No overview of a homebuilder’s insurance program is complete without a discussion of Builders Risk, the specialty property policy for buildings under construction. While this line of business seems simple on its face, policy forms can be complex and vary greatly among the different insurance companies that write coverage. When you consider the variability of the projects demanding Builders Risk, it is easy to see how this coverage area can be prone to misunderstanding. In this article, we will be exploring the key elements of a Builders Risk policy so that you can make the best decisions for your business when purchasing coverage.
Who should purchase Builders Risk? The short answer: typically the property owner and/or general contractor. When it comes to remodeling projects, the answer is not as clear cut as it might be for ground-up construction or property flips; in some cases, the owner’s home insurance company will provide coverage, although the scope of a remodel may dictate the need for Builders Risk in other cases. Remodelers who do not explicitly need a Builders Risk policy should consider coverage for the building materials by way of an Installation Floater.
Choosing the right coverage: Determining the proper limit for your new project should be a relatively straightforward exercise, i.e., what is the value of the completed structure? In broad terms this figure should include all material aspects of the building—from the foundation to the finishing touches, and associated labor costs—while excluding value of the land. For renovation projects, the value of the existing structure needs to be taken into consideration and is often specified within the policy on an Actual Cash Value basis, which take depreciation into account. While the aforementioned subjects make up the core of coverage, following is a non-exhaustive list of important coverages to consider when reviewing your coverage:
- Property in Transit / Temporary Locations: It is important to ensure your Builders Risk policy contemplates what is referred to as “installation property” in insurance-speak. Keep in mind that construction materials are especially vulnerable to the elements when sitting on the jobsite. You do not want to be at the mercy of someone else’s coverage in the event the 18-wheeler carrying your marble countertops is involved in a pileup on I- 93, or if a fire breaks out at the facility storing your custom cabinets.
- Debris Removal: Cleanup for a catastrophic event can get costly in a hurry, especially as your project nears completion. Additional coverage for debris removal is often included as a sub-limit.
- Additional Soft Costs: In the event of claim, Builders Risk can step in to cover the unexpected administrative costs associated with resuming the project, such as architectural fees, permitting fees, real estate taxes, and additional interest on financing.
- Business Income: Delays to a project’s completion are especially painful when you are depending on the income generated by the finished structure; for example, rents from a new apartment. This pain can be alleviated by a properly structured Builders Risk policy
- Equipment Breakdown: This line item provides coverage for the damage caused by the failure of a building system, such as the plumbing. It is important to ensure that hot- and cold-testing, as well as commissioning, is included within the coverage form.
- Earthquake and Flood: Coverage for earthquake and flood are excluded unless endorsed to the policy. In many cases, the premium charged for these coverages on a Builders Risk policy are minor enough to not justify leaving these exposures uninsured. In any event, coverage for earthquake and flood should be included in the quotes for review.
Timing: It should go without saying that Builders Risk coverage should be procured before construction begins. While it is possible to place coverage mid-way through a project, doing so is typically accompanied by a significant cost relative to the alternative. Determining when Builders Risk coverage ends is not always determined by the effective dates of the policy; typically, the policy will include language stipulating that coverage ceases when the building is occupied (in whole or in part) or put to its intended use. Another important note to consider is the cancellation provision. Ideally, your Builders Risk policy will be written on a Pro-Rata basis, meaning you are entitled to a refund of the unearned premium if you complete construction and cancel the policy before its expiration.
Just as no two construction projects are the same, there is considerable variety between the products available in the Builders Risk marketplace. Whether you are building custom homes, tract housing, or engaged in remodeling, it is important to work with a consultative insurance agent who customizes your Builders Risk coverage to meet your specific needs.