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CONSTRUCTION RISK REPORT

Some Key Risks Impacting Owners & Developers

For many owners and developers, the past few years may have resulted in fluctuating material costs and building valuations.  On the risk management side, insurance has become a growing cost consideration (and, for some projects, has become difficult to place).

What are the key risks for Owners & Developers?

  • Market Valuation & Insurability Risk: 
    Insurance availability and cost are increasingly becoming factors in property valuation and project feasibility. As some insurers reduce their appetite for higher-risk zones and/or raise premiums significantly, developers may want to factor insurance costs into feasibility, financing, and exit planning.
  • Climate & Physical-Hazard Risk: 
    The increasing frequency and severity of secondary perils (such as floods, storms, hail, wind) may be contributing to higher exposures for some property owners. Shifting weather patterns and localized risk conditions may also influence underwriting, pricing and property resilience considerations.
  • Liability & Professional Risk: 
    Standard commercial general liability policies may exclude or limit coverage for certain risks, which can narrow available coverage and increase costs depending on the exposure.  Owners and developers may want to evaluate whether subcontractor/consultant contracts, design oversight, and risk transfer mechanisms are aligned to help manage potential liabilities. 

Common Insurance Considerations for Owners & Developers 

  • Relying on the General Contractor's Insurance: 
    Assuming the general contractor’s insurance alone is sufficient or relying exclusively on the general contractor to procure a Builder’s Risk policy, may create gaps depending on policy terms, limits, deductibles and named insured status.  If coverage is insufficient or lapses, the owner may have uninsured exposure.   In addition, a general contractor’s liability policy may not cover damage to the project itself in all circumstances.

    Owners may want to consider purchasing their own Owner-Controlled Insurance Program (OCIP) and evaluate additional insured status based on the project.
  • Insuring the Project Value: 
    Setting policy limits based solely on the construction contract price, rather than the estimated completed value, may create underinsurance concerns. Inflation, change orders, labor costs and rising material pricing may affect valuations over time and can contribute to coinsurance issues or insufficient recovery after a loss. 

    Periodic review of insured values, including potential soft costs (architect/engineer fees), may help support more accurate coverage planning.
  • "Soft Costs" and Delay in Startup (DSU) : 
    Some owners & developers may overlook coverage options designed to address certain  fail financial impacts associated with project delays.  For example, if a covered loss delays construction, direct repair or replacement costs may be addressed under applicable builder’s risk coverage, while certain indirect "soft costs" (such as loan interest, real estate taxes, legal fees, additional architectural fees) may require separate coverage, endorsements or specific policy terms. 

    Owners and developers may want to evaluate whether soft cost or Delay in Startup (DSU) coverage is appropriate based on the project’s financing structure, timeline and risk profile.
  • Policy Start/End Dates: 
    Policy effective dates which start too late or end too early can create potential gaps in coverage.  Depending on the policy terms, materials stored off-site or in transit may not be covered at all stages of the project.  Likewise, project completion milestones or occupancy dates may affect when certain coverage ends.  A careful review of policy effective dates, transit/storage provisions and final handover timing can help reduce unintended gaps.
  • Key Exclusions (Ex: Flood, Earth Movement, Faulty Workmanship): 
    Many property and builder’s risk policies may contain exclusions or limitations for events such as floods, earthquakes and earth movement or certain faulty design/workmanship claims.  Reviewing policy exclusions, sublimits and available endorsements with qualified advisors can help support informed risk management decisions,  particularly for projects in a high-risk area.
  • Managing Subcontractor Insurance: 
    Failing to obtain certificates of insurance (COIs) from subcontractors, or not tracking coverage throughout the project, can create uncertainty regarding whether some risk are intended to be borne by the subcontractor. If a subcontractor causes a significant loss and its coverage is insufficient, unavailable or has lapsed, the owner or developer may face uninsured exposure or potential liability, depending on the circumstances.
  • Bridging the Transition to Property Insurance: 
    Allowing a Builder’s Risk policy to terminate before permanent property insurance is in place can create a potential coverage gap.  Leaving a newly completed building uninsured or underinsured between the completion of construction and full occupancy may present substantial risk.

Common Insurance Coverages for Owners & Developers

The following coverages may help address certain exposures that owners & developers face when initiating projects or holding assets long-term.
 

Owner's Protective Liability:
This coverage is designed to help address certain liability exposures arising from acts or omissions of independent contractors performing work on behalf of the owner. This coverage may be worth evaluating for developers that are not also serving as the builder on the project.
 

Builder's Risk / Course of Construction:
Builder’s Risk coverage is generally designed to help address certain property exposures involving the structure, materials, and equipment during the construction period, which may suffer damage arising from covered events (which might include fire, weather, theft, vandalism, and collapse, depending on the policy terms).  If the project is being financed, lenders typically require evidence of this coverage.
 

Commercial General Liability:
Commercial General Liability generally covers third party bodily injury and property damage claims arising from the project operations, ongoing work, and products/completed operation exposures post-construction, subject to the policy’s terms, conditions and exclusions.
 

Pollution / Environmental Liability:
Pollution or Environmental Liability insurance is designed to help address certain cleanup costs and third-party claims arising from covered pollution conditions on site, depending on the policy’s terms, conditions and exclusions.  This may include pre-existing contamination or construction-related releases.
 

Owner-Controlled Insurance Program (OCIP):
OCIPs are a wrap-up program under which certain coverages may be placed on a consolidated basis for eligible project participants.   OCIPs are often considered on larger projects where centralized insurance administration may offer efficiencies, subject to program design and project needs.
 

Umbrella / Excess Liability:
Umbrella or Excess policies may provide additional limits above certain underlying polices, such as General Liability, Auto Liability, and Employers’ Liability, subject to policy terms and conditions.  Appropriate excess limits may vary based on project size, contractual requirements, risk profile and stakeholder preference.

Insurance & Risk Assessment for Construction Companies

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IMPORTANT NOTICE: The opinions and statements herein are intended for general informational purposes only and should not be viewed as a substitute for any legal, regulatory or other advice on any particular issue or for any particular reason.  The advice of a professional should always be obtained before purchasing any insurance product or service, and you should not rely on the information provided herein for the prevention or mitigation of risks or as a full and complete explanation of coverage under any insurance policy or as a full and complete explanation of terms and conditions of any services offered.  Statistics and data referenced in this report are derived from industry sources and may not reflect current conditions or be applicable to your specific situation. Insurance coverage is subject to the terms, conditions, limitations, and exclusions of the applicable policy, and availability may vary by jurisdiction. Readers should consult with qualified legal, insurance, and financial professionals before making any decisions based on the information in this report. Acrisure disclaims any liability for actions taken or not taken based on this report.