A Simple Guide to Builder's Risk Insurance Policies
Contractors can insure their construction projects by buying what is known as builders "all-risk" or "specified perils" insurance policies. Builders policies are meant to protect construction project property by insuring against almost every conceivable risk that a builder could become liable for during the construction. Once the construction is complete, the builders policy ends and separate property insurance must be purchased to cover the completed structure. The policies are generally flexible and can be tailored to meet the needs of each particular project. Like other types of insurance policies, there are always specific types of risks that are excluded from the insurance. Due to the fact that every construction project is different, in terms of the size, type, location and other facts, construction insurance policies can vary greatly in terms of what is covered and how much they cost. This article will give a general overview of what is covered and not covered in a typical construction project insurance policy.
Builders risk insurance covers property for projects under construction, renovation or repair. The insurance policy will generally cover an accidental loss, damage to property, or destruction of property, which can be identified, and which is not specifically excluded from the policy coverage. If there is a claim for damage to a structure during construction, the policy will usually cover both the cost of clean-up and salvage, in addition to the cost to repair the structure and property. Because of the multitude of players in any given project, the policy will usually protect the property owner, the mortgage company, general contractor, and the subcontractors. The policy may even cover the engineers and the architects.
The "specified peril" policies differ from "all-risk" policies in that they cover only those perils identified in the policy, whereas an "all-risk" policy covers all perils, except for those specifically excluded. In other words, an "all-risk" policy will cover much more than a "specified-peril" policy, but will also cost more. An example of the type of coverage included in a "specified peril" policy, would be a policy that specifically covers direct physical loss or damage to property by lightening. Notice that this type of policy would likely only cover damage by lightening if it hit the building, as apposed to hitting the building next door, which catches fire and then burns your building down. On the other hand, an "all-risk" policy would insure against "all" risks of direct physical loss to property, unless the policy specifically identifies something it doesn't cover. So in the example above, if lightening hit the building next door, which caused a fire that burns your project down, it would likely be covered by insurance unless the policy specifically stated that fire damage is not covered. Therefore, an "all-risk" policy does not detail what risks are covered, as the default coverage is "everything" unless otherwise stated in the policy.
This extremely broad insurance coverage covers a loss due to almost anything, unless due to intentional acts, fraud, or unless the policy contains specific exclusions from coverage. Therefore, the most important part of the all-risk insurance policy is the "exclusions" section. While not every "all-risk" insurance policy is the same, most cover fire, windstorm, lightening or even explosions, and may also include theft, collapse, water damage, snow damage, and costs associated with the repair, such as debris removal and demolition.
In general, construction insurance policies are written to cover buildings or structures on the property during the course of construction, including all additions directly attached to the structure and fixtures, equipment and machinery that could be considered part of the building (such as boilers, HVAC systems, or Electrical systems). Normally, temporary structures are also covered, and so are on-site materials and suppliers that are used in the construction. Some policies can be extended to include materials that are in transit to the property for extra cost.
Generally, a builders risk policy does not cover fences, signs, walkways, roadways, or swimming pools. In building near water, wharfs, docks, dams, tunnels, bridges, and underpasses are usually not covered. Landscaping is also excluded in normal circumstances, so damage to lawns, trees, and plants are not covered. Additionally, underground structures are generally excluded, such as foundations, pipes, drains, and the costs of excavation, grading or filling.
The policy will usually contain exclusions of coverage for damage caused by faulty designs or workmanship because these types of defects can usually be covered by insurance available to architects or engineers. However, if the design defect led to a fire, and fire was covered, then the fire damage could be covered.
The policy also will usually exclude certain types of catastrophic events like earthquakes, volcanoes, landslides, floods, and tidal waves (tsunamis). Water damage is usually excluded where the water comes from below the surface, leaking pipes, and seepage through foundations.
"Endorsements" or "Riders" are unusual terms that basically mean that they are amendments to the insurance contract. The typical policy can be viewed as the standard form, but if a builder is worried about certain types of risks that aren't usually covered, then the insurance company will agree to amend or "extend" the policy to include that risk for an additional price. Almost any type of risk imaginable can be handled by way of a rider or an endorsement. Upon payment of the extra insurance premium, the insurance company will agree to "endorse over" the existing terms and provide the builder an "extended policy". For example, if building a high rise building near an airport, a builder might fear the risk of terrorism, which is likely an excluded risk from the insurance policy. In this case, the builder can ask for a quote from the insurance agent to give a "terrorism" rider or endorsement. At the end of the day, the typical insurance policy will contain a handful of riders or endorsements once the negotiations with the insurance agent are over because every project is unique. The riders are generally one page in length and sequentially numbered and attached to the back of the policy. The rider will generally state that despite what the general insurance policy says, that the insurance company agrees to insure against a specific type of risk.
Insurance policies can be complicated and many times the types of coverage sought is dictated by the bank, which wants to make sure its construction loan is secured. Because insurance policies are complicated, in larger projects it is advisable to have a construction attorney review the policy. However, in all cases a good insurance agent and company should be consulted who know the ins and outs of the construction process and the risks that builders face.