Author: Jim Lobb, Best Lawyers© 2017 Real Estate “Lawyer of the Year” for Louisville.
How is Builder's Risk Insurance Different from Commercial Property Insurance?
Builder’s Risk Insurance and Commercial Property Insurance address fundamentally different, though overlapping, kinds of risk.
Commercial Property Insurance usually provides protection to the named insureds and additional insureds from casualty events in situations where the property improvements have already been constructed, the casualty events impact the physical condition of the improvements, and the universe of expected risks remains fairly constant.
The insurance industry strives for uniformity and consistency. In the pursuit of this uniformity and consistency, Insurance Services Office, Inc. (ISO), a trade organization that services and advises the insurance industry, has prepared and promotes the use of a number of ISO Liability and Property Insurance Forms. Unlike the ISO’s liability insurance forms, which are “recognized nationally as ‘the industry standard’”, the ISO’s property insurance forms have not gained industry standard recognition. They are widely used, but some insurers write Commercial Property Insurance on forms different from the ISO forms.
There is no equivalent uniformity and consistency regarding Builder’s Risk Insurance policies.
Though Builder’s Risk Insurance can be written on ISO Liability and Property Insurance policy forms, most Builder’s Risk Insurance today is written on “Inland Marine Insurance” forms.
This kind of insurance originally developed to provide coverage for goods lost or damaged while in ocean transit. It later evolved to provide coverage for goods lost or damaged while in transit across inland waterways and, later still, overland by train, truck, or plane.
One key distinction between this form of insurance and traditional property insurance is that Inland Marine Insurance follows the goods as they move rather than following the fixed site real estate.
Another important distinction is that while traditional property insurance insures against a fairly constant universe of risks, Inland Marine Insurance policies have historically insured risks that are based on frequently changing conditions.
Finally, it is typical that the Builder’s Risk Insurance policy will name several parties—the owner, the contractor, major subcontractors and suppliers, the lenders of one or more of these parties, possibly the tenant—as insureds under the policy to reflect the fact that in a construction context numerous parties have insurable interests in and risks related to the materials and the way they are incorporated into the construction.
“Inland Marine Insurance”, today, is a misnomer. It is simply the historic name that underwriters who provided this coverage, and who competed for insurance dollars with insurers who were issuing insurance based on damage to fixed site real estate improvements, began using to highlight—market—the fact that their insurance moved, or “floated”, with the goods as they moved from site to site prior to incorporation into the fixed site real estate improvements.
Today, Inland Marine Insurance is used to insure a number of different risks. One risk, of course, is builder’s risk. Inland Marine Insurance can be obtained to cover, among other things, risks associated with (i) the improvements being constructed, (ii) transporting the goods that will be incorporated into the improvements, (iii) materials installation; (iv) contractor’s equipment, (v) preparing concrete forms and other support structures, and (vi) rigging, i.e. scaffolding, the building in order to construct improvements or renovate existing improvements, all related to the construction of the fixed site real estate improvements.
ISO offers a Commercial Inland Marine insurance program. ISO has developed an Inland Marine Handbook which includes forms, endorsements, declarations, and suggestions for managing risk and calculating rates for a broad range of business insurance.
The American Association of Insurance Services, Inc. (AAIS) is, like ISO, a trade organization that services and advises the insurance industry. AAIS also prepares Builder’s Risk insurance forms that are used by many insurers. However, there aren’t a lot of standardized forms, and the forms that do exist are generally used as templates—starting points, really—for the individualized Builder’s Risk Insurance policies that usually must be negotiated to address the circumstances, conditions and risks that are unique to each construction project.
You should be aware that AAIS has filed inland marine insurance forms for some previously unfiled classes of insurance business in a number of states. It is important to check to see if any inland marine insurance forms have been filed in your state.