If you’re commencing on a construction project, there basically are two ways you can look at Builders’ Risk Insurance:
- As a necessary evil;
- As valuable protection against the myriad risks inherent in construction, from the start of the project until an agreed-to point of completion.
Which view you adopt may prove to be a major factor in whether your business succeeds or fails.
Builders are, by their nature, risk takers — one reason why construction entrepreneurs enter an industry that historically has a high rate of failure for start-up businesses. Citing data from the U.S. Bureau of Labor Statistics, Fundera in November 2020 cited construction as the small business industry with the lowest survival rate, reporting: “For the construction industry, about 75% of businesses survive their first year, 65% make it through their second year, and about 35% make it through their fifth year.” (Overall, according to Fundera, the overall figures for small businesses were 80%, 70% and 50%.)
Of course many construction businesses not only survive but thrive. Those that do share at least one trait: They practice strategic, ongoing risk management, including a comprehensive safety program and the transfer of risk through customized insurance coverage.
In a 2019 article titled “Strategies for Surviving Your First Year as a Construction Firm,” the industry website ConstructConnect lists researching the right insurance at No. 4 among eight vital steps. Specifically cited as a key consideration: Builders’ Risk Insurance.
What Does Builders’ Risk Insurance Do?
Builders’ Risk Insurance protects those named on the policy from property damage caused by the elements — including fire, wind, lightning and hail — and from the human acts of theft and vandalism, as well as accidents such as explosions and natural disasters, including hurricanes.
While who’s covered depends on the policy, it’s advisable to name anyone with a financial stake in the construction product, including the:
- Property owner
- General contractor
Covering the insured interests of everyone directly involved in the construction project allows all insured parties to receive compensation through one claim, enabling them to get back to business more quickly and on the same timetable, rather than enduring further delay due to one or two parties’ delayed payments or litigation between various insurance carriers.
Builders’ Risk Insurance allows you to customize your policy based on the risks and exposures involved in the project, specifying protection for property and services such as construction forms, scaffolding, temporary structures, pollutant cleanup, and debris removal and disposal necessitated by a covered loss.
In addition, Builders’ Risk can cover so-called “soft costs” — expenses or losses that aren’t directly related to construction but arise from damage that causes delay. These may include lost sales, lost rental income, cost changes to your insurance for extensions, re-inspection and additional design and permit fees, real estate taxes and additional interest on loans.
So, necessary evil or valuable protection? Given all that could go wrong during a construction project, and all the coverage Builders’ Risk Insurance can provide, the answer should be obvious.
Exclusions and Underwriter Selectivity
Builders’ Risk does come with limitations. Most policies, for example, exclude damage due to earthquake, flood, wind and coastal erosion, though you may be able to add endorsements to the policy to cover such risks. Other standard exclusions include damage due to faulty planning, design or engineering; poor workmanship; subpar materials; mechanical failure; normal wear and tear; rust and corrosion; employee theft; and acts of terrorism or war.
And while frame construction is not a standard exclusion, finding Builders’ Risk coverage for frame projects is a challenge. In a June 2021 story headlined “Construction Industry Hammers Away Amid Labor Woes, Rising Costs, Delays, Tough Insurance Market,” industry publication Insurance Journal recently cited a report that states, “Requirements for water and fire mitigation technologies as well as site security are becoming mainstream, even for noncombustible projects. Market support and capacity for frame remains volatile, especially for larger frame projects located in urban environments or cities that saw an increase in social unrest.” The available capacity for frame construction projects has decreased significantly in recent years, which has resulted in the highest rates for frame projects the industry has seen in a very long time. In some cases, larger frame projects need to be placed with more than one carrier in a process called “layering” to get to the needed limits.
Coverage Cost and the Value of an Experienced Consultant
What you’ll pay for Builders’ Risk coverage primarily depends on the total estimated cost of the structure under construction or renovation, and that depends on such factors as the type of project, location, number of stories and the cost of materials. Building costs, as anyone engaged in a recent construction project knows can attest, have been extraordinarily volatile, with the COVID-19 pandemic, supply chain disruptions, labor shortages and the price of materials all causing or contributing to the volatility.
This makes communication with your insurance agent or broker more important than ever – not only during the crafting of the Builders’ Risk policy but throughout the duration of the project. If changing costs alter the estimate on the project, either to the overall value or to the duration, you need to tell your insurer. If the project experiences delays that could extend it beyond the term of the policy, tell your insurer. Discuss with your insurance agent how features such coinsurance and permission to occupy – a policy clause that permits occupancy of a completed section of a building undergoing construction without terminating coverage of the ongoing project – can factor in or be waived from the policy.
Working with a knowledgeable, experienced insurance consultant is important, too, on renovation projects involving property with insurance on the existing structure. Determining how the Builders’ Risk and existing property insurance work together is a complex undertaking, requiring insight from someone you can trust to provide a well-designed solution.
Other Cost Considerations for Contractors
If you run a construction company or subcontracting business, you’re more than familiar with the challenges involved in attracting and retaining a skilled workforce. Employees and prospective hires are more selective and demanding than ever, while the cost of providing quality health benefits keeps rising. On Thursday, Oct. 21, Alera Group will host a webinar to help you deal with these challenges. Members of our consulting and finance teams will provide insights on how to assess your health plan and implement a long-term strategy for instilling some cost stability amid these turbulent times.
About the Author
Commercial Insurance Consultant
HMK Insurance, an Alera Group Company
As a Commercial Insurance Consultant specializing in the construction industry, Ryan Rispoli negotiates coverage limits, terms and conditions with underwriters and insurance carriers, reviewing contract insurance specifications and developing risk transfer programs for clients, along with safety and loss control practices. He excels in relationship building and earning the trust of his clients as a consultant and advocate for their business.