Many contractors and real estate investors are somewhat familiar with Builders Risk Insurance but rarely are they familiar with determining their limits of coverage. The coverage was designed to insure against the risk of loss for damage to property under construction or renovation. Although the coverage covers business and residential buildings, it also provides coverage for issues not normally associated with a commercial or residential building.
Before deciding on limits of insurance, the property owner, risk manager, or other responsible party must thoroughly review the construction documents. There is a very important relationship between the insurance policy and the construction documents. The documents will determine certain insurance coverage requirements, including indemnity provisions, who is to be listed as named insured(s), any waivers of subrogation required, and limitations on liability.
Although certificates of insurance are typically provided by the agent or broker, it's recommended that you do not rely on them for coverage accuracy. A certificate will not guarantee that the coverage in place represents the coverage required by the construction documents. Always compare the construction document insurance requirements with the quote, binder, and then the issued policy. If discovered, any coverage discrepancies should be immediately addressed with your agent or broker.
Typically the very first question is what property needs to be insured? For renovations, this is very important since the policy needs to insure both the existing structure along with the new construction. As an example, if a project is designed to convert industrial space to residential or retail space, the existing building is usually gutted, and all new systems and interior space are constructed. The current exterior envelope will be a key component of the project which means this portion as well as the interior construction will need to be insured.
A problem that could exist is that many builders risk policies insure at cash value for the existing structure, not at the replacement cost. This means if a fire causes severe damage to the existing structure, the claim would be settled at the depreciated cost to repair the exterior envelope, which would result in a significant shortfall. This shortfall could certainly be enough to ruin a project that is operating on a very tight budget
For new construction, it's important to insure foundations, underground pipes, costs of site preparation, scaffolding, and temporary structures. Each item, if uninsured, could be very expensive to replace in the event of a covered loss. Depending on the needs of the parties involved, the builders risk policy should also provide coverage for tools and equipment, or materials that won't become part of the structure.
Persons or Entities Insured
Certainly, the named insured(s) are as important as the property being covered. Typically, the construction documents will require that the general contractor and the project owner be covered under the policy. Subcontractors should also be covered which will eliminate the need for waiver endorsements among the contractors and subcontractors. Just as in the case of property being covered, the construction contract should specify who should be listed as named insured and who should be listed as additional insured.
Time element coverage is made up of business interruption, expediting expense, extra expense, and coverage for "soft costs." Soft costs, which can be significant, represents the economic risks associated with project delays brought on by a covered peril. This is important because depending on the policy language, normal business interruption coverage may not pay for all economic losses resulting from a delayed project.
Builders Risk Insurance should never be considered "cookie-cutter" coverage. Each project has its specific risks that need to be mitigated, and the best place to start is with the construction contract. If you have questions about purchasing builders risk insurance contact Skyline Risk Management, Inc. at (718) 267-6600 to discuss your concerns.