The Risks of Construction Without Builders Risk Insurance

Builders risk insurance is a specialized form of property coverage that can help protect buildings and other structures under construction. Also known as course of construction insurance, the coverage assists with various expenses that may result from property damage amid construction projects. Understanding builders insurance can be complex as every construction project is unique and coverage needs vary.

Who Needs Builders Risk Insurance?

Determining who should purchase and pay for builders risk insurance usually depends on the nature of the construction project and its contractual elements. Any party with a financial interest in a construction project should have this coverage, including the project sponsor, property owner, general contractor, lender, subcontractors and architects. In certain industries (e.g., public entities, large developers) standard contracts specifically require contractors to carry builders risk insurance. As such, contractors often incorporate the cost of this coverage in their project bids. Regardless of who secures the coverage, all involved parties must be identified as insureds in the policy.

What Builders Risk Insurance Covers

Most builders risk policies provide construction project protection for hard costs — also called “sticks and bricks.” This refers to expenses that are directly related to the physical building or structure and tangible assets of a project. Hard costs are often quantifiable via third-party inspections from lenders and may include:

• Building materials & supplies (e.g., lumber, metal framing, insulation, concrete)
• Labor needs (e.g., temporary workers, subcontractors)
• Construction tools & equipment
• Utilities (e.g., water, gas, electricity)
• Landscaping needs
• Safety enhancements (e.g., installing or updating sprinklers, smoke detectors. fire alarms) & other building improvements
• Project enablement operations (e.g., waterproofing, onsite restroom facilities)

Apart from impacting hard costs, property damage losses amid construction projects can also affect soft costs, particularly when causing project delays. These expenses are not directly related to the physical building or structure or tangible assets of a project but are still necessary to complete the task.

• Soft costs do not require third-party reviews to be quantified and may include:
• Architectural, engineering & consultant fees
• Inspection & permit expenses
• Accounting, advertising, marketing & project management services
• Real estate payments & property taxes
• Equipment unrelated to construction (e.g., computers)
• Interest on project loans
• Post-construction legal fees & insurance premiums

Soft costs are typically only covered by builders risk insurance if they are clearly stated in a policy. Even then, protection for these expenses is generally only available if they’re incurred as a direct result of a covered loss and subsequent project delay. Some insurers may also require a minimum deductible (based on the length of the project delay) to be met before coverage for soft costs kicks in. Nevertheless, there are coverage extensions available to enhance protection for these costs.

Further, commercial property owners can supplement their builders risk insurance with business interruption or loss of rent endorsements, which may offer protection for lost income or rent arising from project delays caused by covered losses.

What Builders Risk Insurance Excludes

A builders risk insurance policy will typically have causes of loss that are excluded, including:

• Work vehicles
• Employee theft
• Damages from certain natural disasters (e.g., floods, earthquakes, wind)
• Flaws from workmanship, materials & design
• Wear & tear
• Acts of terrorism & war
• Post-construction damages

Each building project has unique risks, and the exclusionary provisions within a builders contract can vary. Policyholders need to understand the extent of their coverage and determine whether their policy includes loss provision extensions that can cover post-construction.

Tips to Secure Proper Builders Risk Coverage

To ensure sufficient protection, a builders risk policy should be customized based on the characteristics of the construction project at hand and the unique needs of the parties involved in the project.

Understand Project Exposures

Complete a detailed inventory of all potential exposures that may arise throughout the course of the project, including those on location, in transit and at any offsite storage areas. Then determine the level of protection needed for these exposures and select a policy that limits the likelihood of coverage gaps.

Know When Coverage Begins & Ends

Since builders risk insurance is a temporary form of coverage, it’s critical to be aware of the exact dates associated with the policy period — namely when the coverage begins and ends. Usually, a builders risk policy starts on the same date contracts are signed for a construction project and concludes upon the project’s completion. However, a policy may include specific conditions regarding what triggers the beginning and end of coverage, such as the policy expiring or getting canceled, the property being rented or purchased, the building becoming occupied or the project got scrapped. Regardless, confirm the policy start and end dates to have a clear understanding of when coverage applies.

Check the Anticipated Completion Date

It’s important to distinguish between the project’s anticipated completion date and the end of coverage within a builders risk policy, as the former will help determine the amount of protection provided for losses from project delays (e.g., soft costs, business interruption expenses). An inaccurate estimated completion date could lead to coverage not kicking in during project delays and increased risk of facing out-of-pocket costs.

Review the Policy

Make sure to closely assess all policy language and details to ensure full comprehension of coverage capabilities, conditions and exclusions. Specifically, it’s vital to confirm what is and isn’t covered under the policy. Consider purchasing policy extensions and endorsements if any coverage gaps remain.

Consult Trusted Insurance Professionals

Work with a qualified and experienced insurance broker to further discuss specific coverage needs and secure a builders risk policy that offers ample protection for a given construction project and the various parties involved.

We’re Here to Help with Builders Risk

Builders risk insurance is a valuable form of coverage that can offer much-needed protection when properties or other structures are under construction. Any party with a financial interest in a construction project should consider such a policy and fully understand how their coverage works. Doing so will help ensure a smooth and successful project, even amid unexpected losses. For further insurance guidance and solutions, connect with a member of our team.