Insuring your construction project with a builders risk policy is crucial to protecting your business. And just like your projects, no two policies are the same. So it is important to know what’s covered in your policy for any given project to avoid unexpected surprises if you need to file a claim.
Standard Builders Risk Policies are anything but…
Why isn’t there one standard policy to protect your project? The coverage on a builders risk policy, also known as course of construction, varies greatly because no two projects are ever the same. Each project will have it’s own set of risks and exposures that the coverage is tailored to match.
The estimated completed value of each project is used as the limit of insurance, and the coverage is typically written on an all risks basis (more on that later) which covers the construction site property, as well as off-site storage locations and property in transit. These ever changing variables from project to project make this a unique type of coverage where a “standardized” policy would be an exception, not the rule.
Even though your coverage will be different depending on the variances from project to project there are still some pretty general things that will be outlined in your policy. Here’s what you should look for when reading the policy fine print for your latest project.
Who are the Covered Parties?
General contractors or owner/ developers are typically the person who purchases a course of construction policy. No matter who sets up the coverage, however, the covered parties should include:
- Project owner
- General contractors
- All subcontractors
- The Bank (if there is a loan issued)
The covered parties should be included in the policy as “named insureds.” General contractors and subcontractors have just as much to lose in an unfortunate event as a building owner during the course of construction, and they have a valid insurable interest as their materials and labor go into the project.
Another reason all parties with an interest in the project should be included in the policy is to prevent the insurer from attempting to recover losses that may be the result of a subcontractor or general contractor negligence.
The project bid documents and contract should clearly state who is the responsible party for obtaining the policy, who is responsible for paying deductibles, and a formula for determining when one of the parties is liable for a deductible.
What is the covered property?
Your policy’s description of covered property will normally include more than the building or structure itself. Your covered property will most likely also include materials, supplies, and fixtures as well, and may be extended to include the machinery and equipment needed to complete the job. Depending on your project and your individual policy, your “property” may also include:
- Temporary work structures
- Office trailers
- Sidewalks and other hardscapes
Don’t assume that everything stored on the project site or used off-site is covered, read your policy carefully to see exactly what your covered property includes on each and every project.
Are soft costs included?
Soft costs are expenses that may be lost during the time it takes to repair, replace, and move forward with a project if the worst-case scenario occurs. Costs associated with the project delay may include the costs of “business interruption.”
These soft costs may include
- Insurance premiums for builders risk and possibly general liability coverage
- Legal fees
- Construction loan interest
- Real estate and property taxes for the project site
- Loss of rental income
- Advertising expenses
Every policy is different, and soft costs may not be included in your policy without supplemental coverage. Read your policy, and consult with your insurance carrier to be sure.
What’s not covered in your policy?
A course of construction policy is typically written on an “all risk” basis, meaning everything that could go wrong is covered unless your policy specifically excludes it. If your coverage is “all risk,” be sure you know what your specific policy’s exclusions are. What's not covered in your policy is often as important as what is.
Common exclusions found on a builders risk policy include intentional damage, wear and tear, acts of terrorism, nuclear risks, war or military action, and even some acts of nature. Your policy may exclude floods or earthquakes, for example. Your insurance carrier may offer you supplemental coverage for some of the excluded perils for additional protection, so if your project is located in a flood zone you won’t be left out to dry.
What are your limits?
The builders risk policy limits will be written for the full value of the completed construction project, and should include soft costs and the materials and supplies included as part of your covered property.
When is coverage terminated?
Coverage can be written for 3-months, 6-months, 12-months, or longer terms. Most policies will include a specific provision for the termination of coverage. If your policy contains an occupancy clause, that means that coverage is terminated when someone takes whole or partial occupancy of the project site. Other termination clauses in your policy may include:
- Formal acceptance by owner.
- Building is put to intended use.
- Policy cancellation or expiration.
Keeping track of exactly what is covered in your builders risk policy may seem like a daunting task, but reading (and understanding) what is in your policy can only benefit you in the end. Since every project is different, and every policy is different, you need to know who is covered in each unique circumstance, what your property includes, what your exclusions are, and what could cause the coverage to be terminated.
Your insurance broker can help you understand the language and details of your policy, so don’t hesitate to go over the fine print in detail with someone who knows.