The International Risk Management Institute, aka IRMI, is a fantastic resource for those involved in property insurance. Our firm has been a long-time subscriber to many of its publications. One of those, The Builders Risk Book, 1 came to mind while writing, Travelers Builders Risk Policy—Don’t Buy It If You Are an Owner or Developer.
Regarding the proper methods for listing an owner as a “named insured” or as an “additional insured,” The Builders Risk Book noted the potential coverage controversy from my post, which could have been avoided if the agent had properly written the insurance coverage or Travelers noted taken such a hyper-literal reading of its policy:
Named insured status is recommended for the owner, contractors, and subcontractors even when the construction contract allows for or calls for some other, lesser type of protection for the parties. There are at least two reasons for this.
First, named insured status gives the project owners, contractors, and subcontractors equal coverage and equal standing under the policy.
For example, named insured status gives a contractor or a subcontractor the right to make a claim directly with the insurer in the event that the project owner fails or refuses to do so.
It is appropriate for contractors and subcontractors to have coverage and standing under the builders risk policy that is equal to that of the project owner. Although the project owner usually holds title to the land on which the project is constructed, the contractor and subcontractors typically purchase the construction materials and are paid for the materials and their labor periodically as the project progresses. Therefore, the contractors and subcontractors have a legitimate insurable interest in the covered property, as owners or part-owners of the covered property or as creditors of the project owner to the extent of the labor and materials that they advance.
Second, named insured status should provide the contractors and subcontractors with protection from subrogation (a legal action taken by the insurer to recover amounts paid for a covered loss from the party who caused the loss) in the event that there is a covered loss that is alleged to have been caused by their negligence. Naming the contractors and subcontractors as insureds provides protection against subrogation because of the general principle that an insurer cannot subrogate against its insured.
Attempting to protect the parties to a construction contract by naming them as additional insureds usually is not a good idea. The reason is that there is a great deal of confusion over the differences between named insureds and additional insureds. The builders risk policy language may not clearly establish that the coverage provided for additional insureds is the same as that provided to the insureds that are listed on the declarations page or in the policy’s named insured provision.
In fact, some builders risk policies are not structured to cover anyone other than the named insureds. It is not uncommon for a policy to define the named insureds as ‘you’ and the insurer as ‘we,’ without reference to others. Therefore, additional insureds under such a builders risk policy might not have the benefit of all the policy coverages that apply for the benefit of the named insureds.
Since named insureds have the protection of all of the physical damage coverages provided by the policy, the protection that applies to a named insured is superior to the protection that applies to an additional insured, a loss payee, or one whose interest is ‘included.’ Including the owners, contractors, and subcontractors as named insureds meets the requirements in each of the construction contract forms discussed.
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To summarize, due to the potential coverage differences between named insureds and additional insureds, the default recommendation is to seek named insured status. However, additional insured status may be entirely acceptable, based on a thorough review of the builders risk policy terms and conditions. 1
In the introduction, there is an important warning to those involved with builders risk insurance coverage:
There is no standard builders risk policy, and builders risk coverage provisions are sometimes open to negotiation. Therefore, regardless of whose responsibility it is to obtain builders risk coverage for the project, the owner and general contractor should meet and decide what coverages are needed in the builders risk policy. Simply requesting builders risk coverage is not sufficient. That would be like simply asking for an automobile when looking to buy a car. The question is, what kind of automobile?
To determine what coverages should be included in the builders risk policy, both the owner and general contractor must first identify and evaluate their loss exposures associated with the project. Probably the best way to do this is with a risk management exposure survey for the project. The goals of an exposure survey are to identify the loss exposures and evaluate them in terms of their potential loss frequency and severity.
If this is not done, it may be difficult to determine what coverage features are necessary for a given project. This is particularly true when determining the coverage features that may be needed for projects that are more complex than commercial buildings and roadways-tunnels, bridges, underwater pipelines and other sea works, dams, and water and sewage supply systems, for example.
Once the loss exposures have been identified and evaluated, it may be helpful to use a builders risk coverage checklist when preparing specifications for the insurers that will be asked to provide builders risk coverage proposals…. While even the very best coverage checklist should not be viewed as comprehensive, a good coverage checklist can prove useful in identifying coverage features and options that may be available to address the project’s loss exposures.
For those involved with buying or selling builders risk coverage, this book is worth its weight in gold because it prevents possible coverage controversies. The book’s excellent sample checklist of considerations should be reviewed every time a builders risk policy is written.
Thought For The Day
The mother art is architecture. Without an architecture of our own we have no soul of our own civilization.
—Frank Lloyd Wright
1 Steven Coombs and Donald Malecki, The Builders Risk Book, Insurance Risk Management Institute.
1 Id. at Ch. 6, Who is Covered: Naming the Parties Appropriately.
