When property owners start new construction or a building addition, they should insure against certain risks, such as fire, theft, vandalism, earthquake or flood.
“Most commercial property policies exclude property under construction. That is why it is important to obtain a builder’s risk policy,” says Carla Cave, assistant vice president at Momentous Insurance Brokerage, Inc. “This coverage should be put into place before the project starts and before any material is in transit to the site.”
Smart Business spoke with Cave about what you need to know about builder’s risk policies.
How does insurance coverage during construction work?
Builder’s risk is coverage for property under construction, which can include building materials, supplies, foundations, site preparation, temporary structures (e.g. scaffolding) and soft costs. Soft costs are general contractor’s administrative costs, permit fees, insurance, state taxes and fees, loan interest, etc.
If adding to an existing building, make sure the existing structure is included in the total insured costs on the policy.
You can occasionally add a course of construction endorsement to your homeowner’s policy if the cost is nominal — approximately 10 percent of the dwelling value. It also depends on the kind of construction.
If your company is leasing a location and intends to do improvements and betterments, a builder’s risk policy would be needed. The building owner will ask for proof of coverage if the tenant is contractually responsible for such improvements.
What if you don’t have coverage when construction starts?
Then it’s much harder to get the policy — and sometimes a little more expensive. The carrier might inspect the site to see how far you are, and may put on exclusions.
Who buys the coverage? What does it cost?
It depends. The general contractor, property owner or custom builder could buy the coverage. If the general contractor puts the policy into place, coverage should include the property owner as an additional named insured. However, the owner has no control over the policy, even though the contractor will pass along the cost to the owner.
Insurance carriers underwrite the general contractor, typically asking for three years of claims history. If you don’t have a general contractor or have one that poses an issue, carriers might surcharge the policy.
The cost depends on the scope of work or budget. For example, a $1.3 million home had $2.2 million of renovations, totaling $3.5 million insured value, generating a premium of $12,500. Premiums can increase during the policy if changes are made to the original plans, the renovation uncovers problems or if the project is delayed.
What are some important items to check on your builder’s risk policy?
If increasing the square footage of an original structure, add the existing structure to the policy. Make sure the structure is valued at replacement cost value, not actual cash value. An actual cash value policy factors in depreciation, which could be detrimental if a loss occurs.
Check that your soft cost limit is sufficient, and padded enough to account for problems. If something happens to delay or set back the project, all the project fees will increase.
The transit limit on the policy needs to be adequate, especially if it’s a large project. For example, a high-end office building in Beverly Hills may have granite, copper and high-end fixtures, which all must be transported. You don’t want a $200,000 limit when $500,000 worth of materials are on the road.
Permits will be required to build or renovate per city/county requirements. This is why ordinance or law coverage needs to be included. If a one-year project is vandalized or burns down after six months of construction, the ordinance and laws may have changed.
Off-premises coverage is needed for building materials that may be stored at a warehouse or staging area. Review this limit to make sure it is adequate.
Earthquake and flood can occasionally be included in the builder’s risk policy. If not, it’s recommended that you purchase a separate policy. ●
Insights Business Insurance is brought to you by Momentous Insurance Brokerage, Inc.