Builders Risk Insurance Explained
Builders Risk insurance (also known as Course of Construction insurance) is a critical component of construction risk management and often misunderstood. This key insurance policy covers damage to the construction project and loss to materials during the period of actual construction operations.
A properly written Builders Risk policy provides coverage for several exposures to loss during a construction project. It responds to a physical loss to the project itself, such as fire or water damage occurring during construction operations. It covers loss (to include theft) of materials at the site as well as in temporary storage and in transit. It picks up the labor costs to restore the project to where it was pre-loss and it can also be written to cover so called "soft costs", which are financial losses incurred due to delay such as loan interest, additional fees, delay in opening etc.
Unlike some other types of insurance, a properly written Builders Risk policy should be a vehicle for all parties on a construction project to have a unified position and method for recovery from a loss and continuing the project to a successful completion. All parties, the owner, General Contractor and subcontractors should be insured under the policy and waive all subrogation against each other. A loss is transferred to the Builders Risk carrier for reimbursement without “finger pointing” or claims against possible at fault parties who are insured under the policy.
The unified and broad protection intended under a Builders Risk policy should be verified prior to engaging the contract. While the policy can be purchased by either the project owner or the General Contractor, care should be taken to ensure that the interests of all parties are protected. There also should be an agreement and understanding of all the parties covered under the policy what the deductible is and how it will be allocated if there is a loss. On certain projects with higher Builders Risk deductibles, contractors may wish to purchase a "deductible buy down" to cover these additional possible costs.
A Builders Risk policy is a key component to both Owners and Contractor risk management programs. A properly constructed policy protects all parties on the project from covered losses and is instrumental in allowing the project to continue after a loss. In the Pacific Northwest, a key exposure to loss and one with potential catastrophic impacts to construction projects is Earthquake. Few owners or contractors would be able to absorb a loss to a project from a quake of any significance. Including coverage for Earthquake as a covered cause of loss on Builders Risk policies should strongly be considered. This added protection will facilitate financial recovery and project continuity in the even the project is damaged during a quake.
A well thought out and comprehensive Builders Risk policy is a key component to protecting both owners and contractors from the risk of a loss during construction. These policies are available with a wide variety of coverage enhancements and usually can be crafted to address unique risks faced by any project. Whether it’s the theft of building material at the site, a fire or damage caused by a quake; a Builders Risk policy can help all the parties minimize the financial impact and keep the project on track.
Max Hanley is an Account Executive at Propel Insurance and can be reached at 206-669-4343 or Max.Hanley@propelinsurance.com.