Builder's risk insurance is essential protection for construction projects, but it is complex and often misunderstood. This isn't surprising. There are no standardized policy forms for builders risk and coverage varies from insurer to insurer and project to project. If properly structured, however, a builders risk policy is the backbone for a successful risk management program.
What Is Builders Risk?
Builders risk is a specialized type of property insurance designed for buildings under construction. Also known as “course of construction" insurance, builders risk coverage begins on the policy effective date and ends when the work is completed and the property is ready for use or occupancy.
Because every construction project is different, no two builders risk policies are alike. Generally, however, most builders risk policies cover property losses due to fire, lightning, hail, explosions, hurricanes, theft, vandalism and many other risks. Earthquake, flood and wind in beach zones are usually excluded, but coverage extensions may be purchased for projects in locations that are vulnerable to these types of risks. Other standard exclusions include ordinary wear and tear, acts of terrorism and war, employee theft, rust and corrosion, mechanical breakdowns, and damage resulting from faulty design, planning, workmanship and materials.
What Types of Property Does Builders Risk Cover?
Generally, a basic builders risk policy covers buildings and structures while they are under construction as well as materials, supplies and equipment that are onsite, in transit and temporarily at other locations.
Coverage may also include or be extended to include the soft costs that arise when a covered loss causes a delay in a project's completion. Lost sales or rental income, additional interest on loans, real estate taxes, and other expenses can quickly add up when construction is delayed. Builders risk protection can help minimize or eliminate the financial impact of these costs.
Other coverage may be a standard part of your policy's provisions or purchased as an extension or endorsement. Extensions are commonly purchased for scaffolding, construction forms and temporary structures; debris removal and disposal in the event of a loss; and pollutant cleanup. Coverage may also be available to cover the cost of upgrading a construction site to meet higher “green" environmental standards.
Who Needs Builders Risk Coverage?
Any person or company with a financial interest in the construction project needs builders risk coverage. Stakeholders include the property owner as well as the general contractor and subcontractors who have an interest until the project is installed and they are paid. If the project is being financed, the lender may require coverage and will also be a named insured under the policy. Architects and engineers may also be named on the policy if they are not otherwise covered.
A waiver of subrogation is a standard inclusion in builders risk policies. Through this clause, each party to the contract agrees to waive their right of subrogation against others on the job to the extent that the policy covers the damage.