The construction phase of any project is fraught with risks, ranging from human error to natural disasters. Ensuring comprehensive protection during this critical period is essential for owners and contractors alike. Course of Construction (COC) insurance, also known as Builders’ Risk insurance, serves as a vital safety net, covering a wide array of potential damages such as fire, theft, and weather-related incidents. This all-encompassing policy simplifies claims handling and eliminates the need for multiple insurances, protecting all parties involved from costly legal battles over fault and responsibility.
Equally important is the Wrap Up Liability insurance, which covers third-party liabilities arising from project activities. This includes injuries to passersby or damage to neighboring properties, providing a dedicated limit of liability for all project participants. Additionally, the policy extends coverage to completed operations, ensuring protection against defects or malfunctions that surface after project completion. Together with Delay in Start Up (DSU) insurance, which safeguards against financial losses due to project delays from insured damages, these policies form a robust framework for mitigating risks and ensuring the smooth progression and completion of construction projects.
Essentially:
Course of Construction (COC): Covers project damage during construction against various risks.
Wrap Up Liability: Protects against third-party liabilities related to project activities.
Completed Operations: Extends coverage for completed work for up to 36 months post-completion.
Delay in Start Up (DSU): Shields against financial losses due to delays from insured damages.
Course of Construction (COC), also known as Builders’ Risk
Project Damage
During the construction phase the project is exposed to many different risks. Human error is a big risk factor on project sites and so are “external” risks like fire, rain, flood, watermain ruptures, theft, sprinkler malfunctioning and earthquake etc. Most owners and contractors see the need to insure the project during the construction phase against these risks. The COC can be regarded as a property insurance during the construction phase and it provides excellent protection.
Benefits
- Instead of having to fall back on various policies the COC policy covers all: it covers the contractors, owners, lenders, and subtrades and anyone active on the site.
- Important: it is irrelevant who is at fault. The insurer will not take recourse against any of the parties on site since they are all covered under the policy. The policy contains therefore a waiver of subrogation by the insurer.
- Protects against “All Risks”. The COC covers all risks except those that are excluded.
- Also insures property in storage and during inland transportation with sublimits
- Covered are hard Costs (materials, salaries) and Soft Costs (fees of: AE’s, marketing, lease, accounting, legal, finance etc)
- Testing and Commissioning, equipment breakdown (if endorsed) are included
- The policy is in place from beginning until the end of the construction.
- In case of claims: only one policy – the COC- needs to be consulted for coverage, ease of claims handling.
As indicated above the policy protects all parties involved with the construction against damage to the project so there is no need for “finger pointing” or spending unnecessary time in court to establish who was at fault. This is very cost effective since one policy protects all parties and therefore there is no need for multiple polices.
Even though the policy is “all risk” it is still important to find the cause of the loss. The liability section of the construction contract will then answer who is responsible (liable) and will pay for the deductible under the policy or pay for the whole loss in case of an uncovered event. In most cases the contractors who are on site will bear the deductible except for force majeure events.
Project Wrap-Up Liability
Third Party Liability
Where the COC looks to protect the project against losses, the Wrap up liability insurance covers liability for third party loss or injury because of the project activities. For instance, an injury of a person passing by or damage to an adjacent building.
Same as with the COC, the Wrap up covers everyone involved with the project for third party losses.
Completed Operations Coverage
An important feature of the Wrap up is that it also provides coverage for completed work during 12, 24 or 36 months after project completion, this is the so called “completed operations” coverage
The extent of coverage may address defects in the materials used to build the structure or a malfunction of the electrical or other internal system resulting in damage to the building or occupants of the building.
If for example 8 months after completion the sprinkler malfunctions due to incorrect installation by a sub-contractor and damages several floors, the wrap up will respond under the completed operations section.
Benefits
- One policy for all parties on the construction site, contains waiver of subrogation
- A dedicated limit of liability
- Primary coverage (no other policies need to contribute)
- In force during the entire project period
Customary Extensions Are:
- Voluntary medical payments
- Tenant’s legal liability
- Forest fire fighting expenses
- Sudden and accidental pollution
- Non-owned automobile liability
Delay in Start-Up (DSU) Insurance
Financial Loss
The DSU coverage protects against the financial consequences of a delay in project completion resulting from insured physical damage. It is the “construction version” of the business interruption coverage section of a property policy.
For whom is it? The project owner, sponsors and lenders. They are the entities likely to suffer a financial loss if a project is delayed.
The DSU can be added to the COC policy and most insurers do not offer this coverage as a stand- alone policy.
Trigger for Coverage
The trigger for the DSU is a loss or damage covered by the COC.
A mere delay without a covered damage is not covered. Insured delay event examples: water and fire losses to the project resulting in significant delays in completion. Uninured events: events such as strikes or late delivery of materials. In other words events that have not caused physical damage to the project.
Coverage
The following components can be insured under the DSU:
- The Net profit not realized during the delay
- Fixed expenses such as salaries, license fees, energy etc
- Debt service and principal
One, two or all the above can be insured. In case of lender involvement, typically all 3 are required to be insured.
Indemnity Period
How long will a delay last when a loss occurs on a critical item with a long lead time ? The ability to neutralize a delay is more likely to happen early in the project than when the critical path is affected by a loss occurring just a month before completion.
With that in mind the required indemnity period can then be established. Typical are 12-to-36-month indemnity periods.
Deductibles, contrary to COC and Wrap Up are expressed in waiting periods, for instance 15 days, or 1, 2 or 3 months.
Learn more about our construction practiceShare post:
Roland Waldmeier
National Practice Leader, Construction & Real Estate
I’m Roland Waldmeier, National Senior Vice President of Construction, Contracting, and Real Estate at Axis Insurance, having joined in February 2023. With a rich 32-year tenure in the insurance industry, my expertise spans a broad spectrum including legal aspects, policy wording, claims handling, placement strategies, client advisory, construction placements, and marine insurance.
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