CTL Connect

Builder’s Risk

What is Builder’s Risk Insurance?

A specialized coverage designed specifically to protect contractors and/or building owners against direct physical damage to the building and all materials, equipment, fixtures and supplies connected thereto during the course of the construction.

BEWARE

Coverage on owner provided builder’s risk insurance can end when any ONE of the following occurs:

  • Owner accepts the project as complete
  • Certificate of occupancy is granted
  • Policy expiration date
  • Policy cancellation date
  • Date the project is abandoned
  • Depending on the terms of the policy, when over 20 – 50% of the completed square footage of the project is occupied

Builder’s Risk Coverage Forms

  • Policy coverage forms are not standard and may vary based on the insurance company providing coverage. The types of property covered under builder’s risk policies also vary.
  • Most policies are written on a completed value form which means the total completed value including addendums and change orders.
  • Most insured perils have deductibles ranging from $1,000 to $10,000.
  • If flood is provided, flood deductibles can be up to $500,000.
  • Named windstorm deductible is usually a percentage (2% – 5%) of the values at risk at the time of the loss, subject to a minimum.
  • Some policies have a wind and hail deductible in lieu of a named windstorm deductible.
  • Deductibles apply per occurrence, per policy.

 

Example #1: Named Windstorm Deductible

  • $10,000,000 building completed value
  • 100% complete
  • 3% Named Windstorm Deductible, subject to $100,000 minimum
  • At the time of the loss, the deductible is $300,000 ($10,000,000 x 3%)

Example #2: Named Windstorm Deductible

  • $10,000,000 completed building value
  • 10% complete ($1,000,000 value at risk)
  • 3% Named Windstorm Deductible, subject to $100,000 minimum
  • At the time of the loss, the deductible is $100,000 ($1,000,000 x 3%, subject to $100,000 minimum)

Perils NOT Covered

  • Mold, fungus, rot, bacteria (unless caused by fire, smoke, riot, vandalism, fire extinguisher equipment leakage or collapse and ALL reasonable means were used to save and preserve the property from further loss at the time of the occurrence)
  • Property awaiting installation while in the open and unprotected
  • Utility service failure
  • Delay
  • Flood (can be purchased)
  • Inventory shortage
  • Mysterious disappearance
  • Unexplained loss
  • Criminal acts by employees, officers, anyone with an interest in the project
  • Asbestos
  • Dry or damp atmosphere
  • Settling, subsidence, wear and tear
  • Insects and animals
  • Water intrusion and storm surge (can be purchased)
  • Water damage resulting from an open uncovered roof
  • Machinery and tools not destined to be a part of the project
  • Property at the suppliers/manufacturers location (unless designated for the project and prepaid)
  • Land (including the land on which the property is located)
  • Property in storage that is not specifically designated for the project
  • Uninstalled plants or trees (limited coverage for installed plants and trees)
  • Art work
  • Soft costs, i.e. architect fees, fines, taxes, insurance premiums, loan interest, etc. (can be purchased)
  • Loss of income or loss of rents (can be purchased)

 

Notable Sub-limits

  • Flood
  • Earthquake
  • Soft Costs
  • Property in temporary storage/transit

 

Flood Insurance

Flood coverage can be provided by various policies:

  • National Flood Insurance Program (NFIP)
  • Stand Alone Excess Flood Insurance Policy
  • Builder’s Risk Insurance Policy

National Flood Insurance Program (NFIP)

  • NFIP policies can have various deductibles ranging from $1,000 to $50,000.
  • Maximum coverage available for commercial buildings is $500,000 for the building and $500,000 for contents.
  • Coverage is effective 30 days after the application is received.
  • A NFIP policy can be used to satisfy a high flood deductible on a builder’s risk policy.
  • The NFIP policy applies per building. If the project has more than one building, multiple policies are necessary.
  • Only one NFIP policy can be in force on any building.
  • NFIP policies are written for a 12 month term only. If a policy is cancelled prior to the full term, there is no return premium.
  • If the project duration exceeds 12 months, multiple NFIP policies will have to be purchased.
  • Must have the elevation certificate prior to binding coverage

 

Wind Deductible Buy Back Policy (WDBB)

  • This policy is used to reduce the financial impact from a high named windstorm or wind/hail deductible on a builder’s risk policy.
  • The deductible on the WDBB policy can be from $25,000 up.
  • The policy limit is based on the wind deductible percentage on the builder’s risk policy less the $25,000 (or more) flat WDBB deductible.

Key Factors Controlling Builder’s Risk Premiums/Costs

Builder’s risk pricing is primarily based on information provided by the contractor.

Key factors include:

  • Contract amount
  • Correct construction type
  • Project time line (# of wind months)

  • Distance to the coast/saltwater
  • Elevations
  • Value of existing structures, if coverage required

Another key factor would be current market conditions.

JOB START DELAYS

Insurance quotes are only good for 30 days. A job delay could allow the insurance carrier to re-quote the policy premium with a higher rate. A job that was not scheduled or expected to be affected by hurricane season may now be scheduled to be under construction during hurricane season.

JOB OVERRUNS

When an insurance company quotes a rate on a builder’s risk policy, they consider the fact that the value of the building/materials on the project will be lower at the beginning of the job and higher at the end of the job.

If we have to extend the insurance coverage due to late completion of the job, the insurance carrier typically increases the rate since we are asking them to extend coverage when the job values are highest.