What is builder’s risk insurance?
Builder’s risk insurance (also known as course of construction) is a special type of inland marine insurance which protects against damage to structures, materials and equipment from fire, wind, theft, vandalism and much more while they are under construction or renovation.
Who Needs It?
In this case, this is a tricky question. Either the contractor or the property owner will be responsible for securing builder’s risk insurance. This is often determined in the initial contract.
It is more often recommended that the property owner take out the builder’s risk insurance policy, since they have already invested in the property and the claim money should go to them in the event of damage.
However, if the property owner is distanced from and unfamiliar with the project, it may be best for the contractor to take on this responsibility. Large general contracting companies also may be able to leverage economies of scale to their advantage and secure better terms for the policy.
Either way, a waiver of subrogation is common practice in builder’s risk policies. Each party agrees to waive their right of subrogation against others on the job so that, in the event of a claim, whoever is found responsible in court will the one paying out.
You should always take care that in addition to specifying who will take the insurance policy, your contract specifies what must be covered. This can help to minimize the risk of serious loss in the event of a problem.
While the Insurance Services Office Inc. (ISO) builder’s risk policy is limited to site-specific coverage, most carriers will provide broader coverage to include materials and equipment in storage or in transit.
Occurrences commonly covered by builder’s risk insurance include:
Onsite Tool and Equipment Theft
Over a billion dollars in construction equipment is stolen off of sites each year; that doesn’t even include tools and material theft. Less than 25% of stolen equipment is recovered each year. Everything from copper wire to backhoes can be snatched off your site causing potential tens of thousands of dollars of loss during a single project. Builder’s risk insurance will compensate your business for these losses.
Buildings under construction, especially in cities, are often the victims of vandalism. Everything from graffiti to smashed glass or tile can cause additional delays and expenses. You can ensure that this havoc is covered by getting builder’s risk insurance.
Fire and Weather Damage
If fire or non-severe weather damages your building or building supplies during construction, often the reconstruction is more costly and time consuming that the initial building because of clean-up time and costs. Builder’s risk insurance will cover the cost of repairing the damage or razing the building and starting from scratch. Some policies will even cover the cost of clean-up and debris removal.
Delayed Completion Coverage
Coverage may also include or be extended to include “soft costs” associated with the delay in work from any covered loss. These costs can include profit loss due to delays in sales or rental (for property owners), expediting expenses, accrued taxes or interest, contract penalties, and more. Effectively, this is business interruption coverage for a building under construction.
What’s Not Covered?
Damage caused by extreme or severe weather events and natural disasters is typically not covered by a builder’s risk policy. If you need coverage for hurricanes, earthquakes or floods, be sure to talk to your insurance agent about adding the necessary endorsements.
Not all policies include clean-up and debris removal in the event of damage. If your policy does not include this, you may want to consider adding an endorsement to include this coverage.
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