or occupancy. This means you should think
twice about allowing the property owner to store possessions in
or move into the building before the job is done. A few
lawsuits have ruled that giving the property owner some sort of
temporary use is not the same thing as occupancy, but plenty of
suits have gone the other way. There's even a case on the books
that says the policy terminates even if the contractor did not
know the owner was using the property. The legal idea is that
the insurance company intended to insure an empty building when
it issued the policy. My advice to builders: Tell the property
owners to put their stuff in a storage unit and rent a motel
has practiced and taught law for over 25
years and is the author of The Contractor's Plain-English Legal