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Here’s what to consider when buying builder’s risk insurance

Buildings are subject to a variety of risks when they are under construction. Builder’s risk insurance transfers this risk to an insurance product for construction contractors and subcontractors.

What is covered?

Materials, fixtures and equipment used in the construction of a residential or commercial building. This can include peripheral structures such as pools, driveways, garages and walls.

What isn’t covered?

Damage resulting from professional errors such as faulty design, planning, workmanship and materials will be typically excluded from builder’s risk insuranceThese risks should be covered by professional liability insurance.

Tools and the property of others also are not covered. 

Which perils are covered?

You want the coverage to be as broad as a broad-form property policy including special causes of loss. Fire, explosion, hail, wind, lightning, theft by an individual other than an employee, vandalism are among the covered perils. Check with your trusted insurance broker for a full determination of inclusions and exclusions.

Which perils are not covered?

Unless a policy has been specifically endorsed to do so, builder’s risk insurance does not cover earthquake, flood or hurricane damage. Take note of these exclusions when appropriate, such as when work has been scheduled during hurricane season in a hurricane zone. Check with your trusted broker to add any necessary endorsements.

Does builder’s risk insurance cover personal injury?

Builder’s risk insurance does not cover accidents, injury or death at a worksite. Check with your trusted insurance broker to make sure you have sufficient and appropriate liability and workers’ compensation insurance for these coverages.

Does builder’s risk insurance cover renovations and additions?

The building owner’s existing property insurance may cover renovations and/or additions to an existing building. Check with your broker well in advance of delivering materials to the site or initiating work.

When does a builder’s risk policy expire?

The policy typically expires when work is completed and the building is available for operation or occupancy. In some instances, though, the policy can be extended for a specified period following completion. Of course, homeowner’s or commercial property insurance should be in place once the builder’s risk policy expires.

What are the timing considerations?

Take into account all aspects of timing and any potential delays before purchasing insurance. For example, could materials delivery be delayed due to supply chain disruptions? Could adverse weather conditions delay the delivery of materials or start of work? Could adverse weather conditions interrupt work? Take full account of which permitting issues could delay the start of work. Factor all of this into the policy term. Because it can be difficult to obtain insurance during the course of a construction project, make sure the term of a policy accounts for all these timing considerations. Don’t start too late, for example after the project is underway.

The initial policy term can often be extended, but usually only one time, if the construction project remains unfinished by the end of the policy.

Who purchases builder’s risk insurance?

Typically, the general contractor purchases builder’s risk insurance. In some cases, though, the building or property owner may wish to control the proceeds coming from any insurance payout and so will purchase the insurance policy. Your broker can advise you on the best course of action.

How much coverage should you buy?

A builder’s risk insurance policy will reimburse the policyholder for damages up to the coverage limit. The construction budget, including materials, transportation and labor costs, is the best metric to use when figuring out the appropriate limit of insurance. Additional costs considerations, “soft costs” may include additional permitting and architectural fees as well as other “start again” costs. 

Builder’s risk insurance is complicated

This is no place for amateurs. It is also no time to begin working with a new broker or Grade B insurance carrier. Many questions need to be answered, and a skilled, trusted partner can help answer them. 

  • How many parties will have an insurable interest in the building? Should subcontractors be covered under their own policies?
  • Are renovations covered under present property insurance, therefore causing builder’s risk insurance to be unnecessary? 
  • Which other costs need to be insured? 
  • Will an income stream be produced soon after the building is completed and put to its intended use, such as rent revenue?  If so, there may be a potential business income exposure. 
  • If the building is damaged during construction, will the owner assume additional costs, such as architectural, engineering, financing, and legal fees? How can these risks be transferred to an insurance product?

Next steps

Residential or commercial property insurance must be in place following project completion.  Your trusted insurance broker can help you to choose proper coverage.

Kevin McPoyle, CIC, is President of KMRD Partners, Inc., a nationally recognized risk and human capital management consulting and insurance brokerage firm with offices throughout Pennsylvania. Kevin can be reached at kmcpoyle@kmrdpartners.com

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