Builders risk insurance is a specialized form of property coverage that can help protect buildings and other structures under construction. Also known as course of construction insurance, such coverage can assist with various expenses that may result from property damage amid construction projects. Although specific coverage capabilities vary between insurers, a typical builders risk policy covers property damage losses stemming from fire, lightning, hail, explosions, theft and vandalism. Coverage extensions and endorsements may also be available.
Who purchases and pays for builders risk insurance usually depends on the nature of a construction project and its associated contractual elements. Generally speaking, any party with financial interest in a construction project should have this coverage, such as the project sponsor, property owner, general contractor, lender, subcontractors and architects. Yet, certain industry standard contracts, local governments and large developers specifically require contractors to carry builders risk insurance. As such, contractors often incorporate the cost of this coverage in their project bids. Regardless of who secures this coverage, it’s important that all involved parties are listed as insureds within the policy.
Because every construction project is unique and related coverage needs may vary, builders risk insurance can be a complex topic to navigate. This article provides more information on what builders risk insurance covers and offers tips for securing a suitable policy.
Most builders risk policies provide protection for hard costs associated with the previously mentioned property damage losses amid construction projects. In the scope of construction, hard costs – also called “sticks and bricks” – refer to expenses that are directly related to the physical building or structure and tangible assets of a project. Such costs are often quantifiable via third-party inspections from lenders and may include the following:
Apart from affecting hard costs, property damage losses amid construction projects can also impact soft costs, particularly when causing project delays. These costs entail expenses that aren’t directly related to the physical building or structure and tangible assets of a project, but are still necessary to complete the project.
Soft costs don’t require third-party reviews in order to be quantified and may include the following:
Soft costs are typically only covered by builders risk insurance if they are clearly stated in a policy. Even then, protection for these expenses is generally only available if they are incurred as a direct result of a covered loss and subsequent project delay. Some insurers may also require a minimum deductible (based on the length of the project delay) to be met before coverage for soft costs kicks in. Nevertheless, these are coverage extensions available to enhance protection for these costs.
Furthermore, commercial property owners can supplement their builders risk insurance with business interruption or loss of rent endorsements, which may offer protection for lost income or rent arising from project delays caused by covered losses.
To ensure sufficient protection, a builders risk policy should be customized based on the particular characteristics of the construction project at hand and the unique needs of the parties involved in the project. Keep the following best practices in mind when purchasing such coverage:
As a whole, builders risk insurance is a valuable form of coverage that can offer much-needed protection when properties or other structures are under construction. Any parties with financial interest in a construction project should consider such a policy and fully understand how their coverage works. Doing so will help ensure a smooth and successful project, even amid unexpected losses. For further insurance guidance and solutions, contact us today.
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