Builder’s Risk Insurance

Let’s say a group of thieves broke into a secured jobsite and stole a large quantity of copper that electricians had sitting there for an upcoming installation. Or for example, a multi-family residential condo that was roughly 80% complete was struck by lightning and burnt nearly to the ground? Who is responsible and what type of insurance would cover these scenarios?

The answer is Builder’s Risk Insurance.

What is it?
Builder’s Risk is a type of insurance that covers property during the course of construction.

Specifically, it insures materials, supplies, fixtures, equipment and other items that are intended to become a permanent part of the structure. The items can be on-site, in-transit or temporarily stored at off-site locations.

Builder’s Risk Insurance is meant to protect project owners, general contractors, and subcontractors against any direct physical loss or damage to property on the construction site.

In addition, Builder’s Risk policies can provide coverage for loss of income and additional expenses, say if a project is delayed due to theft or damage to the covered property.

When might claims arise?
Builder’s Risk policies cover loss in the event of extreme weather (wind, hail, lightning), fire, explosions, theft, vandalism/riots, and impact by a vehicle or aircraft.

What is typically excluded?
Because they are essentially an extension of property insurance, they are going to exclude any bodily injury or construction defects. Some typical exclusions include damage caused by:

  • Employee dishonesty or theft
  • Earthquakes and flood (additional coverage is available)
  • Flaws in design, planning or faulty workmanship
  • Acts of war (additional coverage is available for terrorism)
  • Government actions
  • Mechanical breakdowns
  • Mold and pollution
  • Settling, cracking and shrinkage

Who is responsible?
Typically, the owner purchases the Builder’s Risk policy while the project is under construction. Yet, statistics show that these owners’ policies can be incorrectly placed or not property designed up to 50% of the time. That means the contractor can wind responsible for the gap.

What if the work is subcontracted?
The construction contract will determine who is required to carry Builder’s Risk coverage. All subcontractors who have property involved in the project should be named on the policy. It’s also important to make sure there is no overlapping coverage for the same project because it could cause an ugly battle between insurance carriers if a claim arises.

How do I get the right amount of coverage?
Builder’s Risk policies are priced on the “Total Project Value.” It is important to review your construction agreement and cost breakdown to factor in all costs including:

  • Design
  • Labor
  • Materials
  • Construction
  • Overhead
  • Building Profit (optional endorsement)

Determining the right amount of coverage can be cumbersome and important items that will determine the outcome of a total loss, if sustained, can be easily left out.

How does a policy work and how long should you carry coverage?
Builder’s Risk policies are written on an “All risks” basis and should be carried while the project is under construction.
How do you know when construction starts? The insurance requirement section of the construction contract should clearly define this. Your policy will also define when coverage ends.
Be aware that there are often provisions that terminate coverage prior to policy expiration such as:

  • The property is turned over and accepted by the purchaser.
  • Your interest in the property ceases.
  • You abandon the property with no intention of completing construction.

Once the project is completed, it is up to the building owner to find Property insurance to cover the building, its income, and the building contents.

What happens if the situation changes?
Change orders are always a possibility during a construction project. In this case, it is imperative to reach out to your insurance carrier to make changes to the project value. Also, projects can run longer than anticipated. A coverage extension is often available if needed