Black box opened: What factors influence builders risk coverage premiums?
Discover how location, building materials being used and other construction dynamics impact pricing for builders risk policies.
Builders risk insurance protects materials, fixtures and/or equipment to be installed during the construction or renovation of a building or structure should those items sustain physical loss or damage from a covered cause of loss. It’s an essential coverage for personal and commercial lines clients. However, how carriers establish premium is not always clear.
Pricing may seem to be a “black box,” but it really isn’t. Once you understand the factors that go into calculating a project’s exposure, you’ll unveil the mystery and begin to see the impact those factors can have on your clients’ insurance costs.
The primary drivers
A project’s location, value, type of construction and building materials will greatly affect premium.
Coastal areas are typically more expensive than inland regions, and costs increase in areas known for natural disasters, such as wildfires, hailstorms and tornadoes.
Policies for installation projects are typically cheaper than those for new construction and remodeling because their timeline is shorter and require less effort. In contrast, renovations, especially with structural changes, can be the highest to insure when an existing structure is included.
Higher-quality construction means a more durable structure — and less exposure to risk. For example, projects constructed with fire-resistive material are likely to be more favorably rated than a wood-frame structure, which can easily result in a total loss in the event of a fire.
Insurers have varying appetites, depending on their risk tolerance and capacity, which can impact availability and pricing. For example:
- Is your client building in a CAT zone/? Is it in an area where there’s been flooding, wildfires, hurricanes, hail or tornados? That can have a huge impact on eligibility and cost.
- How long will it take to complete the project? Can it be finished in a year, or will it take several years?
- Is the project residential or commercial? Multi-story or single level?
- What type of materials will be used — wood, concrete, brick, metal? Is it a green building?
- Is the project a multi-family building? If so, how close are the buildings being constructed? Is there a parking garage?
These are some of the major factors that can impact the cost, but there are other considerations as well.
Other pricing considerations
Here are some other important features that can change the way a policy is priced:
Limits and deductibles. Limits are generally set by default but can be increased to provide higher coverage. See the list of optional coverages below. The size of the deductible can also affect the price of the policy.
Optional coverages. Most builders risk policies allow for a number of endorsements, which will affect the premiums as well. The good news is that agents can tailor coverages to meet their clients’ specific needs. Here are a few to explore:
- Soft costs. If the builders risk policy already insures against property losses known as “hard costs,” the insured also may want to add “soft-cost” coverage. Often, these come into play if the project is delayed. To name a few, soft costs include advertising and promotional expenses, real estate and property assessments, insurance premiums, interest on construction loans, commissions, fees and legal expenses.
- Loss of business and rental income. For commercial projects that will be rented, leased or used to generate income, a business income endorsement is a key consideration. It covers loss of income and associated expenses if there has been a delay in putting the building to its intended use.
- Changes in project value. Coverage can be added to increase the limits in the policy to respond to contract change orders, which often increase the project’s total completed value. Because agents are not normally contacted immediately when change orders are implemented, this endorsement can provide coverage up to a percentage (10%, 20% or 30%) of the project’s value.
- Flood and earthquake. These two coverages usually can be added to your policy or purchased separately.
- Debris removal. Covers the cost of clearing and disposing of debris from a covered loss. You should check to see if the limits can be increased and if the policy includes demolition if the structure must be torn down. The construction materials’ weight and the number of stories can increase the debris removal limits required for the project.
- Pollutant cleanup. Covers the cost of cleanup and removal of pollutants on the job site. Again, it must be tied to a covered loss.
- Law and ordinance. Coverage for the cost of complying with a new law or ordinance during construction, including the cost of delays due to compliance with a new law.
- Equipment testing. Covers losses stemming from the testing of electrical, plumbing and mechanical systems. There are two types of testing: cold testing for the building’s systems equipment and hot testing for high-pressure vessels, such as boilers, manufacturing equipment, etc.
- Trees, shrubs, sod and plants. Coverage for landscaping on the property that is damaged as a result of a covered claim.
- Property of others. An extension to cover supplies and equipment belonging to others who are working on the job but aren’t named as an insured in the policy
Help your clients by staying informed
By staying up to date about the market and knowing how risk, limits and endorsements impact builders risk premiums, you’ll be in a better position to advise your clients and secure the best policy for their needs.
Rachele Holden is senior vice president, 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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