14 JanBuilder’s Risk 101
Builder’s Risk Explained
If you are a real estate investor, or if you have ever remodeled an existing property, the chances are better than not that you have either purchased or heard of a ‘Builder’s Risk’ insurance policy. The question; however, is whether or not you were ever really protected with any insurance at all.
You see, contrary to its name, a Builder’s Risk policy may not be applicable in many remodeling and construction projects and this is the most commonly mis-sold policy in the market – which means that thousands of people each year pay for insurance which they never really even have.
Some Important Facts to Know
(1) Builder’s Risk policies can often be written in terms of three-months, six-months, or 12-months. If the project is not completed by the end of the initial policy term, it can often be extended, but only one time;
(2) While there are exceptions, it is also important to know that a Builder’s Risk policy usually does NOT provide coverage for any existing property undergoing structural changes or renovations such as foundation work, movement or alteration of load-bearing walls, roof trusses, or new property additions. While this is often the exact nature of the work being performed on existing structures; these items are often specifically excluded and any claim filed on a property which has had this work performed may be immediately denied and the policy declared null and void. In essence, you’ll have no insurance.
(3) Third, all Builder’s Risk policies are considered ‘earned premium’ due the high-risk nature of insurance. What this means in laymen’s terms is that the entire premium for the policy must be paid for up-front and in full at the time the policy is issued. Also, this premium is immediately considered fully ‘earned’ by the company, which means that even if you cancel the policy three days after it is issued, you will get no refund whatsoever as the premium has already been ‘earned’.
(4) Also, unlike a normal homeowner’s policy, Builder’s Risk is not designed to protect against personal liability nor does it cover any losses which occur before the project is actually started or after it is completed. This means that if anyone, such as a neighborhood child, is inadvertently injured on the property and the parents or others choose to file a lawsuit, the insured has absolutely no liability protection unless he is also covered by a completely separate General Liability policy.
(5) Finally, a Builder’s Risk policy automatically cancels and ceases coverage either 90 days after the project is completed or 60 days after the property is put to its intended use (whichever comes first), such as in the case of a rental property in which a new tenant signs a lease and moves in. In the event of a claim after the project is completed, the insuring company can request copies of tenant leases, occupancy permits, or other official documents in order to establish when the project or construction was completed.
Why Do Agents So Often Mis-Sell Builder’s Risk Policies?
The reason so many agents incorrectly write and issue Builder’s Risk policies under the wrong conditions is not because of anything intentional, more often than not it’s simply because the agent you are working with has little or no experience in real-estate investing or anything construction-related. In addition, many agents who have developed their business around selling traditional home and auto policies have seldom, if ever, read through a Builder’s Risk policy to actually understand what is really covered and what isn’t. Therefore, they naturally assume that a Builder’s Risk policy is a one-size-fits-all policy for anything and everything construction-related. It’s only when the unexpected occurs that you find out you weren’t properly insured.
What is a Builder’s Risk Policy for?
Generally speaking, Builder’s Risk Insurance covers buildings and structures under brand-new ground-up construction or minor remodeling of existing structures, such as interior remodels and ‘gut rehabs.’ It typically covers the same types of things as regular property insurance, such as damage from theft, fire, vandalism, wind, hail, and other accidental loss or damage to the property. A Builder’s Risk policy also provides coverage for theft or damage to materials not yet installed, such as uninstalled windows, cabinetry, lumber etc.
As already mentioned, there is no liability coverage and coverage usually extends until 90 days after the building or structure is completed and/or 60 days after it is put to its intended use.
What It Isn’t Used For?
A Builder’s Risk policy is not intended to be used for long-term coverage. It is also not intended to be used for properties which are occupied during the course of construction (except minor remodeling work). Finally, they are not intended for use on vacant or properties actively held for sale.
Who Needs It?
Who should purchase a Builder’s Risk policy? Anyone with a financial interest in a major construction, remodeling, or repair project, including general contractors, real estate developers, and property owners. In addition, some trade associations and lending institutions may require Builder’s Risk Insurance, especially on projects worth a million dollars or more.
Other Things To Take Into Consideration
Builder’s Risk policies don’t cover damage arising from earthquakes or floods, so if you need this coverage you will have to purchase it separately. Also, as already mentioned, most Builder’s Risk policies do cover loss or damage to construction materials in transit and in storage, so if you plan on storing or transporting construction materials, make certain that this coverage is provided.
Additional Coverages You Need To Be Aware Of
Contactors’ equipment and tools typically aren’t covered by the owner’s Builder’s Risk policy and these risks will usually require separate coverage. One caveat to this is that many policies do actually provide a limited amount (usually $5,000) for tools and equipment which are stolen or vandalized, but they must be within 100 feet of the property at the time of the loss itself. They may or may not also cover “soft costs” associated with other aspects of a project such as financing charges, marketing, legal, permitting, and loss of income resulting from property damage.
In closing, Builder’s Risk policies are very different and the coverages they contain can vary greatly from one insurance company to the next and it is very important that when needing a Builder’s Risk policy, you work with an agent who is knowledgeable with regards to these coverage types.
Troy Insurance Group is extremely experienced in construction, commercial development, and real estate investing as well as all matters relating to Builder’s Risk coverage. For a free quote or to discuss the insurance needs of your particular project, call us at (512) 986-6124 for more information.