Behind the Policy: Understanding Builders Risk

14
February 2019
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The best tool for the job is the one you know how to use. True for hand tools and for contractor insurance.

Get a better understanding of one of the most effective contractor insurance tools available - builders risk coverage - with a careful look at the policy itself.

Understanding the Builders Risk Policy

Some insurance policies are written on a standard form, such as property insurance, homeowners insurance, and general liability policies.

“A standard form is designed to be used by many different insurers and has exactly the same provisions, regardless of the insurer issuing the policy.” - International Risk Management Institute (IRMI)

But we all know there’s nothing standard about a construction project. Which is why there is no standard form for a builders risk insurance policy.

After all, a 10-house residential development is going to be completely different in size, scope, and invested expense than a residential remodel; an 18-acre medical center vastly different from a mixed-use, high-rise building.

When no two construction projects are alike, it makes sense that the policy needed to protect your interest in the project during the course of construction would be anything but standard.

Builders Risk: An Inland Marine Specialty

The Insurance Information Institute (III) classifies builders risk insurance as a specialty form of inland marine insurance.

Which is why builders risk policies are typically written on an inland marine form, rather than a standard property insurance form, in order to provide broader and more individual coverage.

Why is builders risk considered a type of inland marine coverage?

Consider the purpose of inland marine insurance: to insures property in transit. Essentially, with the exception of aircraft and motor vehicles used for transportation, commercial inland marine insurance covers “moveable” property.

This coverage type is particularly attractive to home builders, general contractors, road and bridge constructors, and other similar contractors with large inventories of mobile equipment.

Smaller contractors and subcontractors also turn to inland marine policies because, although they have a smaller inventory to insure, they generally cannot afford to lose any of their equipment.

Builders risk coverage typically applies not only to property at the construction site, but also to property at off-site storage locations and in transit from one project site to the next.

An All-Risk Policy

Typically, builders risk policies are written as an “all-risk” basis because it offers broader coverage than a named-perils policy.

  • Named perils: only perils listed in the policy are covered (typically fire, vandalism, theft, etc.)
  • All-perils: all direct losses are covered unless specifically excluded

No coverage is exactly “all-risk”; even this broad policy comes with exclusions. However, with the exception of these exclusions named in the policy, any direct physical loss to the covered property is covered with an all-risk policy.

Common Exclusions

Many of the most common exclusions on a builders risk policy are either perils that would be covered under a separate policy, such as an earthquake policy, or perils that typically aren’t covered by any policy, such as losses from war and nuclear damage.

Common exclusions may include:

  • War and nuclear damage.
  • Loss, damage or expense caused by settling, expansion, or shrinkage.
  • Flood
  • Earthquake
  • Loss caused by error, omission, or faulty construction.

Coverage Period

Coverage for builders risk begins on the policy effective date and ends when the work is completed and the project is ready for use or occupancy.

Coverage can also expire when the policy owner’s interest in the property ceases, if a policy owner abandons the building with no apparent intent to finish construction, after 90 days post-construction, or when the policy hits a designated expiration date.

Policy Value

What sort of coverage limits should your builders risk policy have in place?

According to the IRMI, builders risk insurance can be written on either a completed value or a reporting form basis; in either case, the estimated completed value of the project is used as the limit of insurance.

Who’s Covered?

Builders risk policies typically insure everyone with an invested interest in the project, from owners, developers, general contractors, subcontractors, and even sub-subcontractors.

Because the policy is meant to cover everyone doing work on - as well as investing time, materials, and resources - into the project, it only needs to be taken out by one party.

Typically a developer, owner, or general contractor will be the insured, and all other parties are usually assigned “named insured” or “additional insured” status.

Builders Risk Insurance: Protecting Your Interest

Builders risk insurance can protect the time, materials, and resources that you invest in a project before its completed. With a builders risk policy in place, you won’t have to worry if a seasonal wildfire destroys the work you’ve completed on a project or the materials and equipment you’ve got on site. You also don’t have to worry about the financial impact of vandalism, theft, or other covered perils.

This inland marine policy can offer broad protection for all of the parties involved until the day construction is complete - in other words, it’s a very effective tool to use for projects of any size and scope.

 

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