When to consider builder’s risk insurance

by Dave Wolfenden, CPA, CVA, MS, Managing Director

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In construction, there’s always risk. No matter how careful an operation is, accidents happen — as well as theft, vandalism, bad weather and natural disasters. And let’s not forget the potential for earth movement during construction or hitting hidden pipes and buried gas lines. The list of unforeseen incidents can get long!

While worker’s compensation, liability and property insurance policies provide coverage for personal injury and certain types of property damage, they typically don’t cover damage to property caused by construction. Builder’s risk insurance fills that gap.

Why it’s needed
Lenders nearly always require evidence of a builder’s risk insurance policy before closing on construction loans. Although project owners may buy these policies because they have the most to lose, contractors often must buy them.

In the most obvious instance, the contract may require you to purchase coverage. In other cases, owner-provided policies may not adequately cover the contractor’s exposure to loss (such as stolen tools). Be sure to request and review the owner’s policy before work begins — preferably while you’re still negotiating — to understand what’s covered and who’s listed as insured.

What’s covered
Builder’s risk policies are designed to temporarily insure buildings and structures while they’re under construction. They also may cover materials, supplies, fixtures and equipment that are on site, in transit or temporarily located at other locations.

Coverage varies by policy and project, but policies typically cover property losses caused by fire, explosion, collision by vehicles or aircraft, theft, vandalism and extreme weather (for example, wind, hail and rain). You may be able to buy extensions to cover your construction company’s scaffolding and other temporary structures while they’re on the jobsite.

A variation of the builder’s risk policy may protect against “soft costs” that could arise when projects are delayed. These may include lost sales and rental income or other revenue, additional interest on loans, administrative fees, and real estate taxes. Reimbursements for damages could be made if delays cause these financial obligations.

Exclusions and costs
Extreme acts of nature, such as earthquakes and floods, and wind in coastal areas or beach zones, may not be covered by your builder’s risk policy. But you may be able to buy extensions for projects vulnerable to these risks. Other standard exclusions include employee theft, normal wear and tear, acts of terrorism or war, rust and corrosion, and mechanical breakdowns. Damage resulting from faulty design, planning, workmanship and materials may also be excluded, so read a policy well before you buy it.

Because coverage varies by policy, so does the price. Generally, it’s between 1% and 4% of the construction cost. In simple math, this means a policyholder may pay between $1,000 and $4,000 a year in premiums for a $100,000 project. Factors that impact where the price falls in that range include the type of construction (new vs. renovation, steel frame vs. wood), location, project duration and quality of materials.

Necessary protection
It’s not a good idea to work on a project without builder’s risk insurance. A comprehensive policy should cover the interests of the property owner, general contractor and subcontractors. If a project owner doesn’t buy such coverage, it may be up to you to protect your assets. Keep an eye out for this situation and, if necessary, shop carefully.

We welcome the opportunity to put our construction industry expertise to work for you. To learn more about how our firm can help advance your success, please contact Dave Wolfendenat (302) 254-8240.


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