By Basima Rumman, CPCU, Vice President, Hylant Property & Marine Risk Practice
With the continued improvement in economic conditions, more businesses and organizations are expanding their operations and building new facilities to accommodate the increased demand for their products and services. With that, the question becomes critical as to how to protect the construction exposure and who should be responsible for insuring it.
A primary consideration is whether to insure the construction project under an existing commercial property policy (assuming the owner has a commercial property policy) or under a separate stand-alone builder’s risk policy.
What Is a Builder’s Risk Policy?
Builder’s risk coverage is insurance that protects a person’s or organization’s property against physical loss or damage while it is being built or renovated. It is also sometimes called course of construction coverage. This type of insurance covers structures, materials, improvements and betterments, and equipment used during the building process.
Who Is Responsible for Insurance Procurement?
To procure a first-party property insurance policy, there must be an insurable financial interest in the construction/building. The project owner, the owner’s general contractor and any subcontractors hired by the owner or the general contractor can purchase a builder’s risk policy. These parties have different insurable interests in the project, possibly at different phases of the project. However, normally the project owner has an insurable interest throughout the entire course of the construction project. So, the owner would be wise to purchase a builder’s risk policy, naming the general contractor and subcontractors as additional insureds and identifying their interests.
How Should Coverage Be Arranged?
Many standard commercial property policies provide some level of builder’s risk coverage for new construction and/or renovation. However, the policy intent may be more for incidental exposures with low limits and possibly offer only short coverage periods.
Usually, expansion or renovation of an existing structure can be easily addressed under the insured’s existing commercial property policy, with the same coverage terms and deductibles as the existing property policy. Most property insurance policies readily cover this exposure without any sublimits or time limitation.
However, it is recommended that large, new construction be insured separately under a stand-alone builder’s risk policy, even though the insurance can also be arranged under the existing commercial property policy. There are many benefits to insuring these large construction projects on a stand-alone builder’s risk policy, including but not limited to:
- Coverage designed to address specific needs, such as delay of start-up (business interruption coverage)
- Possible lower deductible than that under the commercial property policy
- Coverage extension to cover losses during testing and commissioning
- Flexible coverage regarding time element, in particular, soft costs such as engineering fees, finance fees, legal fees, taxes, and the like
- Any losses during construction under the builder’s risk coverage will not impact the loss experience on the existing property commercial policy
- Limits can be purchased for the specific project, whereas the commercial property policy can be restricted to the sublimit in the policy for new construction
- Flexibility in including the various interests in the project and any additional insureds or mortgage and/or loss payees
Consideration must be given to construction exposure from various interests. While some existing commercial property policies may provide some element of construction coverage, specific policies, such as monoline builder’s risk policies, may be better suited for larger projects. However, just as with any property insurance policy, it’s critical to carefully review coverage to make sure that the terms and perils insured are appropriate for the exposure and that the limit will satisfy all insurable interests, including the mortgage agreement.
If you have any questions regarding this type of insurance or need assistance, contact a Hylant expert.