3 Key Risk Gaps For Developers To Avoid

Construction insurance coverage requirements don't always match what the market can deliver.

Construction insurance decisions affect every participant on a project, but owners bring a distinct set of priorities to those decisions. The owner’s perspective on risk is shaped by financing obligations, project viability and long-term asset considerations that may sit outside the contractor’s frame of reference. When those perspectives are not aligned early, gaps can surface at inopportune times. 

Three areas seem to generate the most recurring issues in the current marketplace: (1) the disconnect between what construction contracts require and what the insurance market will write, (2) how owners and contractors see the coverage picture differently and (3) the claims dynamics that follow when those differences are not resolved beforehand. None of these issues require new products or legal innovation. They require earlier conversations. 

Contracts and coverage: a frequent disconnect

One of the issues that arises most frequently in construction insurance is contracts that require coverage the market no longer provides or coverage that the market can deliver but at a cost disproportionate to the actual risk.

Capacity has contracted on many lines, and carriers have pulled back on manuscript endorsements and previous concessions that they no longer accommodate. Standard-form construction agreements frequently specify the use of decades-old endorsements or other coverages that carriers will no longer provide. The contract creates obligations that no party can perform, and nobody recognizes the disconnect until the coverage is placed or, worse yet, a claim occurs. 

Similarly, contracts often place obligations on the parties that are available, but do not make sense for the project in question. High excess requirements for low-risk subcontractors, flood or earthquake requirements for projects that are not in flood or earthquake zones are just some examples.

Owners are also facing these kinds of issues with their lenders more frequently. Loan documents frequently impose insurance requirements that reflect more of a general wish list than what the market can realistically deliver for a specific project. Specific carrier rating thresholds, sublimits or endorsements that the market will not write, or loss payee language that conflicts with how the policy is structured are common friction points. The owner ends up caught between what the loan documents require and what their broker can actually place.

Overbroad contractual requirements can derail procurement entirely when the parties are unable to meet the requirements or are able to meet the requirements but not in a cost-effective manner. The fix is to involve your risk management team (risk manager, broker, lawyer) early on to inject current market knowledge into contract negotiations before the insurance requirements are finalized and not after.

Coverage: same goals, different considerations

Owners and contractors want the same thing: coverage that addresses as much project risk as possible at the lowest reasonable cost. Where it gets complicated is that each party brings different leverage, exposure and priorities to how that gets structured. Addressing both sides’ concerns deliberately produces better results than letting them surface by default. 

The party controlling the program has real consequences. The party placing and administering the builder’s risk, for example, controls coverage selections, manages the carrier relationship and drives the claims process. Ceding that control means inheriting those decisions, sometimes without visibility. That’s not to say that ceding control is always the wrong call. A large general contractor with an established corporate program and carrier relationships may secure better coverage at a better price than an owner placing a one-off project policy. The question is who is best positioned to deliver the right outcome on each particular project. 

Deductibles and SIRs are another area where interests can diverge. A contractor carrying a large SIR on their general liability policy may be absorbing risk the owner assumes is fully insured. Similarly, deductible responsibilities on builder’s risk policies may not be clearly allocated for multi-party losses. This can result in disputes over who pays and can slow recovery at a critical time during the course of construction.

Wrap-up programs solve some of the foregoing issues by consolidating coverage under a single program. However, they also concentrate administration and financial control. Whoever administers the wrap generally manages the bid credits, controls how insurance costs are deducted from subcontractor bids and has the ability to finance the program in ways that can produce meaningful cost savings. Again, the party who is not running the program is dependent on the other’s decisions and the economics can be significant on a large project.

Claims: where differences can become expensive

Unresolved coverage questions become urgent when a loss occurs. Which policy responds? Who reports to what carrier and on what timeline? What information does each insurer need and who provides it? On a project with multiple parties, multiple policies and the possibility of complex overlapping coverage, those questions do not answer themselves. Without clear communication and a framework for claims handling, the parties can spend the critical early phase of a claim establishing basics rather than pursuing recovery.

The disconnect is often less about conflicting interests than information gaps. Owners do not know the status of contractor claims and contractors may not appreciate how the owner’s program coordinates with their own. Payment timelines vary by policy and by carrier and a loss that should drive everyone toward maximum recovery across all available coverage can turn into parallel processes that do not coordinate with one another.

The pre-contract conversation worth having

Most of what this article describes is avoidable if the right people are involved before the project starts. The owner’s lawyer, broker and risk manager should be engaged together at the contract negotiation—and not after the fact. Insurance requirements get drafted against what the market will deliver and coverage gets evaluated for gaps and redundancies before anyone pays a premium. 

The goal is maximum coverage across all relevant policy types at the lowest total cost, with no unintended gaps and redundancy that does not serve a purpose. This does not happen by accident. It requires coordination between the owner’s and contractor’s teams, a shared understanding of how programs interact and agreement upfront on how claims will be managed. The projects that invest in that conversation early rarely regret it. 

Originally published by Commercial Property Executive

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.