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, such coverage can assist with various expenses that may result from property damage during construction. Although specific coverage capabilities vary between insurers, a typical builders risk policy covers property damage losses stemming from fire, lightning, hail, explosions, theft and vandalism.
Coverage extensions and endorsements may also be available.
Who purchases and pays for builders risk insurance usually depends on the nature of a construction project and its associated contractual elements. Any party with financial interest in a construction project should have this coverage, such as the project sponsor, property owner, general contractor, lender, subcontractors and architects. Often, local governments and large developers 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 this coverage, it’s important that all involved parties are listed as insureds on the policy.
Because every construction project is unique and coverage needs may vary, builders risk insurance can be a complex road to navigate. This article provides more information on what builders risk insurance covers and offers tips for securing a policy that meets your needs.
Most builders risk policies provide protection for hard costs associated with property damage losses that can arise during construction. In the context of construction, hard costs—also called “sticks and bricks”—refer to expenses that are directly related to the physical building or structure and tangible assets of a project. Such costs are often quantifiable via third- party inspections from lenders and may include the following:
Apart from affecting hard costs, property damage losses on construction projects can also impact soft costs, particularly when causing project delays. These costs entail expenses that aren’t directly related to the physical building or structure or tangible assets of a project but are still necessary to complete the project.
Soft costs don’t require third-party reviews to be quantified and may include the following:
Soft costs are typically covered by builders risk insurance only if they are clearly stated in a policy. Even then, protection for these expenses is generally only available if they are 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.
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.
To ensure adequate protection, a builders risk policy should be customized based on the particular characteristics of the construction project at hand and the unique needs of the parties involved in the project. Keep the following best practices in mind when purchasing such coverage:
Builders risk insurance is a valuable form of coverage that can offer much-needed protection when properties or other structures are under construction. Any parties 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 in the face of unexpected losses.
For further insurance guidance and solutions, contact RMC Group today at 239-298-8210.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2022 Zywave, Inc. All rights reserved.