Builders’ Risk Insurance

The builders’ risk insurance policy covers buildings during construction, renovation, or repair. Insurance is provided on the structure and materials used in construction. In most cases, materials are covered while in transit, at temporary storage locations, and while stored at the job site.

The following are some of the issues to consider.

Who Is Buying the Coverage?
In many instances, your contractor will obtain the builders’ risk coverage for you. Make sure your bank (or the entity that will own the building) is listed as an insured on the policy and that the coverage is broad enough to cover your exposures—specifically soft costs and loss of business income.

You May Already Have Coverage
Your property insurance policy may include coverage for newly acquired and newly constructed buildings. The amount of insurance may be relatively small. However, it may be broad enough to eliminate the need for an additional insurance policy. Talk with your insurance agent and review your policy for the perils included in the coverage.

Amount of Coverage
Most policies require that you use 100% of the expected construction cost as the amount of insurance. Coinsurance penalties may apply if you fail to meet this requirement. Work with your insurance advisor to determine what costs to include in selecting the amount of builder’s risk coverage. Try to eliminate any coinsurance clause.

Higher deductibles can reduce your insurance costs. Consider $5K, $10K, or more.

Perils Covered
What causes of loss are included in the policy? Special perils insurance forms include damage by any cause except for what’s excluded — such as earthquake, flood, intentional damage by you, mold, terrorism, or damage by insects or vermin. Named peril policies list the events that are covered — such as fire, lightning, wind, and explosion. Special perils is preferable because you receive better coverage.

Consider Flood and Earthquake Coverage
Damage caused by flood and earthquake is usually excluded from basic builders’ risk policies. Get quotes and consider the additional perils.

In addition to the flood and earthquake exclusions mentioned, most policies will not cover damage caused by defect in construction, defect in design, mold, pollution, settling, cracking, shrinking, bulging, or expansion.

Theft of Building Materials
Some builders’ risk insurance policies exclude theft of building materials stored on site. Some require gated storage areas. Read your policy.

Subcontractors’ Work
Is the work of subcontractors (while in process) included in the coverage?

Collapse During Construction
Some policies exclude damage caused by the collapse of the building. Review your insurance policy.

Business Income
Coverage can be included for loss of income in the event that a fire or other insured event prevents you from doing business. Imagine a new hotel under construction that is destroyed two months before completion. The losses in revenue while the building is rebuilt could be substantial. Work with your insurance advisor on the correct amount of loss of business income coverage for your bank.

Liability Insurance
Builders’ risk insurance does not include coverage for bodily injury or damage to the property of others. Look to your general liability insurance for protection.

Get Quotes
Your insurance agent or broker can get you quotes. For new construction, your agent should get proposals from several insurers. Specialty programs for builders’ risk insurance may offer a better price and coverage.

Work with your contractor and architect to determine who should purchase the builders’ risk coverage.

Most builders’ risk insurance coverage terminates at occupancy. Coverage ends automatically. Be sure to let your agent know ahead of time that you are moving in. Coverage may also terminate if the building is ready for occupancy. Talk with your advisor.

Soft Costs
After a building under construction is destroyed, there may be architects’ fees, attorneys’ bills, planning board reviews, and the like before reconstruction can begin. Many policies require soft costs to be a separate limit of coverage.