Insuring a construction site: Quick reference for owners, contractors, sub-contractors and professionals

This article was co-authored by Louis-Martin Richer from Marsh Ltee.

The insurance products used to cover construction works and some of the risks resulting therefrom are numerous and complex. Owners, contractors, sub-contractors and professionals may find it difficult to make heads or tails of them due to the technical jargon of insurance policies.

Still, this type of insurance is crucial for any construction site. It gives owners quick access to funds (in the form of insurance indemnity) so they can rebuild the work in the event of a loss, limiting recourses before the courts. For contractors, sub-contractors and professionals, insurance covers some of the risks for which they are liable. 

Here is a quick reference to give you a better understanding of the insurance products generally used to cover construction works. 

Builder’s Risk insurance – Covers material damage to the work itself 

• Builder’s Risk insurance is an “all-risks” type of property damage insurance. In other words, it covers property damage to a construction work resulting from a covered loss, i.e. all risks save those specifically excluded. It goes by a number of names, including Construction Insurance and Course of Construction insurance (or COC). 
• Generally speaking, it covers a specific construction site designated by an address. For some smaller projects, it is possible to take out a project Builder’s Risk policy to cover several designated locations. 
• Its liability limit is usually the full value of the construction work, namely the sum of all contracts that go into the work’s construction, including certain soft costs. Consequently, in the event of a covered loss, the owner will dispose of the funds needed to rebuild the work. 
• Builder’s Risk insurance only remains in effect throughout the construction period. Its insurance period will usually be the same as the construction period. The policy’s wording, however, may vary considerably as regards coverage termination (30 days after the unqualified acceptance, testing and commissioning period, correction of deficiencies, etc.). It is crucial to inquire about and specify the termination date of the Builder’s Risk insurance when taking out the policy and while the project is underway, especially for projects involving lot procurement strategy, as Builder’s Risk insurance will only indemnify if the loss occurs while the policy is still in effect. Time is a crucial component, notably in the case of construction projects deployed by phase. 
• All project interveners are insureds under the Builder’s Risk insurance  for their on-site activities, including the owner, contractors, sub-contractors, professionals and suppliers. It remains good practice, especially for sub-contractors, to verify their status as insureds. 
• For example, if a loss occurs while a project is under construction, the interveners will first turn to the Builder’s Risk insurance to determine what is covered and what is not so as to receive the appropriate insurance indemnity. 
  • For covered damages, the Builder’s Risk insurers will pay out the indemnity and may not seek subrogated recovery against its insureds, regardless of whether they are named, designated or even unnamed.¹ No legal recourse is taken by the parties unless there is a dispute with the Builder’s Risk insurance provider as to which damages are covered. 
  • For uncovered damages, the owner will need to take the appropriate action against the liable parties. 
• Therefore, where the coverage of damages resulting from on-site construction activities is concerned, taking out Builder’s Risk insurance is tantamount to implementing a “no-fault” system. Any insurance indemnity paid out under the Builder’s Risk insurance will be a net loss for the insurer, as there will be no subrogated recovery against the liable insured(s), and at the same time, the parties themselves waive the right to sue each other for damages.² 
• Builder’s Risk insurance, like any insurance product, has its exclusions. Chief among these are the defect exclusions clauses, from faulty workmanship to and faulty materials, to design defects. Most Builder’s Risk insurance policies only cover property damage resulting from a defect, and not the cost of correcting of the defect itself. In practice, such a distinction is often difficult to make and generates its own share of disputes. 
• This is why insurers offer a wide range of defect exclusion clauses, from the very broad to the highly specific (LEG and DE clauses), each at varying costs. Depending on the technical complexity of the project, the owner may decide to avail itself of any clauses available on the market. It is crucial that all interveners understand the scope of the defect exclusion clauses, seeing as most losses result from a defect, regardless of its form.  
• Builder’s Risk insurance policies come in a wide array of coverage extensions and sublimits. For instance, it is possible to tack on a “delay in start-up” coverage to include profits lost due to delays caused by a loss that defers a work’s commissioning. Property stored elsewhere than on the site and goods in transit (on land) are generally covered under a sublimit. 
• Finally, a Builder’s Risk insurance policy does not cover existing structures unless a value is attributed thereto when the policy is taken out. It only covers the work while it is under construction, as the policy is taken out based on the value of the construction work.
• Consequently, in the context of expansion, renovation and reconstruction work, if existing structures are likely to be damaged by a construction site loss, the parties may also want to avail themselves of the no-fault system by insuring all or part of these structures under the Builder’s Risk insurance.

Wrap-up liability insurance – Covers property damage or bodily injury to third parties

• Wrap-up liability insurance is a type of third party liability insurance. It seeks to indemnify third parties against property damage and bodily injury resulting from construction activities on a given worksite.
• Wrap-up liability insurance essentially provides the same coverage as commercial general liability policies, with two notable differences:
  • Like Builder’s Risk insurance, wrap-up liability insurance covers a specific construction site designated by an address. Therefore, its liability limit is specifically dedicated to indemnifying third parties against property damage and bodily injury caused by the construction activities of a specific project;
  • Like Builder’s Risk insurance, all project interveners are insured under wrap-up liability insurance in terms of their worksite activities, which includes the owner, contractors, sub-contractors, professionals and suppliers. Here, too, it remains good practice, especially for sub-contractors, to verify their status as insureds.
• Wrap-up liability insurance therefore offers all parties a dual advantage:
  • The liability limit is entirely dedicated to damages to third parties resulting from the construction activities on a specific work – it is not shared with other projects in which the insureds may be participating;
  • All interveners are insureds under the same third party liability insurance, hence the term “wrap up” – the owner only needs to take out or demand a single policy, and only one insurer will intervene in the event of a third party liability, thus limiting recourses and favouring settlements.
• The liability limit of wrap-up insurance will be established based on the risk of damage to third parties. For example, the more a construction work is located in a densely and highly populated urban environment and the greater is the risk of damaging a neighbouring building, such as the consequences of a fire that spreads, the higher the liability limit will be.   
• Like Builder’s Risk insurance, wrap-up liability insurance remains in effect throughout the construction period and also comes with an insurance period for completed operations risks (generally 24 months). However, since the wording of coverage termination can vary considerably and is not necessarily the same as that found in Builder’s Risk insurance, it also remains crucial to inquire about and specify the wrap-up liability insurance’s termination date when taking out the policy and while the project is underway, especially as wrap-up liability insurance will only indemnify if the property damage or bodily injury takes place while the policy is still in effect.³
• Some of the main wrap-up liability insurance exclusions extend to:
  • Damages to the construction work itself – during the construction period, the insured project is covered by the Builder’s Risk insurance, not the wrap-up insurance – although this exclusion will be stricken in the case of completed operations risks, as the Builder’s Risk insurance is no longer in effect at that time;
  • “Your Products” and “Your Work”, which seek to eliminate any coverage for work that is redone or the replacement of an insured’s products;
  • Damages resulting from professional services, which should be covered by professional (and not civil) liability insurance.

Professional liability insurance – Covers third party damages resulting from the consequences of professional acts

• Professional liability insurance is a type of third party liability insurance. It seeks to indemnify third parties against the pecuniary consequences resulting from (either the performance or the omission of) their professional services.
• Unlike Builder’s Risk and wrap-up liability insurance, third party liability insurance does not insure all worksite interveners, but only those professionals who are specifically designated therein by name and for the acts described.
• This policy may be intended for a specific project (Project-Specific Professional Liability or PSPL), in which case its coverage will be dedicated to indemnifying third parties for the pecuniary consequences resulting from the professional acts carried out in respect of a specific worksite. In such a case, it will remain in effect for the same period as the Builder’s Risk insurance and the basic coverage of the wrap-up liability insurance.
• It may also be general and cover all of the activities of a specific professional firm, in which case its coverage will be shared among several projects and it will have a renewable period of one year.
• Unlike wrap-up liability insurance, professional liability insurance does not just cover property damage and bodily injury, but all of the pecuniary consequences resulting from professional misconduct. In that sense, the coverage benefits third parties in that it is broader and has fewer exceptions.
• However, this type of policy is triggered on a “claims-made-and-reported” basis during the insurance period in effect, which is a highly stringent condition, especially in the context of a construction worksite.
• In other words, in order for the third party liability insurance policy to be triggered, the professional must have received AND reported the claim (e.g., a notice of default), for the first time, during the insurance period in effect. Furthermore, the professional must also report all circumstances to the insurer that might reasonably give rise to a claim in the future before each renewal period, at the risk of being deprived of coverage under a subsequent policy should he or she fail to do so.
• Finally, owing to their triggering mechanism, these policies must provide for an extended reporting period, at least three years but ideally five to ten years. It is indeed possible for a third party claim only to be received once the professional liability insurance is no longer in effect, in which case the professional will be without coverage. To some degree, the extended reporting period “extends” the term of the last policy in effect so that it covers, for the agreed-on period, claims that the professional may receive at a later date.

Properly assessing the insurance products specific to your construction project

When drafting the insurance clauses that are to be included in construction contracts, notably in the context of public calls for tenders, consider consulting a lawyer who specializes in this area. Even though the CCDC clauses are generally adequate, they provide minimal coverage and are broadly worded. Depending on the project and its specific characteristics, an instructing party may want to obtain better or specific coverage by contractually specifying the coverages, coverage extensions, sublimits and exclusions its project requires.

For contractors, sub-contractors and professionals, a legal advisor will be able to revise the insurance coverage for a specific project – based not only on the insurance clauses provided for in the contracts, but also on the wording of the insurance policies actually taken out – and therefore identify what risks and property are not covered, an important aspect of sound risk management.

Finally, an insurance broker who specializes in construction is a formidable and even indispensable ally when it comes to taking out insurance or managing claims. The insurance market is constantly evolving, with new coverages, exclusions and requirements in such areas as pollution, delay in start-up and transit insurance. Optimizing coverage and managing financial risks require the specialized services of brokerage firms, such as market watches, claims appraisals and engineering services.

This quick reference is just that, a quick reference. 

If you are taking out insurance for your construction project, we invite you to consult with your legal and insurance brokerage professionals.