One area of the property insurance market which has seen an increase in green building policy endorsements over the past year is the builder’s risk market. This article will take a look at exactly what builder’s risk is meant to insure, and then review some of the available green building endorsements to such policies that are currently available.
Because the risks for property damage, loss, or destruction are quite different for a building under construction versus a building that’s already been built, standard property insurance policies will not provide coverage for damage to or destruction of the former. This is because the owner’s insurable interest is constantly changing; title to material and equipment may change daily, and the overall value of the actual project itself increases from zero as the building itself takes shape, which makes it more or less impossible for the insurer to determine the appropriate premium. Enter builder’s risk insurance, which generally refers to a property insurance policy that will remain in place while the project is under construction. Unless specified by endorsement or otherwise, once the project is completed, builder’s risk coverage terminates, and the owner will need to make sure that a standard property insurance policy is in place to cover accidental losses, damages, or even total destruction of the building or property in question. Determining exactly when that termination takes place can be tricky, and is a good reason to review both the terms and conditions of the construction contract, as well as the terms of the policy and law of the controlling jurisdiction.
Considering the purchase of various endorsements is important because standard commercial builder’s risk coverage will insure only one thing: the building under construction, and not associated soft costs (such as those incurred with third-party green building certification). Standard builder’s risk policies will cover damage or losses to the building’s foundations, scaffolding, construction forms, other temporary structures at the project site, fixtures, machinery and equipment used to service the building and intended to become part of it, and materials and supplies at the site which will also become part of the building. Typical endorsements include those for “floater” coverage; i.e., damage to equipment used to build the project, or materials and supplies in transit from point of manufacture or supply to the project site, as well as the costs and expenses that the owner may incur if completion of the project is delayed.
According to the most recent Marsh survey (from December of 2008), several insurers now offer specific green building endorsements to traditional builder’s risk policies which owners and their contractors should consider carefully on green construction projects of any size. Fireman’s Fund, for example, offers a “Delay of Occupancy or Use – Green Amendment” to its builder’s risk product. The endorsement provides coverage for the soft green building-related costs that an owner may incur after a covered loss, such as the recycling of construction debris, flushing out the reconstructed space with clean air, commissioning repaired or reconstructed building systems, and re-registering the project with USGBC to continue pursuit of LEED certification. In addition, the policy may provide coverage for the owner’s loss of net earnings from alternative energy or water efficient installations if those systems were operational prior to the loss. Travelers, Zurich and Ace now offer similar endorsements to their builder’s risk policies as well.
As new construction starts (hopefully) increase as the economy slowly lurches around, look for more comprehensive endorsements to builder’s risk policies from a broader range of insurers to emerge; as always, we’ll be keeping an eye on such trends and follow up here at GRELJ accordingly. In the interim, if anyone out there has purchased any of the available endorsements, I’d be interested in getting your feedback in the comments.