Builder's Risk Part 2: The True Meaning of Protective Safeguards
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3 Common Types of Protective Safeguards
In 2003, a fire destroyed one of the four dormitories being built at Arizona State University. The damages were estimated as more than $2 million. The insurance carrier on the project denied coverage for the claim due to the “Protective Safeguard/Warranty Endorsement.” So you may be thinking to yourself, it has “protective” and “safe” right in the name – how can this void coverage? Despite the title spin, what a protective safeguard warranty does is require the first named insured, usually the owner or contractor, to comply with requirements the insurance carrier has set forth. If these requirements are not met, there will be no payment for important perils usually covered under a builder’s risk, like theft or worse – fire.
Here are the 3 most common types of protective safeguards and what you need to know about each:
- Lights – When the protective safeguard states “lights” the carrier wants the jobsite to be lit sunset to sunrise. If this is listed as a requirement it’s very important to drill down on what the scope of lighting entails – Christmas lights, flashlights, spotlights? Joking aside, many jobsites have lights over a job trailer but may not have lights located on the project site until power is hooked up. If the carrier is requiring temporary lighting, depending on the expanse of the jobsite, this may or may not be feasible.
- Fencing – On most jobsites, it’s standard practice to have a fence. In major cities, the idea of pedestrians wandering through a jobsite is about as believable as dinosaurs doing the same. However, it’s much easier to fence a big city jobsite than a seven-acre jobsite for an apartment complex in Coon Rapids, MN. The fence required at the seven-acre jobsite would add multiples of cost to the project and really not provide any additional protection to the project as a vast open expanse would still exist. When fencing is required, does the carrier require “active construction fencing” or “whole project fencing?” These can be two very different controls and costs to the project.
- Security – Security has become most prevalent with frame projects over $10 million in hard cost values. The insurance carriers will require either “security” or “24-hour watchman.” The reason for this is wood frame is incredibly susceptible to fire and until the building is constructed, the fire alarms and sprinkler systems are not operational. When the carriers require security it’s important to find out what type of “security.” Do they mean construction portable alarms such as a tattletale or watchmen? Cost to add either of these can be significant – potentially hundreds of thousands of dollars significant – thus security cost should be considered in the budget as early as possible, if required.
It’s important when you place a builder’s risk to ask your agent specifically if the program includes any Protective Safeguard Warranties. If the answer is “yes” there should be a very specific clarification on what these entail to make sure your insurance program is indeed, safe and protective.
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