How to Make the Most of Your Insurance Coverage During Construction Projects

Insurance coverage on supplied materials and equipment can be an effective tool to protect yourself from potential loss during a construction project. During NACM's most recent construction think tank session, Jim Untiedt, partner and construction practice leader at Acrisure Construction, LLC, describes what types of insurance policies are out there and how credit professionals may utilize them to ensure their work is covered.

Untiedt explains there are five areas creditors look at to protect themselves on a construction project: mechanic's liens, payment bonds, builder's risk insurance, installation floaters and supplier's transit insurance. He focused on the three main types of insurance policies listed above, including:

• Builder's Risk Insurance – typically purchased by the owner or general contractor so they don't have to pay twice
• Installation Floaters – typically purchased by subcontractors to protect themselves for damages to materials and equipment
• Suppliers Transit Insurance – purchased by suppliers to protect the value of materials being shipped to the jobsite

According to the American Institute of Architects (AIA) 2017 Contract Section A.2.3, owners or general contractors shall purchase builder's risk insurance for the full value of the project, including change orders. They have to be on a replacement cost basis, and maintain coverage until substantial completion.

"If the owner chooses not to purchase that policy, they're often going to require the general contractor to purchase it," Untiedt said. "I would say for about 90% of brand-new construction projects, if not a greater percentage, there will be a builder's risk policy in place."

However, builder's risk insurance does impact the rest of the contractual chain considering owners or general contractors typically do not share the policy with lower tier subs, Untiedt said. "Contracts are usually worded in a way that subcontractors need to determine if coverage exists [for them]. If not, they need to be responsible for damage to their work, their materials and their equipment."

Furthermore, the deductibles included in the builder's risk insurance policy may be passed down to lower-tier subs in the event of materials being stolen or damaged. Untiedt notes that he has yet to see a builder's risk policy that states subcontractors and suppliers of every tier are covered.

In cases where there's not a builder's risk policy protecting all parties, subcontractors can purchase an installation floater to protect themselves for damage to their work for both labor, and materials supplied by a supplier. This policy covers materials while they're being transported, stored, on the jobsite, during installation and when installation is complete but not yet accepted by the owner.

This brings us to two "action steps" for suppliers when looking to acquire an insurance policy. The first involves contacting the subcontractor to see if they have purchased installation floater coverage. "That is an option for you, as a supplier, to give you some evidence that there's somebody with the ability to pay if your materials are damaged before you get paid," Untiedt said.

The second action step offers another option for suppliers looking to pursue coverage on their own, and that involves suppliers transit insurance. Much like installation floaters, this policy protects the value of your materials while its being shipped, Untiedt said.

"Sometimes transit insurance can provide coverage at other locations for a period of time as well," Untiedt said. "So, you can take some action on your own insurance policies by talking to your own insurance broker and asking "what insurance can I purchase to protect my materials until they're paid for? But the best way [to protect yourself] is to require your subcontractors that you're working with to show evidence of an installation floater equal to the largest amount of materials at risk before you're being paid."

-Bryan Mason, editorial associate