If you’re embarking on a construction project, there are two ways you can view Builders Risk Insurance: as an unfortunate necessity or as invaluable protection against the many risks inherent to construction.
Which view you adopt is a major factor in whether your business succeeds or fails.
Construction companies are inherently risky ventures — one reason why construction entrepreneurs enter an industry that historically has a high rate of failure for start-up businesses. Citing data from the U.S. Bureau of Labor Statistics, Fundera in November 2020 cited construction as the small business industry with the lowest survival rate, reporting: “For the construction industry, about 75% of businesses survive their first year, 65% make it through their second year, and about 35% make it through their fifth year.” (Overall, according to Fundera, the figures for small businesses were 80%, 70%, and 50%.)
Of course, many construction firms do more than survive––they thrive. Successful companies uniformly practice ongoing risk management, emphasizing safety and transferring risk through customized insurance policies like Builders Risk.
From potential damage caused by fire or severe weather events to theft and vandalism, the financial implications could be significant. This is where builders’ risk insurance becomes a crucial part of a comprehensive construction risk management strategy.
In a 2019 article titled “Strategies for Surviving Your First Year as a Construction Firm,” the industry website ConstructConnect lists researching the right insurance at No. 4 among eight vital steps. Specifically cited as a key consideration: Builders’ Risk Insurance.
Let’s explore this topic in more detail.
What Does Builders’ Risk Insurance Do?
Builders’ Risk Insurance, also known as “course of construction” insurance, is a specialized type of property insurance that is indispensable for construction projects. It is designed to protect against the risks specifically associated with construction, which can include damage to the building in progress or the materials and equipment used in the project.
The significance of Builders’ Risk Insurance lies in its comprehensive coverage, which can include the contractor’s or owner’s interest in materials at the job site before they are installed, materials in transit intended for the job, and the value of the property being constructed until it is completed and accepted by the owner. The policy generally lasts for the duration of the construction project, and coverage ends when the work is completed and the property is ready for use or occupancy.
Anyone with a financial stake in the construction project should be named in the policy. This includes the property owner, general contractor, subcontractors, architects, and lenders. By including all major parties, the coverage ensures that, in the event of a loss, there is a streamlined process for compensation, which aids in avoiding delays or disputes over liability.
This collaboration can be crucial in keeping a project on schedule and within budget.
The scope of Builders’ Risk Insurance can be quite broad, and it’s critical to customize policies to fit the specific risks of a project. Policies can be tailored to include coverage for temporary structures like scaffolding, pollutant cleanup, and debris removal following a loss event. This customization ensures that the unique aspects of each construction project are adequately protected.
Moreover, Builders’ Risk Insurance policies can also cover “soft costs,” which are the financial losses incurred as a result of construction delays caused by an insured event. These can include lost sales or rental income, additional interest on loans, and increased expenses due to extended insurance coverage or additional professional fees. These costs are often overlooked but can be substantial, particularly for large-scale projects.
Given the variety of incidents that can occur on a construction site, from weather-related damage to theft, and the potentially high costs of such events, Builders’ Risk Insurance provides a layer of financial protection that can be critical for successful project completion. It not only protects the investment but also provides peace of mind for all parties involved.
Exclusions and Underwriter Selectivity
Builders’ Risk Insurance is an essential tool for anyone involved in construction, but navigating its complexities can be as challenging as the construction process itself. One of the most critical aspects to understand is what the policy does not cover. These exclusions can significantly impact the project’s financial safety net, and recognizing them is crucial.
Common exclusions in most Builders’ Risk Insurance policies include natural disasters such as earthquakes and floods. Damage from wind and coastal erosion often falls under exclusions as well, particularly in regions where these risks are higher. However, it’s possible to add specific endorsements to cover these perils, tailoring the policy to the project’s geographical vulnerabilities.
Other standard exclusions are often related to the quality and integrity of the work itself, including damage due to faulty planning, design, or engineering; poor workmanship; the use of substandard materials; and mechanical failures. These exclusions underscore the importance of maintaining high standards throughout the construction process. In addition, normal wear and tear, rust, corrosion, employee theft, and acts of terrorism or war are typically not covered.
The insurance industry also exercises caution with certain types of construction, such as frame projects, which are not categorically excluded but can be harder to insure. According to Insurance Journal these projects face stringent requirements and a volatile market, particularly in urban settings or areas with recent social unrest. For larger frame constructions, securing sufficient coverage might require layering policies from multiple carriers.
Coverage Cost and the Value of an Experienced Consultant
The cost of Builders’ Risk coverage is another area that requires careful consideration. It’s influenced by a myriad of factors, including the project’s type, location, size, and the fluctuating cost of materials. The recent instability in building costs—exacerbated by the COVID-19 pandemic, supply chain disruptions, labor shortages, and volatile material prices—makes accurate estimation and regular communication with the insurer more important than ever.
Changes in project cost, timeline, or scope must be reported to the insurer to ensure the coverage remains adequate and valid. It’s also crucial to discuss policy features such as coinsurance and clauses like permission to occupy, which allows for parts of the building to be used while construction continues elsewhere on the site.
The value of working with an experienced insurance consultant cannot be overstated, especially for renovation projects where Builders’ Risk and existing property insurance must be coordinated. An expert can provide tailored advice and design a comprehensive insurance solution that best fits the project.
Other Cost Considerations for Contractors
For contractors, there are additional financial considerations beyond the direct costs of construction and insurance. The construction industry faces an ongoing challenge in attracting and retaining skilled labor. With workers becoming more selective and demanding, and the cost of providing quality health benefits on the rise, contractors must factor these into their business planning.
Given these complexities, Builders’ Risk Insurance is not a one-size-fits-all product. The careful selection of coverage, understanding of exclusions, and proactive management of the policy are critical to protecting the financial interests of all parties involved in a construction project. The role of trusted insurance professionals becomes indispensable in this intricate landscape, where they can provide clarity and confidence in coverage for their clients.
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