Builders’ Risk Insurance, An Introduction

Builders’ risk insurance policies cover buildings during construction, renovation, or repair. Insurance coverage 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.

Here are some of the issues to consider:

Amount Of Coverage – Most policies require that you include 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 adviser to determine what costs to include in selecting the amount of builders’ risk coverage.

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. Review your policy for the perils included in coverage.

Deductibles – Higher deductibles can reduce your insurance costs. Consider five thousand dollars, ten thousand, or more.

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

Consider Flood and Earthquake Coverage – Damage caused by flood and earthquake is almost always excluded from basic policies. Get quotes and consider the coverage.

Exclusions – In addition to the flood and earthquake exclusions mentioned, most policies will exclude 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 in 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 adviser on the correct amount of loss of business income coverage you should have.

Liability Insurance – Builders’ risk insurance does not include coverage for bodily injury or damage to 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. There are specialty programs for builders’ risk insurance which may offer a better price and coverage.

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

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