A property during construction has different risks than an established structure, and builder’s risk insurance helps to manage these unique risks. Unlike homeowners’ insurance, which covers structures that have already been built, builder’s risk is made for new constructions, renovations, or additions. From contractors to investment companies, it is essential for any person or organization with a financial stake in construction. Following are answers to common queries to help you and your clients better understand the basics of Builder’s Risk.
- What is Covered by Builder’s Risk Insurance? — Basic builder’s risk insurance protects the building under construction, and the materials, fixtures, and equipment being used to build it. It might also cover additional expenses not directly related to construction, such as the lost sales incurred during a delay. However, builder’s risk does not cover everything. Common exclusions include damage due to fault design, employee theft, and natural disasters (like earthquakes or floods). Agents can explore coverage extensions to fill the gaps and tailor the policy to their client’s specific needs.
- When Is Builder’s Risk Purchased? — Builder’s Risk policies should be secured just prior to or on the date construction starts. People do not want to pay for insurance when it is not needed, so brokers must act promptly in order to secure coverage on time. If a client begins construction before purchasing a policy, coverage can still be secured but the percentage of construction completed is factored into the underwriting process.
- How Much Does It Cost? — Several factors go into the cost of insurance, but the single most important is the cost of the project. Insurance can cost anywhere from 1 to 5% of the total project cost. Other important factors include, length of the project, the location’s natural disaster risk, and whether or not frame structures are being used. All of these things can lead to increased risk which leads to increased premiums.
- Who Should Buy Builder’s Risk Insurance? — Contractors, property owners, investment companies, architects, and any other party exposed to potential losses should secure coverage. One policy will typically include all those with insurable interest so there is no need for each party to purchase their own separate policies.
- How is the Policy Limit Determined? — Policy limits are based on the total estimated completed project value. The project value is the sum of all costs —materials, labor, overhead, etc — associated with the construction project. A copy of the construction agreement or cost breakdown is a good way for agents to verify project value. Additionally, project value might change as the scope of the project increases. Agents should remind their clients to report changes in project value as it occurs, so that the policy limit can be amended.
While low to average construction projects might be able to get away with not purchasing a builder’s risk policy, it is absolutely essential for large projects, like a high-value home or commercial real estate project.
As is the case with most insurance coverages, clients focus mostly on price, which likely leaves them with inadequate protection. To find the best coverages for your clients at the lowest cost, contact an insurance expert.