Are you involved in any type of construction? Chances are good that
you are, since there is a considerable amount of construction going on in the
Houston area. Retail stores, warehouses,
office buildings, factories, hotels, multi-use
facilities, townhouses, apartments or single-family homes are going up all over the
area.
With any construction there is risk. Have
you thought about that? Have you done
anything about it?
“Even though risk management can be a
big line item on any project’s budget, it is
too frequently a last-minute consideration
for project managers,” says Jackie Whiting,
account manager at Arthur J. Gallagher
Risk Management Services, Inc.
“Owners, developers, managers and
builders need to identify their exposure,”
adds Jim Braniff, IV, senior vice president
at Gallagher. “They need to determine how
to mitigate their risks and transfer all the
risk that they can.”
Smart Business talked with Braniff and
Whiting for more insight into insuring
property under construction.
At what stage in a project should the
owner/developer consider insurance coverage?
They really should start to think about it
at the very beginning of the initial project
planning. That way they can make sure
they are considering the right kind of coverage and have the right number in their
budget for the project. It should be part of
the due-diligence effort as a project is considered.
When they get into the project, they need
to read and understand all contractual language before anything is signed. They need
to, at a very minimum, have their experienced insurance broker review contracts
and coverage offered by the builder to
make sure the owner’s needs are met. They
need to understand the significance of the
risk management piece of their part of the project. Who is responsible under what situations? Who might be at fault? Where
might there be gray areas? What about soft
costs? What happens if the building contractor needs to be replaced? What happens if the builder doesn’t pay the subcon-tractors? The owner also needs to get his
or her own insurance quote as a comparison before making a decision on accepting
what the contractor offers.
Why not just let the builder take care of the
insurance and include it in the bid?
There are a number of reasons. It should
be up to the owner to protect his or her
own interests. Owners have more control
over the project and risks if they consider
all of the ramifications of their own insurance. They have more control if something
happens. They have their own broker
working for them in the event of a claim. If,
for any reason, the builder on the project
has to be replaced, the owner isn’t exposed
with no insurance because the builder’s
insurance was the only coverage. They
have another set of eyes going over the
contracts to see that all risks are transferred. Soft costs are usually not covered
by the contractor’s insurance. If the owners
rely on the contractor’s insurance, they will
be sharing the limits of the master policy and be subject to the deductible set by the
contractor, whether it fits their needs or
not.
What do you mean by ‘soft costs’?
Soft costs include additional taxes, additional interest, professional fees, permits,
lost rental income and additional insurance. Any of these costs can come up if the
building burns down or is damaged in
some other way during construction. New
plans may have to be drawn so additional
architect fees may be needed. New permits
may be required or expired ones renewed.
Soft costs are not usually covered by the
builder’s policy.
Any other thoughts?
The owners/developers should obtain
some idea of what property and liability
insurance rates might be on an ongoing
basis after the project is completed. This
adds important information to the feasibility study at the start of the project.
Also, there can be many differences
between insurers and policies, so the
options presented should be compared
and key points analyzed to make sure coverage is spelled out and not just assumed.
There are also many different needs
depending on circumstances. Insurance
coverage is a process of negotiation. It is
imperative that your coverage is negotiated
by an insurance broker experienced in
your business area and placed with an
underwriter that understands the coverage.
JIM BRANIFF, IV, is senior vice president at Arthur J. Gallagher
Risk Management Services, Inc. Reach him at
[email protected].
JACKIE WHITING is account manager at Gallagher. Reach her at
[email protected]. Reach either at (713) 623-2330.
