Understanding Builders Risk Insurance

Builders risk insurance is essential protection for construction projects, but it is complex and often misunderstood. This isn't surprising. There are no standardized policy forms for builders risk and coverage varies from insurer to insurer and project to project. If properly structured, however, a builders risk policy is the backbone for a successful risk management program.
 
This article explores builders risk coverage and its nuances along with key considerations to keep in mind when purchasing a policy.
 

What is Builders Risk?

Builders risk is a specialized type of property insurance designed for buildings under construction. 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.
 
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.
 

What Types of Property Does Builders Risk Cover?

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.
 
Coverage may also include or be extended to include the soft costs that arise when a covered loss causes a delay in a project's completion. Lost sales or rental income, additional interest on loans, real estate taxes, and other expenses can quickly add up when construction is delayed. Builders risk protection can help minimize or eliminate the financial impact of these costs.
 
Other coverage may be a standard part of your policy's provisions or purchased as an extension or endorsement. Extensions are commonly purchased for scaffolding, construction forms and temporary structures; debris removal and disposal in the event of a loss; and pollutant cleanup. Coverage may also be available to cover the cost of upgrading a construction site to meet higher “green" environmental standards.
 

Who Needs Builders Risk Coverage?

Any person or company with a financial interest in the construction project needs builders risk coverage. Stakeholders include the property owner as well as the general contractor and subcontractors who have an interest until the project is installed and they are paid. If the project is being financed, the lender may require coverage and will also be a named insured under the policy. Architects and engineers may also be named on the policy if they are not otherwise covered.
 
A waiver of subrogation is a standard inclusion in builders risk policies. Through this clause, each party to the contract agrees to waive their right of subrogation against others on the job to the extent that the policy covers the damage.
 

What Do You Need to Consider When Purchasing a Policy?

These basic guidelines can help owners and general contractors understand their exposures and limit their risks:
 

Find an Experienced Agent or Broker

Because every construction project has unique risks, it's important to work closely with an agent or broker and insurer to design the coverage that provides the unique protection your project needs. Your agent can also help you select the appropriate amount of coverage and provide quotes from several insurers.
 

Consider All of Your Exposures Before Purchasing Coverage

Do an inventory of all exposures for the project, including those at the construction site or that will be in transit or in temporary storage at different phases of the project. You may choose to purchase broad protection for property of all kinds at all locations or may elect to narrow your coverage to specific property and risks. Whatever level of coverage you choose, carefully review your policy provisions to ensure there are no unwanted gaps or surprises in the event of a loss.
 

Know When Coverage Begins

Builders risk insurance generally takes effect as of the date that all contracts are signed, but policy provisions may restrict when coverage begins for your project. Make sure you understand specifically what triggers commencement of your coverage.
 

Know When Coverage Ends

Builders risk is temporary insurance. Your policy will state the conditions upon which coverage will cease. This can vary, but usually occurs when the policy expires or is cancelled, upon occupancy, or when building is accepted by the other or put to its intended use. Coverage ends automatically, so it is advisable to make arrangements for permanent property insurance in advance of the expiration date.
 

Understand the Extent of Coverage for Defective Work Problems

As a general rule, builders risk policies exclude the costs of repairing or correcting faulty work performed by subcontractors. However, policies with an ensuing loss provision may cover resulting in damage to other property that is caused by the faulty workmanship. Exclusionary provisions can vary widely, however; if your policy contains such a provision, make sure you understanding the extent of coverage.
 

Read Your Policy

Before signing your contract, carefully read through all policy provisions. Double-check all coverages, conditions for coverage and exclusions. Make sure you understand what will and will not be insured should a loss occur.
 

How Should You Select an Insurance Carrier?

Most builders risk policies are written on inland marine forms rather than standard property insurance forms, which allows coverage to be broader and more tailored to the needs of each construction project. For this reason, it's important to choose an experienced marine insurance carrier. You'll reap the benefit of working with an underwriter who specializes in builders risk and who can design a policy to meet your needs. Other crucial services to look for include risk engineering specialists and resources to help you avoid losses, and claims specialists who understand builders risk and can deliver prompt and fair claims service when a loss occurs.
 
 
All coverages and services may not be available for all businesses or in all states. For details on what coverages and services are available to you, contact your agent at The Hartford today.

This site outlines in general terms the coverages and services that may be afforded under a Hartford policy. All policies must be examined carefully to determine suitability for your needs and to identify any exclusions, limitations or any other terms and conditions that may specifically affect coverage. In the event of a conflict, the terms and conditions of the policy prevail. All Hartford coverages and services described on this page may be offered by one or more of the property and casualty insurance company or life and accident insurance company subsidiaries of The Hartford Financial Services Group, Inc.

All information and representations herein are as of August 2016.