If you are a business owner with a need to build a new facility or undertake a major renovation/retrofitting project, don’t overlook the cost and issues related to insuring the project. Insuring the cost of a construction project often isn’t as easy as you might expect.
Most property policies exclude the cost of major construction, necessitating that a new, separate policy be obtained. If you have to pull a permit to do the project, it's probably not covered by your existing policy. In underwriting such coverage, carriers must consider a wide range of risks in the determination of the premium rates, deductibles, limits and exclusions they are willing to offer. Underwriting criteria include:
- Materials used in construction
- Site location
- Time of year construction is in progress
The foremost consideration for the underwriter will be the construction materials used. If flammable materials (wood) will be used at floor level or in the frame, the premium rate could be double, even triple what they would charge for non-combustible materials. Furthermore, policy limits for wood frame construction are usually a fraction of the coverage available for non-combustible materials.
Stick built roof trusses over non-combustible framing/walls (joisted masonry) usually carry a lower rate than wood framing but there are usually lower coverage limits to joisted masonry than construction using non-combustible materials.
Site location is of prime concern. Availability of and proximity to adequate fire protection is a critical factor. If your project is near a fire house within a municipality/county that provides sound infrastructure and fire fighting capability, you’ll be able to command a lower premium rate and higher per project policy limit. Rural locations will increase, possibly double, the premiums and cut the per-project limits significantly.
Geographic locations, i.e. those in flood zones, subject to extreme weather, or earthquakes, will carry higher rates, higher deductibles, lower limits, and/or exclusion of coverage when covering perils arising from flooding, wind/wind-blown rain, and earthquakes. A project within 50 – 75 miles of the Atlantic or Gulf coasts, in progress between May 1 and November 30 (hurricane season), will carry higher premiums and be subject to either exclusions or higher deductibles for windblown rain. West coast underwriting criteria, with which I am less familiar, will vary based on weather patterns. Earthquake coverage for west coast projects will be of more critical importance and will affect coverage and cost in like manner.
Any policy should contain some measure of coverage for materials in transit or stored offsite as well as a variety of after-disaster costs, i.e. debris removal, pollutant cleanup, record retrieval, expending expenses, to name a few.
Coverage for projects without unique and significant risks can usually be obtained by the contractor, sometimes at discount premiums, via a “reporting form” policy. Assuming the project falls within the underwriting parameters specified in the policy, coverage is provided without carrier approval. As long as the contractor reports the qualifying projects and pays the premium timely. Also, the premiums are due monthly instead of up front so changes to the contract as the work progresses are reported systematically instead of at the end of the project. Administratively, reporting form policies are very simple and easy to both procure and underwrite. However, some lenders will not accept a reporting form, primarily to avoid the possibility that the contractor will fail to report the project and pay the premiums on a timely basis.
The alternative to a reporting form policy is a contract form policy which is project specific and subject to underwriting before the policy is issued. Such policies are available to both owners and contractors, depending on which party is responsible for the coverage. Premiums are due up front and will carry some measure of earned (non-refundable) premium.
If the other party to the construction contract is responsible for carrying the builders risk policy, you will need to ensure that the deductibles, exclusions and sub limits of the policy, coupled with the contact terms, don’t leave you exposed to significant uninsured/underinsured costs. The construction contract should clearly address the coverage required for the project, who is responsible for the procuring the coverage and for paying uninsured costs.
Builders Risk coverage can be an unforeseen impediment to getting a project underway. If you find yourself wrestling with insurance issues that are derailing your contract negotiations and you need objective advice, please don’t hesitate to give me a call. I can help you sort out these kinds of issues.
© 2016 – All rights reserved
