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.
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.
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.
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).
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.
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.