What does “getting it right” mean? In school, it’s about giving the correct answer — like knowing 2 + 2 = 4. In a debate, it’s about presenting enough evidence to make a compelling case. At home (particularly with my husband), it’s about (usually me) always being “right.”

Essentially, being right means ensuring accuracy aligns with your goals. But when it comes to an insurance policy, is it any wonder that “getting it right” can be a bit of a challenge?

There can be conflicting priorities when it comes to setting the ideal standard of what to achieve in an insurance policy. A critical factor often overlooked by the insured is how these priorities can vary in importance.

Ultimately, there is no such thing as a universal solution in an insurance policy, especially in the construction industry.

This article focuses on common insurance policy gaps, explains the risk, and shares a corresponding strategy to either broaden your protection or mitigate risks with help from a construction broker.

Determining Goals

Top-tier insurance brokers advocate that the primary goal should be ensuring that all parties involved in the transaction — underwriter, broker, and insured — fully understand and are educated on the coverages being offered. As a result of that understanding, the intended protections are put into effect.

For instance, if a lower premium is the top priority, then the insured might sacrifice some coverage to reduce the cost. Conversely, if comprehensive coverage is the main goal, the premium may be higher.

Disputes

Contractual and claim disputes can be caused by uncovered claims, non-compliance with contractual requirements, inability to meet bid or job requirements, litigation, out-of-pocket expenses, lost bid or job opportunities, and time poorly invested.

According to the 2023 Arcadis 13th Annual Construction Disputes Report, the highest valued dispute in the U.S. was $2 billion, with the average dispute landing at $42.8 million. The average length of a dispute is almost 14 months, and the most frequent cause of these disputes is due to inaccuracies in the contract.¹

Respondents commented that increasingly complex projects with tight timeframes resulted in underdeveloped design documents with last-minute changes being pushed through. As a close second, the next leading dispute statistic was owners, GCs, and subcontractors misunderstanding and/or ignoring their contractual obligations. Finally, the third most frequent dispute was from unsupported and deficient insurance claims.²

With all of this in mind, “getting it right” in an insurance policy requires a clear understanding of the specific goals for the total cost of risk, along with an understanding and communication of policy coverages. This understanding can prevent costly disputes and ensure that all parties are aligned in their expectations and insurance requirement obligations.

Fundamental Insurance Gaps

Issue: Named Insured Schedule

The named insured schedule is the most fundamental portion of an insurance policy, as the appropriate named insureds must be present for coverage to apply. Commonly missed named insureds include:

• Property ownership entities
• Equipment and vehicle ownership entities
• Past and inactive entities that remain within the statute of repose or limitations
• No automatic language for newly acquired entities or majority-owned entities

Recommendation

Review your named insured schedule annually with your broker and request a breakout of the named insured schedule for each policy.

Issue: Manuscripted & Specific Exclusions in General Liability & Excess Liability Coverages

There is no substitution for reading the policy. A few common examples include:

• Absolute residential exclusions present for contractors that occasionally work in apartments or condos.
• Subsidence exclusions present for excavation contractors.
• Welding liability exclusions present for welding contractors.
• Sexual abuse and molestation exclusions present for contractors that work in schools, hospitals, or assisted living facilities (contracts often require that there must be no such exclusion present).

Recommendation

Review the exclusions and endorsements in the policies. If a concerning exclusion is uncovered, then seek to understand why it is present and what the underwriter’s concerns are. If the underwriter will not remove it, then a change in condition policy or a program move may be warranted.

Property & Inland Marine Insurance Gaps

Issue: 80-100% Coinsurance Penalty on Property or Contractors’ Equipment Policies

The coinsurance provision³ is a restricting clause that may lower a claim if the values provided to the carrier are not adequate. It generally provides the carrier the ability to reduce the payment in the event of a loss to provide protection against insureds from underreporting physical values. This can also be found in business interruption and builder’s risk insurance as well.

Recommendation

Evaluate your limits and request an agreed value, which waives coinsurance. In some cases, for property, it may be advised to procure an industrial appraisal. Most contractors do not have a significant property schedule, and so the insurer may be more likely to waive the coinsurance clause.

If property values are in line with a carrier’s market analysis, then removing coinsurance typically does not cost additional premium. However, if an insured is unwilling to increase building values to meet the carrier for their agreed value, then coinsurance is an important consideration of which to be aware. For an example of coinsurance, see Exhibit 1.

Issue: Low or “Off the Shelf” Property & Inland Marine Sublimits

Potential gaps in coverage include:

• Newly acquired property
• Debris removal
• Unused equipment leased or rented from others
• Rental reimbursement
• Continuing rental payments after damage
• Extra or expedited expenses
• Claims preparation expenses
• Overhead lines transmission
• Sump pump backup

Recommendation

Discuss possible loss scenarios with your broker to ensure that the sublimits an insured may need in the event of a loss are adequate. Many sublimits can be increased at little to no premium cost.

Issue: Equipment Written for Actual Cash Value

Insureds often value their equipment at acquisition cost and then don’t adjust the values annually for depreciation. When a policy offers actual cash value, it will only reimburse for the depreciated value.⁴ Therefore, if values for the equipment are carried at acquisition cost, then the insured would be paying for an insurance limit they would never receive at the time of loss.

Recommendation

Review your equipment values annually. If the values have depreciated, then the actual cash value may be fine.

Replacement cost may be available for newer equipment, which can be negotiated with an underwriter. Replacement cost can be offered by some carriers at no additional premium.