Builders Risk Insurance can protect worksites during construction.
By Carter Bumgardner
The construction industry is booming across the country, with commercial real estate development and rehabilitation on the rise – from shopping centers to high rises to multi-use facilities and more, the number of projects and spending continues to grow. With this upsurge in construction work comes increased risk for the owners of the properties.
Not to mention the general increase in the frequency of extreme weather events the last few months, causing severe damage and major delays to worksites. In fact, the cost of damage resulting from Hurricane Michael is estimated at $4.5 billion, according to an article published in Insurance Journal. Add all of this up and it becomes more important than ever for property owners to have sound insurance coverage in place during construction.
In most cases, it is best to insulate the owners’ current property coverage from the increased risk of the new construction or rehabilitation project. The most common way to do this is through a Builders Risk policy, which would be put in place for the duration of the project.
Builders Risk Insurance is a specialized type of property insurance designed for buildings under construction or renovation and covers the materials, supplies and equipment that are onsite, in transit and temporarily stored at other locations. This can protect the worksite from potential damage to the building while it is under construction – occurring from vandalism and theft, in addition to natural causes, such as hurricanes, fires, hail, explosions and lightning. In addition, for areas that may be particularly vulnerable to a unique risk, such as flooding or high winds in a beach zone, coverage can be extended to address such hazards.
Property owners are typically the ones who purchase Builders Risk policies, but regardless of who purchases the policy, the contract documents typically require that the owner, contractor and subcontractors be covered under the policy.
This allows for the insurance company to cover the project and eliminates the need to seek additional recoveries from negligent parties. Most projects where construction or renovation is occurring should be backed by this type of insurance, unless it is simply routine maintenance.
When it comes to Builders Risk policies, one of the most critical – and difficult – decisions for property owners is determining the proper insurance limits. In the case of a rehabilitation project, the limit would include the replacement cost value of the current building, the construction cost of the project, and the soft costs; whereas for a new building being built from the ground up, it would only include the cost of the new construction and soft costs.
Soft costs are costs that may be incurred when a covered loss causes a delay in the construction project’s completion or additional costs such as extended project financing and re-engineering parts of the project. For example, if a $15 million apartment building project takes longer to complete because of a covered loss, therefore pushing back the tenant move-in date, the loss of rent should also be considered. Soft costs related to the delayed opening may be $3 million for the project, bringing the total project limit to $18 million. A building owner’s insurance broker can provide a soft cost worksheet which will help property owners arrive at the proper limit to ensure the project can continue on budget despite the lost time.
It is also important to determine when the policy will expire. Most Builders Risk policies end when the building is put to its intended use or at completion of the construction project – when traditional property insurance will take over. This can create a gap in coverage if the policy is not written correctly. For example, if a property owner is building a shopping center with five different stores, finishes one and it is fully operational, but is still building the others, the policy needs to specify that even though a portion is complete, the entire project is not fully in use. Otherwise, the policy could cancel and the owner could be left vulnerable.
Builders Risk policies provide critical coverage for property owners by helping to insulate property loss experience and provide greater protection for loss or damage to buildings under construction. Loss or damage cannot be controlled but being properly insured should a loss occur can be. So, while Builders Risk Insurance is not required, it should always be highly recommended.
If a project is over $100 million, it may be best to also investigate a Wrap Up Program – also known as an Owner Controlled Insurance Program or a Contractor Controlled Insurance Program – to cover the liability that arises from the construction. Ultimately, it is up to the insurance broker to help guide property owners or developers toward the proper program with the proper coverage. From there, the coverage should be monitored throughout the construction process – and modified, if needed.
Carter Bumgardner is a producer at Graham Company, one of the country’s largest insurance brokers.