Who purchases and pays for builders risk insurance usually depends on the nature of a construction project and its associated contractual elements. Generally speaking, any party with a financial interest in a construction project should have this coverage, such as the project sponsor, property owner, general contractor, lender, subcontractors, and architects. Yet, specific industry standard contracts, local governments, and large developers 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, all involved parties must be listed as insureds within the policy.
Because every construction project is unique and related coverage needs may vary, builders risk insurance can be a complex topic to navigate. This article provides more information on what builders risk insurance covers and offers tips for securing a suitable policy.
What Builders Risk Insurance Covers
Most builders risk policies protect hard costs associated with the previously mentioned property damage losses amid construction projects. In the scope of construction, hard costs—also called “sticks and bricks”—refer to expenses 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:
- Building materials and supplies (e.g., lumber, metal framing, insulation, and concrete) Labor necessities, including temporary workers and subcontractors
- Construction tools and equipment Utilities (e.g., water, gas, and electricity)
- Landscaping needs, such as planting trees and shrubs
- Safety enhancements (e.g., installing or updating sprinklers, smoke detectors, and fire alarms) and other building improvement activities
- Project enablement operations, including waterproofing the building for adverse weather and renting out on-site restroom facilities for workers
Apart from affecting hard costs, property damage losses amid 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 and 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:
- Architectural, engineering, and consultant fees
- Inspection and permit expenses
- Accounting, advertising, marketing, and project management services
- Real estate payments and property taxes
- Equipment unrelated to construction, such as communication devices (e.g., computers)
- Interest in project loans
- Post-construction legal fees and insurance premiums
Soft costs are typically only covered by builders risk insurance if they are stated in a policy. Even then, protection for these expenses is generally only available if they are incurred directly from 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.
Furthermore, 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.
Tips for Securing Proper Coverage
To ensure sufficient 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. Keep the following best practices in mind when purchasing such coverage:
Understand project exposures. Before securing a builders risk policy, complete a detailed inventory of all potential exposures that may arise throughout the project, including those on location, in transit, and at any off-site storage areas. From there, determine the level of protection needed for these exposures and select a policy that limits the likelihood of coverage gaps.
Know when the coverage begins and ends. Since builders risk insurance is a temporary form of coverage, it’s critical to know the exact dates associated with the policy period—namely, when the coverage begins and ends. Usually, a builders risk policy starts on the same date contracts are signed for a construction project and concludes upon completion. However, a policy may include specific conditions regarding what triggers the beginning and end of coverage (e.g., the policy expiring or getting canceled, the property being rented or purchased, the building becoming occupied, or the project getting scrapped). In any case, be sure to confirm the policy start and end dates to have a clear understanding of when coverage applies.
Check the anticipated completion date. It’s important to distinguish between the project’s anticipated completion date and the end of coverage within a builders risk policy, as the former will help determine the amount of protection provided for losses resulting from project delays (e.g., soft costs and business interruption expenses). An inaccurate anticipated completion date could lead to coverage not kicking in during project delays, increasing the risk of facing out-of-pocket expenses.
Review the policy. Make sure to closely assess all policy language and details to ensure full comprehension of coverage capabilities, conditions, and exclusions. Specifically, it’s vital to confirm what is and isn’t covered under the policy. Consider purchasing policy extensions and endorsements if any coverage gaps remain.
Consult trusted insurance professionals. Work with a qualified and experienced insurance agent or broker to further discuss specific coverage needs and secure a builders risk policy that can offer ample protection for a given construction project and the various parties involved.
Who purchases and pays for builders risk insurance usually depends on the nature of a construction project and its associated contractual elements. Generally speaking, any party with a financial interest in a construction project should have this coverage, such as the project sponsor, property owner, general contractor, lender, subcontractors, and architects. Yet, specific industry standard contracts, local governments, and large developers 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, all involved parties must be listed as insureds within the policy.
Because every construction project is unique and related coverage needs may vary, builders risk insurance can be a complex topic to navigate. This article provides more information on what builders risk insurance covers and offers tips for securing a suitable policy.
What Builders Risk Insurance Covers
Most builders risk policies protect hard costs associated with the previously mentioned property damage losses amid construction projects. In the scope of construction, hard costs—also called “sticks and bricks”—refer to expenses 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:
- Building materials and supplies (e.g., lumber, metal framing, insulation, and concrete) Labor necessities, including temporary workers and subcontractors
- Construction tools and equipment Utilities (e.g., water, gas, and electricity)
- Landscaping needs, such as planting trees and shrubs
- Safety enhancements (e.g., installing or updating sprinklers, smoke detectors, and fire alarms) and other building improvement activities
- Project enablement operations, including waterproofing the building for adverse weather and renting out on-site restroom facilities for workers
Apart from affecting hard costs, property damage losses amid 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 and 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:
- Architectural, engineering, and consultant fees
- Inspection and permit expenses
- Accounting, advertising, marketing, and project management services
- Real estate payments and property taxes
- Equipment unrelated to construction, such as communication devices (e.g., computers)
- Interest in project loans
- Post-construction legal fees and insurance premiums
Soft costs are typically only covered by builders risk insurance if they are stated in a policy. Even then, protection for these expenses is generally only available if they are incurred directly from 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.
Furthermore, 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.
Tips for Securing Proper Coverage
To ensure sufficient 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. Keep the following best practices in mind when purchasing such coverage:
Understand project exposures. Before securing a builders risk policy, complete a detailed inventory of all potential exposures that may arise throughout the project, including those on location, in transit, and at any off-site storage areas. From there, determine the level of protection needed for these exposures and select a policy that limits the likelihood of coverage gaps.
Know when the coverage begins and ends. Since builders risk insurance is a temporary form of coverage, it’s critical to know the exact dates associated with the policy period—namely, when the coverage begins and ends. Usually, a builders risk policy starts on the same date contracts are signed for a construction project and concludes upon completion. However, a policy may include specific conditions regarding what triggers the beginning and end of coverage (e.g., the policy expiring or getting canceled, the property being rented or purchased, the building becoming occupied, or the project getting scrapped). In any case, be sure to confirm the policy start and end dates to have a clear understanding of when coverage applies.
Check the anticipated completion date. It’s important to distinguish between the project’s anticipated completion date and the end of coverage within a builders risk policy, as the former will help determine the amount of protection provided for losses resulting from project delays (e.g., soft costs and business interruption expenses). An inaccurate anticipated completion date could lead to coverage not kicking in during project delays, increasing the risk of facing out-of-pocket expenses.
Review the policy. Make sure to closely assess all policy language and details to ensure full comprehension of coverage capabilities, conditions, and exclusions. Specifically, it’s vital to confirm what is and isn’t covered under the policy. Consider purchasing policy extensions and endorsements if any coverage gaps remain.
Consult trusted insurance professionals. Work with a qualified and experienced insurance agent or broker to further discuss specific coverage needs and secure a builders risk policy that can offer ample protection for a given construction project and the various parties involved.
The Last Word
As a whole, 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 amid unexpected losses. For more information, contact an InsureGood Advisor today.
