Coverage Tailored to Your Unique Project
Every construction project is unique, and builder’s risk policies can vary significantly depending on the insurer. Insurance Solutions 365 helps you navigate the options from top insurers to find the best coverage for your construction insurance needs.
In the simplest terms, builder’s risk insurance (also known as course of construction or inland marine coverage) insures a structure and construction material while under construction (subject to certain restrictions and exclusions).
A builder’s risk policy can cover a variety of projects, offering standard coverages and optional endorsements to tailor coverage for almost any residential or commercial course of construction project. A builder’s risk insurance policy is often required to comply with government regulations or as a condition to meet banking or other contractual arrangements.
Generally, builder’s risk exposures are divided into three categories: hard costs, soft costs and business interruptions on (BI) or loss of rent.
Hard Costs
The physical property and tangible assets involved in a construction project, including materials, labor, and landscaping—often referred to as “sticks and bricks”—are categorized as hard costs. Builder’s risk insurance typically covers these hard costs in the event of damage caused by severe weather, fire, vandalism, theft, or other risks. In its most basic form, a builder’s risk policy is designed to cover only hard costs, ensuring protection for the essential elements of the construction project.
Business Interruptions
When a loss occurs during the construction of a commercial building, delays can disrupt business operations and lead to a loss of revenue. Builder’s risk insurance can be extended to cover Business Interruption (BI) or Loss of Rent caused by construction delays.
For example, if a retail center’s construction delay prevents the building owner from leasing space to tenants, the lost rental income would be covered under Loss of Rent. This includes revenue that would have been earned from rents or leases, minus any non-continuing expenses.
Similarly, BI coverage protects against the loss of income that would have been generated if there hadn’t been a delay. This includes net profit or loss, as well as continuing normal expenses. Much like BI coverage on a standard property policy, the extension typically covers operating profits, fixed costs, ongoing expenses post-loss, and additional costs incurred to minimize delays and expedite project completion.
Soft Costs
When a covered event causes physical damage to a construction project, the financial impact often extends beyond just property damage. Delays caused by these events can lead to additional expenses, such as increased construction loan interest, re-inspection fees, or the need to extend permits and licenses. These expenses are known as soft costs, which refer to any ongoing costs that arise due to a delay caused by a covered loss.
Soft costs are typically not covered by a standard builder’s risk policy unless specifically included with special endorsements. Since soft costs can vary depending on the project, it’s crucial for agents and brokers to help clients assess all potential expenses to ensure appropriate coverage.
Common soft costs related to construction delays include:
It’s important to note that soft costs are only covered if they result directly from a covered loss, such as fire or vandalism. Additionally, insurers often require a minimum deductible based on the length of the delay before soft cost coverage applies. Typically, builder’s risk policies cover soft costs from the date the project would have been completed if no loss had occurred, until construction is finished.
