Insurance coverage is very important for all businesses, including construction companies and building owners. Business general liability insurance covers most of the liabilities a business will have, but it doesn’t cover construction work that is in progress or partially complete. This is where builders risk insurance comes in.Builders risk insurance (also called course of construction or inland marine insurance) provides coverage for project owners and contractors for losses that are not insured by general liability or standard building policies. Although it may not be required on every construction project, it is beneficial to all parties to have a policy in place before a project starts.
What is builders risk insurance?
This type of insurance covers a project during the process of construction. It generally covers losses due to fire, lightning, hail, explosions, hurricanes, theft, vandalism, and other risks. It can be purchased by the project owner or the general contractor, and usually certain members of the project team such as the general contractor are added as additionally insured on the policy.
These policies generally exclude wear and tear, acts of terrorism or war, employee theft, mechanical breakdowns, water damage, earthquake, but does not cover damage from faulty design, planning, workmanship, and materials, which are general liability issues. Builders risk is designed to cover events that create property damage and occur during construction and aren’t covered by business liability or workers compensation insurance.
What does it cover?
All types of construction projects can be covered, including residential and commercial, new construction, remodels, and installation projects. These policies cover all the materials, supplies, and equipment for a project, whether they are on site, in transit, or temporarily located at another location.
There are some additional coverages that can be purchased and added to the standard builders risk policy. These coverages include scaffolding, inclusion of debris removal from a covered loss, and valuable papers (plans, etc.). An owner can also include coverage for soft costs that may be caused by a project delay. These soft costs could include lost sales, loan interest, and real estate taxes.
Not all potential claims are covered. It does not cover the property of others, subcontractors, tools or equipment, accidents, any losses after the project is complete, construction or design defects and professional liability losses. For these types of coverages, general or professional liability insurance is usually required, or separate tool and equipment floater policies.
How much coverage do you need?
When looking for builders risk insurance, the project owner or contractor will need to purchase enough coverage to cover the total completed value of the building or project. This includes labor and materials but excludes land costs. The construction budget is usually a good number to start with. The term of the policy is usually the duration of the project, and it can be extended if construction isn’t complete at the expiration of the policy. However it is best to purchase a policy with a longer duration as construction tends to finish late on many projects, and the costs of an extension later are far greater than the incremental cost of a longer project at the beginning.
This type of insurance is not required on every project. On most financed projects, it will be required by the bank or finance company. The financing company is looking to protect its interests while the project is under construction. If a project is self-funded by the owner, it can be optional. It may be a good idea to get the coverage anyway, as then everyone is covered and there won’t be disagreements about who has to pay for damages for covered events.
How much does it cost?
The overall cost of builders risk insurance is going to depend on several factors about the project. They include the project location, project type, construction type, and project size.
The project location can affect the cost of a policy due to the increased exposure in certain environments and areas. For example, coastal areas are generally more expensive than inland sites. Also, those areas more prone to natural disasters, such as fires, hailstorms, floods, earthquakes hurricanes and tornadoes, will raise the cost of the policy.
New construction projects are generally going to cost more than most remodels or smaller projects. Although, during a remodel project the builders risk policy also must cover the existing building, which can make these policies more expensive. Often the owner will buy the policy on an existing building, as the contractor may have difficulty getting coverage since they don’t own the property.
Construction type, such as wood-frame versus metal building, will also affect the cost of the policy. Wood-framed buildings are more prone to damage than a metal building or all-brick structure, due to their fire-resistant properties. The more vulnerable the project is to damage, the more the premium will be.
Since the total cost of a builders liability policy is based on the total cost of the project, smaller, less expensive projects are going to have lower premiums. Generally, the cost of a policy is 1-2% of the overall project cost, depending on the factors above and the purchaser’s credit rating and experience with the bonding company.
Why builders risk insurance is important
Course of construction policies cover a project when it is the most vulnerable to damage – during construction. When there are no doors or windows and the exterior finishes aren’t complete, weather and vandals have an easier time getting in. Security measures can only do so much to delay the determined, and weather is always unpredictable. Having an insurance policy that covers the building materials and structures from this type of damage makes business sense. The small cost of the policy is worth the peace of mind.
Also, because the policy covers all the materials and structures on the project, it offers comprehensive coverage for the entire project in one policy. It is easier to file one claim with one insurance company to cover all damage than it would be to file multiple claims with each contractor’s insurer. This makes the process simpler, and faster, speeding payment of the claim and replacement of the damaged work.
Insurance is recommended
Builders risk insurance is recommended on all construction projects, especially those that will be vulnerable to weather or theft. It provides a level of protection for the whole project team, assuring that any damage to completed work or materials on site will be covered. With a cost of only 1-2% of the project cost, it is well worth the investment.
