The Risky Business of Forgetting about Builder’s Risk Insurance
What is Builder’s Risk Insurance?
Builder’s Risk Insurance refers to a special kind of property insurance that covers a building, or part of a building, that is under construction at the time. Also known as Course of Construction, it could cover simply the structure of the building, or the materials on site that are to be installed or taken to the job site. Insurance policies carried out to cover Builder’s Risk are written in terms of three, six, or twelve months. Generally, the policy can be extended if the work is not finished by the time the initial term ends, but this can usually only be done once.
Up to the coverage limit, the Course of Construction insurance policy will pay for damages. This limit is determined by the total value of the building structure when completed, including all labor costs and material costs, but not the land value.
Difference between Builder’s Risk Insurance and Commercial General Liability Insurance
Although there is some grey area between them (caused by the fact that both could potentially cover property damage to the construction project caused by subcontractors) Builder’s Risk insurance policies differ from Commercial General Liability Insurance in some key ways. Builder's Risk is usually used to cover damages caused by external events like a fire, not incidents related to the construction work itself. Some Builder’s Risk Insurance Policies are what is called all-risk, so that they cover a wider range of losses, excepting those that the contract excludes explicitly. So this kind of Builder’s Risk policy would also be covering any property damage occurring while the construction is ongoing, even if caused by the subcontractor. It all depends on what kind of policy you have taken out.
On the other hand, a Commercial General Liability Insurance is often a required safeguard that protects general contractors against any damages caused by their subcontractors. This kind of policy covers incidents a third party claims your business caused, like bodily injuries, property damage or advertising injuries. For this kind of coverage to apply to damages caused to the construction project itself, the loss event must have occurred in a place covered by the policy. You must also be required by the law to pay for the damages.
Who Buys Builder’s Risk Insurance?
Builder’s Risk insurance policies are usually taken out by the custom builder or general contractor. The property owner could also purchase it. Some believe that the property owner, indeed, is the right person to have it, since they’ve already made payments to improve their land—meaning that if the builder were to receive the funds directly from a claim, it’s possible for them to abscond with it. This line of thinking means that it is safer for the property owner to obtain the builder's risk policy, since this makes them the beneficiary of the insurance, and gives them control of this benefit. Of course, the builder will end up with the funds in the end, but the risk of absconding is lowered.
Who it Covers?
Depending upon your policy, Builder’s Risk Insurance can cover the owner, general contractor and possibly even subcontractors. Coverage can be customized to your specific project, so you need an good understanding of your needs so that your insurance agent can write a custom policy for you. There are few things worse than paying for insurance only to find out it doesn’t cover a particular claim because project-specific needs weren’t discussed in advance. Insurance is meant to protect you, just make sure you are getting the protection you need.
What does Builder’s Risk Insurance Cover?
Course of Construction insurance policies cover damages to the insured building or part of building from a variety of events. While certain elements differ from policy to policy, most of them will cover
Fire
Lightning
Hail
Wind
Explosion
Vandalism
Theft
Vehicles/Aircraft
What it doesn’t cover
Always familiarize yourself with the limitations and exclusions of your builder’s risk insurance policy. Most policies provide limited coverage for collapse, while exclusions usually include:
Earthquake
Water damage
Employee theft
Government action
Contract penalty
Losses caused by ordinance charges
Mechanical breakdown
Damages beyond the estimated value of the construction
Voluntary parting
Weather damage to property in the open
Losses from war, nuclear hazards, or actions by civil authority
Damage from faulty design, planning, workmanship, or materials.
Do You Need an Extension of a Builder's Risk Insurance?
In some situations, you might be able to extend your coverage, although such coverage is likely to be limited. Some of these situations include the following:
When your property needs to be protected from loss while being transported to the job site.
Scaffolding
Valuable papers (site plans, blueprints, etc)
Scaffolding, temporary structures or construction forms when at a location you have reported.
Property in temporary storage
Debris removal
Water damage from the back-up of sewers and drains
Property in transit
Fire department service charge
Sewer and Drain Backup
Typical Cost
Builder’s risk insurance policies tend to be in the range of 1-4 percent of the construction cost. However, this does also depend on the individual policy, and the type of coverage and exclusions it has. A quality insurance company would accelerate the processing of your claims. Some insurance companies also cover the soft costs of the project, but this is then included in your coverage, increasing the cost of the Course of Construction.
What if I don’t get a Builder’s Risk Insurance Policy?
You shouldn’t take the risk. While hopefully the chances of untoward events damaging your building structure are low, if such damage does happen, you could be in for some heavy losses. And let’s not forget that recovering after such a loss costs a lot more than what it costs the first time the work was done. Your contractors could very well protect themselves against the additional expenses, leaving you in the lurch. Plus, the longer the project goes on, the greater the chances of damages occurring. So if there are any delays or extensions in the schedule, a Builder’s Risk insurance policy could be extended to keep covering such damages. The rewards of Builder’s Risk insurance far outweigh the risk of not having it in place on your next project.
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