By AIA Contract Documents
November 3, 2022
One of the best ways to manage risk on construction projects is through insurance and bonds. Throughout the next several weeks, the AIA Contract Documents Program is going to release a series of articles pertaining to construction insurance. This is Part 2: Builder’s Risk.
Builder’s Risk Insurance
Usually, but not always, the owner will procure the property insurance for the project, in the form of a “builder’s risk” policy. Builder’s risk insurance is, at its core, property insurance that insures against loss to the project before it is complete. The contract clause requiring the owner to obtain builder’s risk insurance usually says something like “the Owner shall purchase and maintain, from an insurance company or insurance companies lawfully authorized to issue insurance in the jurisdiction where the Project is located, property insurance written on a builder’s risk “all-risks” completed value or equivalent policy form and sufficient to cover the total value of the entire Project on a replacement cost basis.” The language may also include some specific terms that the policy must include.
Essentially, this language requires the owner to obtain a builder’s risk policy (1) from a reputable insurance company, (2) on a policy that is written on an “all-risks” form, and (3) that will cover the total value of the Project on a replacement cost basis. Prudent owners should seek the assistance of insurance and legal counsel when negotiating and complying with these terms.
The owner and contractor may decide that the contractor is in a better position to procure the builder’s risk insurance. If this happens, the owner typically will reimburse the contractor for the premium, especially if the contractor is working on a “cost-plus” basis.
Do AIA Contracts Contain Insurance Requirements Related to Builder’s Risk?
Yes. A101™-2017 Exhibit A requires either the owner or contractor to purchase property insurance written on a builder’s risk “all-risks” completed value or equivalent policy form and sufficient to cover the total value of the entire project on a replacement cost basis. The owner is required to secure property insurance covering the contractor’s work unless the parties select the option of having the contractor provide this insurance. The limits of this insurance shall be sufficient to cover the total value of the entire project on a replacement cost basis. At a minimum, this should be no less than the amount of the initial “Contract Sum” plus the value of any subsequent modifications, materials supplied or installed by others, and furnishings, fixtures, and materials located at the project site. Importantly, property insurance typically carries through until substantial completion and afterwards. If the project involves construction performed by the owner’s separate contractors, this work should also be covered by the owner’s property insurance. This insurance is to include the interests of the owner, contractor, subcontractors, and sub-subcontractors in the project, and the interests of mortgagees as loss payees.
Stay tuned for Part 3!
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.