How to Safely Navigate the Perilous World of Builder's Risk Policy Procurement.
Builder's Risk Insurance might appear to be a somewhat exotic animal in comparison to more mundane insurance products, such as homeowners insurance or auto insurance. However, a few simple reminders will help the insurance professional avoid many of the E&O pitfalls associated with the procurement of this type of policy.
First, as with any insurance product, know the policy, what it covers and what it doesn't cover and determine if a builder's risk policy is the appropriate policy for the type of risk your client wants to insure.
Builder's Risk Insurance commonly indemnifies the policy holder against damage to buildings while under construction or renovation. It also protects materials, fixtures, and equipment used in construction or renovation of a building. Most often, the covered perils include fire, wind theft and vandalism. Sometimes, a few other perils are covered as well. The coverage is normally intended to end when the building is ready for occupancy or work is completed. When this occurs, a new policy is needed for a new type of risk, which includes occupancy. If the risk includes both renovation/construction and additional occupied structures, make sure the existing occupied structure is covered as a builder's risk policy normally would not cover that part of the risk.
1. Know what the policy does not cover. Typical exclusions often include: your work, concurrent causation, partial occupancy, earthquake. Some endorsements are available to broaden coverage with some carriers. Make sure these endorsements are discussed with the client. In addition, check to see if the client might need another policy to cover other aspects of the risk, such as professional liability coverage.
2. Determine the period of time needed for the work to be completed. Does the policy need to be renewed for ongoing construction? This information should be gathered after detailed conversations with the client. A diary system should be used for follow-up with the client in order to check on the status of construction or a follow up to questions posed to the client about the nature of the risk.
3. Make sure the risk is adequately insured – sufficient limits are obtained. Look at the construction budget to help determine the amount. Make sure the client has input into the amount. Document.
Next, if you go to the construction site to inspect the risk to be insured, document the inspection with photos and date stamp the photos. Check on whether the premises are occupied and whether the policy excludes coverage if occupied. Most builder's risk policies have exclusions based on occupancy.
I have handled E&O claims involving the procurement of a policy with the occupancy exclusion where the agent allegedly knew or should have known the premises were occupied. Sometimes during construction or renovation of commercial structures, part of the building is under renovation and part of the building is occupied or in use. Make sure to discuss this type of risk with the as well as with the carrier's underwriter about how to insure this risk. Document all of this.
Insist that the client immediately contact the agency when conditions change – is the renovation complete or has the structure been put to its intended use? Put this in writing. When the nature of the risk changes, due to occupancy or use, make sure the appropriate policy is procured.
Documentation is key. Document all discussions in writing with the client about the risk and confirm via letter or email. Refrain from using text messaging. Text messages can be lost or difficult to access if needed several years later. If the agent asks additional questions about the nature of the risk, write down the questions and when they get the answers, keep those in writing as well. Confirm in writing with the client. Follow up if you don't get responses. Make sure all applications are signed by the client.
In summary, as with other lines of insurance, know the product. Continue to ask questions, throughout the procurement of the policy. Work with the carrier's underwriting department to ensure you are getting your client the coverage they need. Document your inspection of the site if you inspect the risk. Clear and frequent communication, which is well-documented, will ensure your client obtains the appropriate insurance coverage and in turn will greatly reduce your exposure to E&O claims.
John Spiehs is vice president and claims expert at Swiss Re Corporate Solutions and works out of the office in Kansas City, Missouri. Insurance products are underwritten by Westport Insurance Corporation, Kansas City, Missouri, a member of Swiss Re Corporate Solutions.
This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group ("Swiss Re") and/or its subsidiaries and/or management and/or shareholders. Copyright © 2018, Big “I” Advantage, Inc. and Westport Insurance Corporation. All rights reserved. No part of this material may be used or reproduced in any manner without the prior written permission from Big “I” Advantage. For permission or further information, contact Agency E&O Risk Manager, 127 South Peyton Street, Alexandria, VA 22314 or email at email@example.com.