Builder’s risk insurance is specialized first-party property insurance that protects a project during construction or renovation. It is designed to react to losses that occur during the course of construction, with the goal of getting the project back up and running after a loss. This type of insurance is recommended for anyone with a financial interest in a property that is being built or renovated.
In this article, we will discuss some key considerations that go into purchasing a builder’s risk policy, including:
- Why is builder’s risk insurance important?
- Who is covered?
- How long does coverage last?
- What is covered?
- What are common exclusions associated with builder’s risk policies?
Why is Builder’s Risk Insurance Important?
Buildings in the process of being constructed or renovated are vulnerable to significant risks, including fire, theft, wind damage, lightning or hail, and damage caused by vandals. However, typical commercial property insurance policies do not adequately insure ongoing construction projects. Builder’s risk insurance fills this gap by providing coverage for the period before the project is ready for use or occupancy.
Who is Covered?
All parties with an “insurable interest,” whose financial interest would be detrimentally impacted by a loss, should be listed as insureds under the builder’s risk policy. Typically, the builder’s risk policy is purchased by the building owner or general contractor, which makes sense considering these parties have the most to lose if the property is damaged or destroyed in construction. Whichever party purchases the policy is then responsible for ensuring that all parties with an “insurable interest” in the property are listed as insureds. This will commonly include the owner/general contractor (whoever is not the first named insured), subcontractors, and financial lenders.
How Long Does Coverage Last?
Because builder’s risk insurance is meant to protect insureds during construction, it is temporary in nature. Therefore, coverage usually terminates on a date specified in the policy or, in the absence of a specified date, when the project is considered “completed.” Generally, policies define the date of completion as the owner’s acceptance of the structure as complete, the local building authority’s issuance of a certificate of occupancy, or the structure being put to its intended use. Additionally, a builder’s risk policy may terminate when permanent property insurance is obtained.
What is Covered?
For a loss to be covered under a builder’s risk policy, the loss generally must be a (1) direct physical loss or damage to (2) covered property (3) caused by a covered cause of loss.
a. Direct Physical Loss
The direct physical loss or damage to requirement excludes coverage for purely economic losses or diminution in value. Generally, courts have held that this condition is satisfied only where there is some physical change in the condition of the covered property.
b. Covered Property
All builder’s risk policies cover the structure being built or renovated. Additionally, builder’s risk policies usually provide coverage for building materials, supplies, equipment, and machinery intended to become a permanent part of the covered property. Coverage may also be provided for temporary structures on the job site and materials in transit or in temporary storage away from the job site.
c. Covered Cause of Loss
There are two basic types of builder’s risk insurance: “named perils” and “all-risk.” If the policy is written on a “named perils” basis, then only those risks specifically enumerated in the policy will be covered. On the other hand, if the policy is written on an “all-risks” basis, then all risks of loss, except for those specifically excluded, will be covered.
What are Common Exclusions Associated with Builder’s Risk Policies?
Builder’s risk policies written on an “all-risk” basis begin with a broad grant of coverage and then limit the scope of coverage through exclusions. Builder’s risk coverage is not standardized, but common exclusions include faulty workmanship, subsidence – earth movement, design/specification, consequential damages, and anti-concurrent/antisequential loss provisions.
In sum, construction projects are susceptible to significant risks that standard commercial property policies will not cover.To mitigate these risks, builder’s risk coverage should be a consideration for any new construction or renovated project. An experienced coverage attorney can analyze your situation and make specific recommendations based on individual needs and considerations.
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