Understanding Builders Risk Insurance

Before you ever purchase insurance the first thing you need to understand is what is a Builders Risk Policy. In easy terms, it is essential protection for construction project, however it is complex and often misunderstood by those seeking to procure it. That’s why I have taken the time to talk more about it in this post. The reason that there is so much confusion is that there are no standardized policy for builders risk and the amount of coverage varies from insurer to insurer and can even vary from project to project. So let’s take a look at this policy and cover the thing you need to know before purchasing one.

What Is Builders Risk?

First things first, a Builders Risk Policy is a specialized type of property insurance designed for buildings under construction (this can also include properties being renovated). Also known as “course of construction” insurance, builders risk coverage begins on the policy effective date and ends when the work is completed and the property is ready for use or occupancy. Every carrier and every broker will structure their policies a little different. So make sure you understand exactly what you’re getting. Having a broker who understands your business and what you really need should always be your first step. Because every construction project is different, no two builders risk policies are alike. Generally, however, most builders risk policies cover property losses due to fire, lightning, hail, explosions, hurricanes, theft, vandalism and many other risks. Earthquake, flood and wind in beach zones are usually excluded, but coverage extensions may be purchased for projects in locations that are vulnerable to these types of risks. Other standard exclusions include ordinary wear and tear, acts of terrorism and war, employee theft, rust and corrosion, mechanical breakdowns, and damage resulting from faulty design, planning, workmanship and materials. If you’re not sure what your policy covers the best thing you can do is get it reviewed by someone who understands the insurance business and can explain to you where you may have gaps.

What Types of Property Does Builders Risk Cover?

Again, every policy is different, but generally, a basic builders risk policy covers buildings and structures while they are under construction as well as materials, supplies and equipment that are onsite, in transit and temporarily at other locations. Sometimes it may also cover other non-hard costs that arise when a covered loss causes a delay in a project’s completion. Lost income, additional interest you’re paying on loans, the ever present taxes, and other expenses which add up very quickly during construction and can make a deal unprofitable. The Builders risk policy is designed to be the protection that can help minimize or eliminate the financial impact of these costs.

Who Needs Builders Risk Coverage?

If your company is performing any form of construction on real estate then you should consider getting a Builders Risk Policy. This is protection not only for yourself and your own financial stake in the project but it is also coverage for other major stakeholders. This may include the general contractor and subcontractors who have an interest until the project is finished and they can be paid. If the project is being financed, which is most often the case, the lender would be covered by the policy. Other people include Architects and engineers who may also be named on the policy and covered. Remember every policy is different though and I am talking in generalities, always be sure you understand who is covered and who is not by your policy.

What Do You Need to Consider When Purchasing a Policy?

Here are some basic guidelines to consider for purchasing a Builders Risk Policy…

Find an Experienced Agent or Broker

Your business is not in the process of stamping out the same widget 100 times a day. Every project is unique if for no other reason than the land it sits on. Because of this it’s critical that you have an agent who understands your business inside and out. Not all agent’s are created equal and not all agents truly understand the detailed aspects of the real estate business.

Know When Coverage Begins & Ends

One of the things that makes what I do unique is that we offer a blanket annual policy. This means that you don’t have to worry about when coverage begins and ends because you’re covered for the entire year. We simply project the amount of projects you’re going to do and build from there. We can make adjustments throughout the year if things change. This means less time for you securing and cancelling coverage and more time for you to focus on growing your business.

Why Builders Risk instead of a Property Policy Forms

The majority of Property policies I see issued for Home Builds, Renovations, Flips are limited to named perils (Basic Form) and exclude Theft. The other major issue I see with these “Property” policies is the Vacancy issue is present from the day policy is issued. With a correctly written Builders Risk policy the forms are broader, no vacancy provision exists, and Theft is covered. In short, issuing a Property policy for a Home Build or major Renovation leaves too many gaps in coverage and is typically more expensive

Read Your Policy

Before signing your contract, carefully read through all policy provisions and if anything at all is unclear simply ask your agent to clarify it for you. This is one more reason why the annual coverage I can provide for you is better. You don’t have to worry about your policy changing from project to project!

How Should You Select an Insurance Carrier?

At the end of the day I wouldn’t worry as much about choosing the right carrier as much as choosing the right agent, especially a broker who has connections to many different carriers. In the world of insurance the “big guys” aren’t always the best. In fact often times there are smaller firms that can provide the same coverage as the big guys for a fraction of the cost because their overhead is much lower. If you’re ready to talk insurance give me a call. I would be happy to help you figure out the best policy and the one thing I promise is that if I am not a good fit for your business I will put you in touch with the person who is.