Builder's Risk Best Practices

With Spring comes the start of many significant capital projects, from new office and administration buildings to pipelines and treatment plant expansions.  The risks to property under construction are significant but can be well managed through an effective builder’s risk insurance program.
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Builder’s risk insurance programs can be handled by the owner or left to the general contractor or construction manager.  Project owners understand the scope, cost and special conditions of the project and are better equipped to set up the builder’s risk insurance program.  Contractors may not address all of the ancillary elements and supplemental limits needed for a builder’s risk project and may, mark up the cost of the insurance with profit and overhead. 

Underwriting

​In the absence of detailed information, many underwriters may make assumptions which could result in higher than necessary premiums.  Providing details on the type of construction materials, a timeline of work to be completed (e.g. Gantt Chart) and a summary of new construction vs existing facilities being renovated, will provide greater clarity on the project. This will result in more competitive terms.

Insured Value

​Many organizations use the contract value or guaranteed maximum price when setting the insured value for their projects.  While this is a good starting point, a careful review of the projects costs often yields many items that may fall outside of coverage, or for which you would not intend coverage to respond.  These may include site grading, pavement, purchase of property or property rights (e.g. easements). 

Policy Term

​When establishing the term of the builder’s risk policy, owners and contractors should incorporate potential delays from material suppliers, subcontractors and sub-subcontractors, weather and other exigent circumstances which could result in a delay to the project.  Builder’s risk underwriters will generally increase the policy rate for projects that are behind schedule and need an extension in the policy term.  

When designating the policy term, allow additional time for unanticipated delays from contractors and suppliers.  Builder’s risk policies can be cancelled before the policy expiration at the conclusion of the project, with the unearned premium returned to the owner.  This approach will yield the lowest overall builder’s risk policy rate and total cost.

Named Insureds

​Policies should include both the owner and contractors as insured parties.  This has become more critical in recent years due to the increase in owner supplied specialized equipment, which would not be covered under a standard builder’s risk policy obtained directly by a general contractor or construction manager.

Occupancy or Use

​Understanding the transition from the builder’s risk policy to your permanent property insurance program is critical.  Builder’s risk policies may specify that coverage for the project will end when substantial completion is achieved, when a certificate of occupancy is obtained or when the property is put in service for its intended use, even if the project is not yet complete.  

These timelines should be communicated when evaluating builder’s risk insurance options, and throughout the duration of construction to ensure that the project is not left without coverage. 

Coverage Extensions

• Debris Removal - A major loss to the project could result in significant debris removal costs.  Most insurance companies will provide a basic limit in this area; however, an assessment should be completed to determine if an increased limit should be included.  Debris Removal costs can be significantly higher for projects involving frame construction, multiple stories, or extensive renovation of existing facilities.

• Earthquake or Earth Movement - Construction projects are vulnerable to earth movement risks beyond those generated by earthquakes.  In addition to Earthquakes, the broader Earth Movement coverage can respond to claims arising from landslides, sinkholes, excavation collapses, and the failure of shoring.  

• Equipment Breakdown - If the project involves specialized equipment (e.g. Generators, Turbines, Pumps, Blowers, Etc.) which need to be tested and commissioned, then equipment breakdown coverage should be included.  The equipment breakdown coverage should be set up in conjunction with the manufacturer’s warranty.  

• Equipment Testing - Coverage for equipment testing generally is provided in two areas: ‘Cold’ and ‘Hot’ testing.  
  
  Cold testing checks equipment under ‘dry run’ conditions.  Examples include, using instruments to detect a circuit, or filling a pressure vessel with water to test for leaks.
  
  Hot testing operates equipment under actual working conditions, and includes the application of heat, fuel, feedstock, or connection of equipment to a grid or load circuit. The hot testing phase poses a greater potential for failure.

• Expediting Expenses - Should the project include custom equipment or materials, with lengthy production times, expediting expenses could be crucial.  
  
  Recently, a power station was in the process of a major renovation which included the replacement of several key transformers.  Unfortunately, one of these transformers was damaged while being delivered to the site.  The builder’s risk policy included coverage for the transportation of construction materials to the site, as well as the expediting expenses necessary to rush the manufacture of a replacement transformer and the additional expense to have the transformer shipped by plane rather than on a container ship. This allowed the project to stay on the original timeline and saved months of delay and added cost to the project.
  

• New Construction vs Renovation of Existing Structures - Many property insurance policies will not provide coverage for facilities undergoing renovation.  For renovation projects, the value of existing facilities and new facilities should be communicated to the builder’s risk underwriter, to ensure coverage is afforded for the entire facility in the event of a loss.

• Property in Transit / Temporary Storage Locations - Builder’s risk policies can provide coverage for property that is stored off-site, to be used in constructing a new facility (e.g. building materials, large equipment, etc.).  
  
  Coverage can also be provided for property that is in-transit to the construction site, for which the owner or contractor have the responsibility to insure.  These limits should be set commensurate with the maximum exposed value.  Examples include power generators that may be stored off-site and later moved to the site for installation, large pump motors, HVAC components, treatment plant equipment, etc.
  
  
• Soft Costs - These are also known as Delay in Opening Expenses.  This coverage will pay for additional financing costs, real estate costs, marketing and re-leasing expenses, administrative expenses, and architectural/engineering fees which are incurred because of a covered loss – one that causes delay in completion of a project. 

• Temporary Structures and Falseworks - Many projects include extensive temporary structures and falseworks, e.g., Scaffolding, shoring, bracing, fencing, temporary offices or storage buildings, etc.  Often these items or structures are overlooked.  The costs to replace them can be significant in the event of a loss.  An analysis should be completed to assure that the limit on the policy is adequate to cover the value of these structures. 

• Water Damage - Due to the high potential for water damage during construction from weather and plumbing related incidents, many builder’s risk policies limit coverage for water damage.  The coverage is limited by a sublimit or by increased deductibles.  A few policies may exclude this risk altogether.  Reviewing your water damage mitigation plans with underwriters can increase the availability of coverage in this area for your project.