The changing builders' risk marketplace

Risk & Insurance, July, 2002 by Michael (Canadian premier) Harris, Michael Pilla

Inland marine insurance is unique to the United States with roots going back

to the 1600s. Inland marine, which is defined at length by the National Association of Insurance Commissioners Nationwide Marine Definition, embraces many divergent types of risks. These risks include covering property in the course of transit or property that in some way is associated with transportation or communication and quite frequently includes location coverage.

The all-risk builders' risk policy became eligible for coverage as an inland marine class with the adoption of the 1976 Nationwide Marine Definition. Coverage can be provided for property while it is under construction as well as while undergoing renovation, rehabilitation, repair or testing. The builders' risk may also be written on a commercial property form, however, it is most commonly written as an inland marine policy. Builders' risk is a nonfiled class of business in most states. The property insured consists of the machinery, equipment, materials, supplies, and fixtures that will become or have become a permanent part of the building or structure. Coverage can be extended to include the forms, scaffolding, falsework, and temporary structures used in the construction.

Today, as the builders' risk market continues to evolve in response to shrinking capacity, reduced coverages, increasing rates, and greater insured retentions, it has become obvious that none of us may take the "business as usual" approach. Gone are the days of making a simple phone call and a few hours, sometimes minutes, later receiving a quote. Obtaining the most comprehensive builders' risk policy with competitive terms and conditions requires dedicated time and in many cases, very detailed underwriting information.

Special coverages available include:

* Soft costs-values/limits: The definition of covered additional expenses varies greatly among carriers but typically is defined as recurring expenses that can include interest expense on money borrowed to finance construction, realty taxes, advertising, costs of renegotiating leases, and other similar expenses or assessments.

* Earthquake: Be aware of the varying level of risk acceptance in major earthquake fault areas such as California, Alaska, Pacific Northwest, and New Madrid.

* Flood: Identify if project site is located within a known flood zone.

* Testing: The typical real estate project contains exposure limited to heating and air conditioning units, telephone systems, and elevators. For more comprehensive projects, be prepared to identify individual items having greater degrees of hazard related to testing such as gas or electrical turbines.

* Debris removal: Necessary expense to remove debris of insured property caused by or resulting from a covered cause of loss.

* Pollutants cleanup and removal: Necessary expenses to remove "pollutants" from the covered property if the release, discharge, or dispersal of the pollutant is caused by a covered cause of loss.

* Accounts receivable: Pays for loss or damage to records of balances owed by an insured's customers.

* Valuable papers: Pays for loss or damage to valuable papers such as blueprints, plans, drawings, or data processing media.

* Trees, shrubs, or plants: Pays for loss or damage to trees, shrubs, or plants, including lawns caused by or resulting from a covered cause of loss.

* Fire department service charges: Pays for an insured's liability for fire department service charges assumed by contract or agreement prior to a loss or required by local ordinance.

* Service work: Provides coverage to property of others for loss or damage occurring during a service call an insured makes on property the insured originally installed.

* Contract penalty: Pays the contractual penalties an insured is required to pay to his or her customers as a result of any clause in the contracts for failure to timely deliver the products according to the contract terms.

* Computer equipment, data, and media: Provides coverage to electronic data processing equipment, media, data, and programs owned, leased, or rented for which insured is legally liable for direct physical loss or damage.

* Expediting expense: Covers additional project expenses necessarily incurred to complete construction according to the contract schedule when such expenses are a result of loss or damage to covered property. Examples are costs to expedite replacement parts or materials, additional labor, and rental expenses for additional equipment.

Underwriters have varying levels of risk acceptance authority; a risk exceeding an underwriter's authority requires approval via referral to positions having higher authority levels. Construction projects of higher levels require referrals. Information that is available online significantly assists in expediting this referral process.

Other considerations must be made when marketing the large projects requiring high levels of capacity. Few insurance companies have net and treaty capacity exceeding $50 million for the single exposed risk. The reinsurance marketplace has less capacity than in the past due to September 11, consolidations, acquisitions, and prior year losses. This necessitates both the risk manager and underwriter working jointly in determining the most appropriate approach in addressing the capacity needs of these risks. They may use a layering approach whereby an insurance carrier is determined for the primary or lowest level of first dollar loss coverage and then additional carrier's provide coverage on top of that layer. Generally the higher the layer the lower the carrier's exposure to loss and, thus, a lower premium is applicable. Sharing of the risk on a prorata basis from the ground up to full value by several carriers also is available.