Builders risk: How insurers handle large construction submissions differently
Depending on the market, higher-value projects require more documentation and underwriting intervention.
Most agents are familiar with builders risk insurance, a form of inland marine coverage that insures building, remodeling and installation projects during the course of construction. Because it’s easily accessible and the named insured can be your personal or commercial lines client, it’s a good product for your portfolio.
Smaller-value projects are generally fast and simple to bind. However, when it comes to big accounts, not all builders risk insurers have the same appetite and the process of securing coverage looks different.
Depending on the market, higher-value projects — let’s say $3 million and above — require more documentation and underwriting intervention. As projects increase in value, you can expect carriers to ask more questions in order to validate eligibility and determine the pricing to match the exposure. Carriers will want to know the contractor’s work experience as it relates to comparable jobs and may ask for a credit or cashflow report. In addition, a carrier will need to see a cost breakdown to accurately value the project. This can often be found in the construction agreement.
With larger, complex cases, knowing the market becomes imperative. Agents should do their due diligence in order to advise clients on the appropriate limits, deductibles, exclusions and endorsements.
Here are a few things to consider when seeking builders risk coverage for large construction projects:
Location and length of exposure
Getting coverage can be a challenge when a large project is located in an area prone to severe weather. In recent years, CAT claims have been rising, and areas that historically weren’t susceptible to wildfires or flooding are now at risk.
Generally, builders risk excludes coverage for floods and earthquakes unless the optional coverages are available for purchase. However, most policies stipulate a minimum distance from tidal water, so be sure to know the distance between the structure and any body of water.
In addition, builders risk insurers have distance requirements for multi-family buildings that can affect eligibility. Here’s one reason why: The risk of a fire spreading is higher when structures are built close to each other.
Length of exposure is another key consideration. A large project that takes several years to complete poses a higher risk than one that can be finished in one season. Since builders risk is written for a specific term, you’ll need to make sure the policy can be extended if needed.
Limits, deductibles and exclusions
With large projects, policy limits can be an issue. In some cases, coverage can be staged. For example, a development that has multiple dwellings can be insured in sections. As one building or section is completed, it comes off the builders risk policy and should then be moved to a permanent property insurance policy.
Builders risk does not automatically insure all perils throughout the course of construction. Where there are coverage gaps (outlined as exclusions within the coverage form), you may be able to add endorsements or purchase separate coverage.
While there is no hard-and-fast rule regarding deductibles, insurers look for a deductible that is commensurate with the limits of the policy. A $1,000 deductible on a $500,000 policy makes sense, but it doesn’t make sense on a $10 million policy. Most carriers are willing to be flexible on their rates when higher deductibles are selected.
Soft costs and additional coverages
Builders risk insurers are more likely to offer some flexibility and customization for larger accounts. Again, familiarize yourself with what’s covered in a carrier’s form. Where there are exclusions in the policy, you may be able to add the coverage.
For reference, following are just a few examples:
- Most policies allow for cold testing of building systems but not hot testing. Check to see if you can add this if your client needs to do high-pressure testing.
- Most policies exclude water damage. However, you may be able to add coverage or purchase a flood policy.
- Policies have various default limits, which can usually be increased by the agent. These could include limits for materials in transit or debris removal.
Soft costs must be added to a builders risk policy for most insurers. Soft costs are additional expenses a builder might incur due to a covered cause of loss, such as additional interest payments, tax assessments, legal fees or insurance premiums. Commercial project owners may also need coverage for loss of rent and business income. Other coverages that can be purchased include contract change-order endorsements, installation floater policies for tradesmen, and contractors equipment to cover mobile equipment such as a backhoe or dozer.
The big picture
With large construction projects, keep the big picture in mind.
Pay careful attention to when coverage begins. Too often, clients wait until after the foundation has been poured to secure builders risk insurance. However, many carriers won’t insure a project after it’s started, or they’ll charge higher rates and require more scrutinized underwriting review.
Equally important is knowing when coverage ends. Usually, it’s when the building is occupied, leased or rented, but this can vary among providers. Read the coverage form and be aware of these conditions.
In summary, when agents understand the project and exposures, and are prepared to provide additional underwriting information, they’ll get a quote faster from a provider. Additionally, they’ll be better informed to ensure clients are properly protected should a loss occur.
Rachele Holden is SVP, head of product underwriting for US Assure, where she is responsible for product development, loss analysis, and rating and guidelines. US Assure exclusively distributes, underwrites and services Zurich’s builders risk insurance program across the U.S.
Opinions expressed here are the author’s own.
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