No matter the size, construction projects present complex insurance issues. If you are confused about the risks you face when undertaking a construction project, you are not alone. There are no standard builder’s risk policy forms that cover these types of risks, making each project unique and often requiring a construction insurance expert to navigate each policy’s nuances.
To help you limit your risk, consider the following tips from our Cowan construction experts on builder’s risk insurance.
The basics of builder’s risk insurance
Construction insurance, also known as builder’s risk coverage, is a specialized type of property insurance designed to cover property during construction, including renovations or repairs. Typically, this coverage is purchased by either the property owner or the contractor and protects both property owners and contractors from additional construction work risks. A standard property policy does not cover construction-specific risks.
For example, if someone steals a contractor’s equipment from the job site or construction materials are damaged, the owner or contractor could be held liable for the loss if there is no builder’s risk coverage.
No matter who purchases the coverage, anyone with property involved in the project, including tools or materials, should be named in the policy. This may include:
- The financial institution funding the project
Once the project is complete and accepted by the owner, your standard property policy will take effect; however, the period of coverage for construction projects can be complex. The policy should be reviewed carefully to ensure that adequate builder’s risk coverage is being purchased. Experienced construction insurance specialists can evaluate each unique aspect of the project to help owners or contractors obtain the right coverage.
A common mistake that contractors and owners make when purchasing builder’s risk coverage is failing to consider the policy period. Due to the unpredictable nature of construction projects, it may not always be clear when the coverage should begin and end. To ensure you have coverage exactly when you need it, keep the following in mind:
Commencement of coverage
Prior to any site preparation, demolition, or delivery of materials or equipment, you should be aware of any restrictions on your policy’s effective date so that you are not beginning construction before the coverage takes effect.
Typically, building contracts require insurance for the duration of the contract period, meaning that the policy must be effective on the date the contracts are signed. The lender may also specify the inception date. However, some insurance policies have restrictions on when the coverage begins; be sure to check these provisions for conflicts with your contract date or the date you plan to start construction.
Policies may also contain clauses that prevent coverage from beginning until construction commences, leaving you uncovered for the period between the contract date and the beginning of construction. In other situations, the insurance carrier may only cover losses at the time you become legally responsible for the covered property, either on or after the effective date.
Determining when coverage terminates can be equally challenging. Builder’s risk policies often contain provisions that terminate coverage before the policy’s expiration. Typically, these provisions state that coverage will end when one of the following occurs (whichever happens first):
- The policy expires or is cancelled
- The property is accepted by the purchaser
- Your interest in the property ceases
- You abandon the construction with no intention of completing it
- Coverage may cease when left unattended for more than 30 consecutive days or when construction activity has ceased for more than 30 consecutive days
- Unless specified otherwise in writing:
- 90 days after construction is complete, or
- 60 days after construction is complete and the building described in the declaration is:
- Occupied in whole or in part, or
- Put to its intended use
Common pitfalls of builders risk insurance
Since builders’ risk policies function differently than standard property policies, many people fail to realize some of the unique restrictions associated with construction coverage. Keep the following in mind as you consider your construction insurance needs:
- In some cases, the policy may provide coverage for up to 90 days after the completion of construction, but this would only be the case if there were at least 90 days remaining in the policy period. For example, if a building was completed only two days before the policy expiration, only two days of coverage would be available
- Coverage issues can arise at the end of a project, once construction is complete and the structure is occupied, if outstanding completion work or final touches still need to be completed
- Under some builders risk policies, there may be no coverage under the policy if the building is occupied to any extent for over 60 days without the written consent of the insurance company
To avoid the pitfalls of builder’s risk insurance and ensure that your project’s specific needs and risks are covered, it is critical to understand the insurance coverage obligations of the project documents and contracts so that your policy fulfills at least the minimum requirements of the project.
It can be useful to engage an experienced insurance broker for complex policies to make sure you understand what triggers your coverage to commence and cease. You will also need to make sure that permanent coverage is in place when your builder’s risk coverage ends so that you are fully protected without gaps.
Careful planning is the foundation for a smooth construction project. Many businesses choose to transfer or accept risk through contracts, purchase orders, and lease agreements, but not all contracts or endorsements are created equal. A broker who understands your business can help you parse your builder’s risk policy’s language to meet the needs of your project.
Contact Cowan Insurance Group today to learn more about builder’s risk insurance, and how it impacts your construction, renovation, or repair project.