There are many different ways to complete a project; however, regardless of how it’s completed someone has to insure the project. The question is “who buys the insurance?”.
First, let’s look at what’s available. The most common project specific insurance coverage options are General Liability Insurance and Builder’s Risk. While these are not the only coverage options to consider, in order to illustrate the point, we will limit this discussion to those two. Other coverages could include: Boiler & Machinery, Professional Liability, Environmental Impairment Liability, Worker Compensation, Political Risk, and a number of others.
General Liability Insurance (also known as Wrap-Up Liability) is a project-specific liability policy that covers the owner, the general contractor, consultants, and all subcontractors and sub-consultants involved in the project.
Builder’s Risk Insurance is essentially property insurance that is designed to cover property in the course of construction or renovation.
Regarding the question of “who buys the insurance?”, we can generally break it down into three options or a combination thereof:
- Owner Controlled Insurance Program. This is when the owner purchases the project specific insurance to cover his or her project.
- Contractor Controlled Insurance Program. This is when the contractor purchases the project specific insurance.
- Rely on the contractor and subcontractors to provide the necessary insurance. This method is commonly used only on smaller projects in which the owner relies on the contractor and subcontractors insurance policies to cover the project. As this method is only for small projects I’ll limit further discussion to the Owner and Contractor Controlled Insurance Programs.
Note that project insurance can be purchased on a project by project basis or blanket program.
Regardless of if the owner or the contractor purchase the insurance, there are clear advantages to project specific coverage:
- Covers owner, general contractor, subcontractors, consultants and sub-consultants
- Features dedicated limits / higher limits / broader coverage
- Guaranteed uniform insurance coverage for all contractors and subcontractors
- Coverage is tailored to the specific demands of the project
- Claims settlement is simplified as a control adjuster can often be arranged for the entire project to reduce litigation
- Reduces the possibility of inadequate coverage by sub-trades
- Avoids the risk assumption: “Let’s pass it down and see what happens”.
- Reduces administration cost of gathering proof of insurance from multiple contractors.
Why would the owner purchase the insurance?
- More control over the coverages and deductibles. When the owner purchases the insurance through their broker, they are involved in the process of reviewing coverage and choosing the deductibles they’re comfortable with.
- Reduces the possibility of gaps in coverage between the owner’s insurance program and project specific insurance.
- Eliminates the possibility of the contractor using the insurance as another source of revenue.
Why would the contractor purchase the insurance?
- The contractor may be able to take advantage of better rates because of the volume of premium with their carriers. It should be noted that this may also apply to the owner in some cases.
- The contractor and the broker may be more experienced with placing project insurance.
In order to properly insure a project, the owner must consider these different options and their advantages when deciding what method is best suited to protect their investment. That’s what it comes down to: protecting the owners’ interests.
Whoever purchases the insurance must be willing to take the time to work with their broker to properly explain the project in order to fully understand and effectively manage the risk. As such, it is critical to have an insurance broker that understands construction and insurance.