Ask The Expert: Builders Risk Insurance

August 02, 2018

What is builders risk insurance?
Builders risk insurance is a specialized type of property insurance designed for buildings under construction or renovation and covers the materials, supplies and equipment that are onsite, in transit and temporarily stored at other locations.

How do you determine limits?
Limits should be inclusive of the cost of the project as well as soft costs, which are costs that may be incurred when a covered loss causes a delay in the project’s completion. For example, if a $15 million apartment building project takes longer to complete because a piece of machinery is damaged, therefore pushing back the tenant move-in date, the loss of rent should also be considered. Soft costs may be $3 million for the project, making your limit to $18 million. Your broker can provide a soft cost worksheet which will help owners arrive at the proper soft cost limit to ensure the project can continue on budget despite the loss.

Who needs it, and under what circumstances?
Owners are typically the ones who purchase builders risk policies, but regardless of who purchases the policy, the contract documents typically require that the owner, contractor and subcontractors be covered under the policy. This allows for the insurance company to cover the project and eliminates the need to seek additional recoveries from negligent parties. Most projects where construction or renovation is occurring should be backed by this type of insurance, unless it is simply routine maintenance.

Why is it important to identify building use and timeline for use?
These are critical – but often overlooked – questions. Most builders risk policies end when the building is put to its intended use or at completion of the project. If you’re building a shopping center with five different stores and you finish one and it is fully operational, but you’re still building the others, your policy needs to specify that even though a portion is complete, the entire project is not fully in use. Otherwise, your policy could cancel and you could be left vulnerable.