Insuring a structure that does not yet exist

A property damage policy insures a thing that exists, whose value and location are known, and whose exposure hardly varies from one month to the next. A construction policy insures the opposite of that. It bears on an assembly under way, whose value grows every week, whose configuration changes daily, and which will only reach what it is really worth on the day it stops being insured by that policy. Almost every peculiarity of this class descends from that simple fact, and that is where to take hold of it.

The first consequence bears on the sum insured. It is set at the final contract value, works and supplies included, whereas the exposure on any given date is only a fraction of that figure. A fire in the eighth month of a thirty-month project does not destroy thirty months of works. That asymmetry is not a design flaw: it is necessary, since a loss in the twenty-ninth month can approach the total. It does explain why the premium is computed on an average exposure, and why underinsurance arises differently here than elsewhere: what must be checked is not today's value but that the sum insured follows the variation orders. A contract that swells by fifteen percent mid-execution without the policy being adjusted carries a shortfall that will only surface at the latest loss, that is, the heaviest one.

The second consequence bears on what the policy actually covers. It guarantees physical damage to the permanent works, to materials intended to be incorporated in them, to temporary works, and depending on the wording to construction plant, which is often handled in a separate section with its own limit. The form is called all risks, which does not mean everything is covered but everything not excluded. Three families of exclusion decide almost everything: defective design, material or workmanship, which the module devoted to it examines in detail; wear, corrosion and gradual deterioration, which rule out what is not an event; and purely financial losses, which belong to another cover and not to this one.

The third consequence bears on dates, and it is subtler than it looks. Cover does not attach on the purchase of an item but on its arrival at site, often at offloading. Between leaving the factory and offloading, a transit policy answers, and the handover between the two is the first of the scope gaps in this class. Cover detaches at acceptance, or at taking of possession, which the next module examines. In between, the covered period is sometimes carved up: a construction period, a testing period, a maintenance period, each with its own conditions.

The testing period deserves attention its name does not invite. It is the moment when the installation is energized, pressurized or loaded for the first time, when every erection error surfaces at once, and when the exposed value is at its maximum since the structure is nearly complete. The loss experience of that phase bears no comparison with the rest of the project. Policies handle it in three ways: by limiting its duration, often to a few weeks, by sub-limiting it in amount, or by excluding certain events peculiar to testing. A project whose testing stretches beyond the planned duration can therefore find itself without cover at the precise moment it needs it most, and that stretching is the most commonplace event on a site.

A separate section deals with the project owner's existing property, and it is regularly underestimated. A site is not always a bare field: it is often an extension inside a running plant, a floor added to an occupied building, underpinning beneath a live railway. The risk is no longer only the structure under construction, it is what surrounds it and is often worth far more. That section carries its own limit, its own deductible, and sometimes its own prevention conditions, notably on hot work. A two-million extension inside a hundred-million plant is a file whose real insured value does not sit in the policy's main line.

That leaves the heads always bought too short, discovered at the first serious loss. Debris removal, which on a collapsed structure can represent a considerable share of the cost. Expert and engineering fees needed for reconstruction. Expediting expenses, that is, what it costs to work overtime to catch up, a head whose interest is obvious on a project where every week has a price. Each of these carries a sub-limit, often set by habit rather than by calculation. The sum insured of a construction policy is therefore never the project's real exposure: it is the main line, around which orbit a dozen sub-limits whose sum decides what will actually be paid.