Builder’s risk insurance is a type of property insurance that indemnifies against damage to buildings while they are under construction. Specifically, a builder’s risk policy covers materials, fixtures and equipment being used in the construction of a building or structure in the event they are damaged by a covered cause.
Builder’s risk insurance is typically purchased by either the contractor performing the work or the owner of the property, All parties with an insurable interest, including the owner, contractor and lending institution involved, are usually included as named insureds.
Although a builder’s risk policy falls under the broad category of property insurance, it is usually written as “inland marine” coverage, a type of insurance that protects property while it is “in transit.” Under this form of coverage, any materials that ultimately will be incorporated into the building are covered, whether they are:
Builder’s risk policies usually cover temporary structures, cribbing and scaffolding and any equipment that will ultimately become a part of the permanent structure being built. However, they generally do not cover equipment owned by the contractor, including tools and heavy machinery such as bulldozers and cranes, or automobiles.
Builder’s risk insurance is usually written on an “all risk” basis, which means that the policy covers all potential hazards except those that are specifically excluded. Less often, a policy will be written on a “named perils” basis, which means that only the hazards listed on the policy are covered and all others are not.
In either event, builder’s risk policies typically cover only “fortuitous events” or accidents. Any loss that results from a deliberate act on the part of the insured is excluded automatically. Other common exclusions are damage due to:
* Earthquake or volcanic eruption
* Landslides, mudslides or sinkholes
* Flood
* Pollution
* Sewer or drain backup
* Asbestos
* Mold, mildew or rust
* Wet rot or fungus
* Loss of income due to construction delays
* Mechanical or electrical failures
* Wear and tear
* Employee dishonesty
Additionally, most policies exclude coverage due to "defective or faulty workmanship,” which means the insurer will not pay to repair defective work. However, some policies will pay for “ensuing losses,” or damages that occur as a direct result of faulty work.
For example, if a ceiling collapses because a contractor installed it improperly, the insurer would not be responsible for repairing the ceiling itself. However, if the collapse results in damage to other structures or property in the building, that damage would be covered if the policy has an “ensuing loss” clause.
Depending on the specific policy provisions, there may be extensions or additions to the exclusions noted above. These may be included in the policy or available at additional cost, and include:
* Transit extension -- covers materials from the time they leave the warehouse to their arrival at the job site.
* Temporary structure coverage -- includes subcontractors' materials, supplies and equipment even if the subcontractors are not insured under the policy
* Collapse extension -- is an addition to a “named peril” policy that specifically excludes coverage for settling, cracking, shrinking, bulging or expansion
* Debris removal extension -- covers removal of debris resulting from a covered loss
* Coverage for specific perils, such as earthquakes or floods
Unlike most insurance policies, which have predetermined start and end dates, builder’s risk policies are in force from the time construction begins until the project is complete. Typically, construction is said to have started when work begins, even if no portion of the structure is complete.
The project end date is a bit more nebulous, and is defined in various ways. Generally, most policies state that the policy terminates when any of the following occurs:
* The policy expires or is cancelled
* The project is accepted by its owner or purchaser
* The property (or a portion of the property) is occupied or put to its intended use
* The named insured’s insurable interest in the covered property ends; or
* When the named insured abandons construction with no intention to complete it.
Whether you are a contractor or owner of a property under construction, it’s important to understand and mitigate your risks. Builder’s risk insurance is an essential form of coverage, but it can be complex and difficult to understand.
We at Carmoon Group are construction insurance experts, so let us guide you in designing a builder’s risk policy tailored to your needs. We are available every weekday from 9 a.m. to 6 p.m., so give us a call at 516-292-3780 to schedule an appointment. Or simply request a free consultation online now.