Builder’s Risk Insurance
Builder’s Risk insurance is a special type of property insurance which indemnifies against damage to buildings while they are under construction. Builder’s risk insurance is coverage that protects a person’s or organization’s insurable interest in materials, fixtures and/or equipment being used in the construction or renovation of a building or structure should those items sustain physical loss or damage from a covered cause. Essentially, it is property insurance for work in progress.
Buildings are subject to many different risks while under construction. They may catch fire, be damaged by high winds, or fall victim to other catastrophes. A principle of law is that any new construction or other improvement to land becomes property of the owner of the land – the title holder – once there has been an “improvement” to the owner’s site. Builder’s risk insurance indemnifies against some of these losses.
The builder’s risk policy will provide coverage for damage done to the insured structure from a wide variety of events. Read your builder’s risk insurance policy and ask your agent to become familiar with its limitations and exclusions. Most builder’s risk policies are “all risk” policies, meaning they will cover all risks of property damage unless the risk is specifically excluded. Consequently, such policies normally contain a number of ‘standard’ exclusions and should be closely examined in order to determine their coverages, and extensions are available to cover situations like property in transit (to the project site) or storage off site and the cost of fire-service if that would be otherwise assessed against the project in the event of a catastrophic loss.
An important exclusion which should be read in its entirety excludes coverage for damage resulting from faulty design, planning, workmanship and materials. However, this exclusion may vary depending on the policy and the insurer. Sometimes the exclusion reads: The exclusion applies to (1) “Loss or damage caused by fault, defect, error or omission in design, plan or specification, but this exclusion shall not apply to physical loss or damage resulting from such fault, defect, error or specification in design, plan or specification;” and (2) “cost of making goods faulty or defective workmanship or materials, but this exclusion shall not apply to physical damage resulting from such faulty or defective workmanship or materials.” Generally, the intent of this exclusion worded this way is to preclude payment from the insurer for the cost of correcting errors in the design or construction of a structure, and only providing coverage for the ensuing physical damage resulting from errors in design or construction. Thus, there may exist limited coverage for errors in design or construction depending on the policy.
However, some insurers offer coverage for defective work through endorsement to the policy. The Hartford, for example, offers Builder’s Risk insurance and its website states: “We cover temporary structures, cribbing, false work, fencing, scaffolding, construction signs, even trees, shrubs, sod and plants. We’ll help pay for debris removal, damage from defective workmanship, materials and design. And rather than value your loss based on actual cash value, we do it based on replacement costs.” So not all policies are the same and not all insurers offer the same coverages.
If the project involves renovations or additions to an existing building, the owner’s existing property insurance may cover the work under construction, obviating the need for builder’s risk insurance. (Policies vary.) However, in the case of new buildings under construction on vacant sites, the owner may not have an existing policy that provides coverage. Start a conversation with your agent if you have questions about the types of coverage available.