Builders risk insurance is insurance coverage designed specifically to protect buildings and structures that are under development, renovation or construction as well as the equipment being used in the construction project. Builders risk coverage can include protection for construction materials, heating and air-conditioning equipment, labor costs and expenses as well as temporary structures such as cribbing, false work, fencing, scaffolding, construction signs and even trees and other plants.
In addition to the materials, labor and expenses coverage, builders risk insurance also helps cover the costs of debris removal and defective workmanship. A builders risk insurance policy from The Hartford helps cover the owner, the general contractor, subcontractors, and the financing bank.
Limits. The limits in a builders risk policy are usually the amount of the construction contract. Most policies include an insurance to value or coinsurance clause. If the value of the contract is more than the policy limit, the insurer will not pay for 100% of the loss. The shortfall will be calculated by dividing the limit by the contract amount and then multiplying that percentage by the amount of the loss.
Sublimit. The policy will include sublimit (less than the total policy limits) for building materials in transit and materials stored away from the construction site. It will not provide coverage for the contractor’s own equipment used to erect the project.
Special Causes of Loss. The broader policies will provide protection for damage arising from special causes of loss. Special causes of loss means the risk of direct physical loss, unless the loss is excluded by the exclusions or limited by the limitations of the policy
Exclusions. There will be at least 14 exclusions including flood, earthquake and collapse. Earthquake and flood may be available by endorsement for additional premium. Many policies will exclude collapse from design or construction errors.
Earthquake. This endorsement extends your cause of loss to include damage that results directly from an earthquake. Coverage is provided for replacement of buildings only. All earthquake shocks that occur within a 168 hour period (one week) are considered to be a single occurrence. A separate deductible applies and is determined by the value of the insured property.
Flood. A general and temporary condition of partial or complete inundation of normally dry land areas from overflow of inland or tidal waters, the unusual accumulation and runoff of surface waters from any source, and abnormal, flood-related erosion and undermining of shorelines. Flood also means inundation from mud flows caused by accumulations of water on or under the ground, as long as the mud flow and not a landslide is the proximate cause of loss.
Deductible. A deductible is the amount of loss the insured pays in a claim before the insurance company makes any payment. The purpose of a deductible is to discourage small claims that the insured can manage as a normal cost of doing business. The larger the deductible an insured accepts, the lower the premium charge.
Hard Costs. Hard costs are the tangible assets that comprise the construction project; quite simply, the costs of material and labor associated with a project – also known as “sticks and bricks.”
Soft Costs. Soft costs, also known as Delay in Opening Expenses, are usually covered and limited by special endorsements to builder’s risk property policy. Coverage is provided for additional construction loan interest, real estate taxes, marketing and re-leasing expenses, administrative expenses, and architectural/engineering fees which are incurred as a result of a covered loss – one that causes delay in completion of a project. These expenses can be further broken down into two sub-categories: construction expense and additional soft costs.