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 Jim_Braniff4@ajg.com.
JACKIE WHITING is account manager at Gallagher. Reach her at Jackie_Whiting@ajg.com. Reach either at (713) 623-2330.