Builders Risk Policy is a property insurance policy, often referred to as Course of Construction Policy. These policies are generally written on an inland marine policy form, as opposed to a commercial property form. This policy is provided to extend coverage to a project while it is under construction. Generally, but not always, these policies are written on an all-risk basis. But don’t let “all-risk basis” mislead you — there are still several items to be mindful of when trying to find the right coverages for your particular exposure.
There are several coverages that are critical to both the general contractor and the owner of the project that can protect them in the event of a covered loss. For a general contractor, it’s important that the communication is clear, so the owner and the contractor are on the same page with what is being expected in terms of coverage. Most of the time, the general contractor will secure this policy, but not always. Hence, the importance of making sure both parties are on the same page.
Some builders risk policies do not include profit for the general contractor, but in many cases can be bought back for additional premium. For example, let’s assume a 2-year project catches fire and is a total loss right before the project is delivered to the owner and must be rebuilt. The general contractor would certainly want to have his profits paid, and depending on how the contract is written, it could be problematic for this general contractor should the builders risk not provide profit within their form.
There are also critical coverages known as soft costs within the builders risk form. For the owner, one key coverage they would want, but many don’t know is an option, is loss of income coverage. This is often referred to as loss of revenue, loss of income, or loss of rents — the type of project determines which language you would choose for your specific project. However, this coverage is critical for our owners. For example, suppose there is a 2-year apartment building job that the owners are budgeting for $1 million during the first year open and $3 million during the second year open. Like the example above, what if that apartment building catches fire and must be rebuilt? The owner has now lost out on all that revenue due to the loss.
There are also several types of builders risk programs, depending on the project, lender, or other items that will determine which program is right for you. Are you better off on a completed value basis, or are you building 500 homes a year where a blanketed policy may make more sense? We would encourage our owners and general contractors to have open conversations on what both parties are expecting to make sure those exposures are ultimately protected to avoid any difficult conversations later, should a claim occur. Stay tuned for more information on the builders risk market for 2022 and difficulties in the builders risk market, specifically for high wood framed projects.