Insurance Coverages

What You Need to Know About Starting a Building Project

Building Project Blueprint

You're growing. That means your facilities are also expanding. If you're involved in a building project or foresee one in the immediate future, you should be aware of the proper procedures to ensure everyone's safety during this transitional period. Let's face it, all construction sites create a liability exposure for the landowner. It's also not uncommon for a building to be damaged during construction. People might be injured, or neighboring buildings could be damaged. According to statistics from the United States Bureau of Labor, more than 1,200 construction workers are killed and more than 400,000 injured annually. Selecting the proper insurance depends on a number of factors including if you are using a general contractor, subcontractors, volunteer labor, or a combination. Regardless of the situation, your organization's general liability and umbrella liability policies should be reviewed with your representative before construction begins to ensure protection.

• Builders' Risk Insurance
• Hiring a General Contractor
• Self-Managed Projects
• Volunteer Labor
• Two Projects With Different Outcomes

Builders' Risk Insurance

For most building projects, your organization will need to purchase "Builders' Risk" insurance to cover damage to the building under construction.

Builders' risk can be added to an existing multi-peril policy or purchased as stand-alone coverage. In some cases, the general contractor will purchase this coverage for you. Builders' risk is necessary because a typical commercial policy does not cover a new building, or the expansion of an existing one, until construction is completed and the structure is approved for occupancy by the local building inspector.

A builders' risk policy covers damages from causes such as fire, lightning, vandalism, collapse, wind, and hail. The covered causes of loss can vary by policy. You can also add coverage for theft of building materials at and away from the construction site as well as while in transit. The construction contract specifies who is responsible for stolen materials.

The limit of insurance selected should be equal to the estimated completed value of the new building or expansion. This limit should be higher than the project's estimated cost if you utilized volunteer labor or had materials donated. Also, a damaged building can be far more difficult to repair than it is to build. Those who volunteered their time to build might lack the skill to make repairs or be unwilling to repeat the task.

There also could be a coinsurance penalty assessed if the building is damaged and not insured to the proper value.

Hiring a General Contractor

Using a general contractor doesn't mean your organization is protected from loss throughout the construction project. A competent general contractor will provide the expertise for a building project, but there is no guarantee the contractor will obtain insurance to cover property and liability losses or purchase workers' compensation insurance.

Before signing a contract with a general contractor, here are points to consider:

• Does the contractor have experience in this type of construction? Get references and call them.
• Has the contractor performed projects with similar construction methods?
• Has the contractor completed projects of similar or greater value?
• What is the contractor's safety record? Ask for a copy of the contractor's safety plan.
• List all the insurance responsibilities of all parties in writing. It is common for the general contractor to provide workers' compensation insurance. Some general contractors will also obtain a builders' risk policy.
• Require that you are named as an "additional insured" on the contractor's general liability policy.
• Obtain certificates of insurance showing that the contractor is insured for "XC&U" (explosion, collapse, and underground damage to property) liability, products and completed operations, workers' compensation, and automobile liability.
• Some contractors include "hold harmless" or "indemnity" clauses in the contract. These release them from negligence and liability. Before signing a contract that contains such clauses, consult your attorney.
• Some contracts include language that waives subrogation rights relieving the contractor's insurer from any liability. Before signing a contract that contains such a clause, consult your insurance representative and attorney.
• Require proof of bonding from the contractor. A bid bond covers you if the hired contractor backs out before starting the project. A performance bond covers you if the contractor does not complete the project as specified in the terms of the contract. A payment bond ensures that the subcontractors and suppliers will be paid for their involvement. It can prevent liens from being attached to your property in the event workers are not paid.
• Ask for the rating of the contractor's bonding company.
• Have all contracts reviewed by an attorney or construction consultant before you sign them.

Self-Managed Projects

Some organizations elect to appoint a knowledgeable member to serve as the project manager. This individual works on the organization's behalf to hire the various contractors to do the work.

This technique eliminates the cost of a general contractor but increases the organization's responsibility and insurance risk and cost. There is a tremendous amount of work that must be done to properly select specialty subcontractors, schedule the work, and coordinate the project.

Organizations taking this route should:

• Purchase a builders' risk policy.
• Obtain certificates of insurance from all vendors and contractors for liability and workers' compensation insurance and verify they are current.
• If you hire employees for the project, purchase workers' compensation insurance for them.
• Start no work until you have obtained all necessary permits.
• Follow all building codes. Failure to do so could result in tearing recently completed areas down and lead to a judgment of negligence if someone is injured because of a failure to meet codes.

Volunteer Labor

If you turn to volunteer labor during the construction project, you must provide skilled leadership. Other tips include:

• Assign jobs carefully. Construction equipment and tools can be dangerous even in the hands of skilled workers.
• Closely supervise them.
• Determine who is responsible to replace stolen tools and other property of your members. Talk to your insurance agent if the organization wants to cover them.
• If you are providing room and board for them during the construction phase, find out if they fall under your state's workers' compensation laws.

Two Projects With Different Outcomes

Theft delays construction
A congregation was in the process of building a new fellowship hall adjacent to its worship center. The land had been cleared of trees and leveled, the cement slab poured, and the walls were going up. One morning, the general contractor came to the job site and discovered about 50 trusses for the building had been stolen along with other building supplies. Neither the congregation nor the contractor purchased a builders' risk insurance policy before the project began. The congregation did not have the additional funds to purchase the building materials a second time and was forced to halt the project for more than a year while a new fund-raising campaign took place.

Storms fail to halt completion
A congregation was only weeks away from moving into its new sanctuary, classrooms, and office facility. The last of the rooms were being painted, and the flooring was nearing completion. Furniture was scheduled to be delivered in the next few days. Disaster struck quickly in the form of a major tornado damaging much of the new facility. Members of the congregation were in disbelief as they toured the site and witnessed what little was left of their new church. Although completion of the project was delayed for more than six months, a builders' risk insurance policy covered the rebuilding of the damaged section of the facility and allowed the project to continue and remain within the tight budget constraints.


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