Pay special attention to specifics of builder's risk policies

Builder's risk insurance is a special type of policy that provides coverage for buildings during the course of their construction and is normally provided to the county by the general contractor. Reviewing the builder's risk coverage specifics can be extremely important.

Most standard property insurance policies are not designed for many of the exposures normally associated with the process of construction, which is why the builder's risk policy form was originally developed.

Typical construction projects are going to have all kinds of exposures to loss that are often temporary in nature. Examples are building materials on the job site pending actual use, forms, scaffolding, falsework, cribbing and materials stored at other locations until they are actually needed at the site.

In addition, there are often "soft costs" – additional expenses required to complete a construction project that has been delayed due to unexpected physical damage. Examples are loss of favorable financing for the project, extra expenses, advertising, design fees, loan interest payments, general administration, loss of use, permit fees and even insurance premiums previously paid.

These soft costs are contrasted to "hard costs," which include the typical cost for labor and materials that are directly affiliated with the project's physical construction.

Because builder's risk policy forms are often an unfiled class of inland marine insurance, the coverage providers are free to design their policy forms without the influence and regulation of the state Department of Insurance. This leads to potential wide variances in the scope of coverage. No two insurance company's builder's risk policies will read exactly the same.

Some supplemental coverage can be included – often with a smaller sublimit – that can be easily overlooked but become quite valuable after a major event, such as a flood, earthquake, coverage for personal property, ordinance of law (for both damaged and undamaged parts of a building), and even pollutant cleanup and removal. Some will include perils such as the collapse of a building or structure, contract penalty coverage, expediting expense coverage and fire department service charges.

Areas of major coverage variance that bear special attention can include:

  • What are the actual perils insured against? Are they named or specifically listed, or is it written as "all risk" except as excluded?
  • How will a given loss be valued – replacement cost, stated value or actual cash value basis – and at what exact time will the policy cease providing its coverage? Some will terminate without notice if the property owner moves any contents into the structure in anticipation of occupancy in a short time but prior to taking legal possession.
  • Who is responsible for the deductible should a loss occur, and who is responsible for the selection of the size of the per occurrence deductible? Some larger general contractors will have an annual builder's risk policy form that covers multiple construction projects. This allows for monthly reporting and automatic coverage for new projects as they are started. These policy forms can carry per occurrence deductibles occasionally as high as $100,000.

When working through the bidding process on a sizeable construction project – aside from receiving the usual bid and performance bonds and certificates of insurance – it would be a good practice to request an actual certified copy of your general contractor's builder's risk policy for your specific project. That puts you in the best position to better understand the conditions, provisions, limitations, deductibles and coverage specifics before a loss occurs.