Why do you need builder’s risk insurance?
When a building is under construction it does not qualify for traditional property insurance. Builder’s risk or course of construction insurance is designed to cover buildings under construction all the way through to the project’s completion.
A builder’s risk policy may also be in place during renovation of a building. This policy may or may not extend coverage to the existing building. A standard property policy covers building materials used in a renovation but excludes coverage for materials that are owned by subcontractors or have not yet been installed. A standard property policy may extend coverage for the actual value of materials owned by the building owner but would not cover the labor and overhead associated with that installation. This is a significant coverage gap that could derail your renovation project.
Builder’s risk policies are intended to accommodate the increase in values during construction. The values will start small and increase through the course of the project. The pricing methodology for a builder’s risk policy reflects this ramping up of values. A traditional property policy would charge for the full value from the start of the project.
In many cases multiple subcontractors are providing the materials and labor. As such, you are depending on the insurance program for each entity to respond at the time of loss. This creates a cumbersome claim scenario where several insurers are arguing over who is responsible for paying the claim.
Who should carry the policy?
We recommend that the project owner be the holder of the builders’ risk insurance. This addresses several concerns. The first is that the owner knows the in-force status, policy limits, and provisions of coverage. The owner is not relying on a third party to select coverage and pay premiums.
The second reason for the owner to hold the policy is to have control over any potential claims. The owner can be sure to have their interests front and center during the claim settlement negotiations. If you are not the policyholder, you are along for the ride as someone else is in control.
What is covered in a builder’s risk policy?
Many insurers will offer several policy forms that vary based on what property is covered. The most basic forms will cover buildings in the course of construction or newly constructed buildings. These forms do not provide coverage for a standing or existing building.
Renovation based forms will cover renovations or rehab projects and also extend coverage to the existing building. This is a critical coverage term that must be considered to ensure coverage is extended to the existing portions of a building.
There are forms that add additional insurance coverage that provide broader coverage for other exposures. These exceed the scope of this article.
Policy Variations
Most policies are consistent and include the major exclusions around civil authority, earth movement, flood, fungus and mold, sewer back up, ordinance and law and war and military action.
The variation comes into play with the next tier of exclusions. The forms may be different around exclusions related to freezing, materials and workmanship, losses from rain, snow, ice, or sleet and settling cracking or bulging. The forms that have more restrictive language are slightly less expensive.
The next level of variation between policies is the number of coverage extensions and supplemental coverages that are included.
Typical coverage extensions are debris removal, emergency removal, fraud and deceit, waterborne property, and a nominal fungus sublimit. The second area is supplemental coverage that can include ordinance and law, expediting expenses, fire department service charges, limited pollutant cleanup, sewer back up, property in transit or in temporary storage. The forms may add or subtract this supplemental coverage and change the limits.
What the policy will pay
Every builder’s risk policy is based on replacement cost. This is the cost to repair, replace or rebuild the property with materials of like kind and quality.
The policy may have a coinsurance clause. If your limits are found to be inadequate, your loss recovery will be reduced by the ratio of insufficiency. We have an article on coinsurance that expands this discussion. Coinsurance article - click here
When coverage may end
Coverage ends when the policy expires, you fail to pay the premium or the project is completed.
Your builders’ risk policy may no longer provide protection if the building is partially or fully occupied for its intended purpose without the permission of the insurer. For phased construction projects or projects where some units may be completed and occupied earlier than others, you must manage this notification process. The loss exposures in an occupied structure are different from a construction site and the carrier may or may not want to assume those exposures.
The Driehaus Difference
Insurance for a construction project is not something to leave to the lowest bidder. Different policy forms, different coverage needs and knowing which insurance company has the appetite for your project are where we bring our expertise to focus on your needs. Call us at 513-977-6860 or contact us via our website at www.driehausins.com We want to be your insurance provider.
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