Building a dream home. Renovating a starter home. Expanding a business. In all of these scenarios, you would be quick to offer your clients builders risk insurance. But before you issue that policy, consider some of the unique exposures their project might encounter.
Is there a coverage endorsement available that would better help them survive a jobsite loss? In this post, you’ll learn about three scenarios in which your clients could benefit from optional builders risk insurance endorsements.
The first option to consider is soft cost coverage. Soft costs in construction are all of the expenses besides labor and building materials. These include:
- Additional interest on construction loans
- Insurance premiums
- Legal fees
- Real estate and property taxes
- The costs of new permit and inspection fees.
Soft cost coverage is designed to protect clients from recurring out-of-pocket expenses like the above examples. It’s important to note that coverage is not automatic just because a soft cost is included in the policy; those expenses are only covered when another covered cause of loss is the reason the soft costs occurred or re-occurred. Additionally, you should exercise care in differentiating between soft costs and hard costs, which would include payroll, materials, and costs associated with grading the land.
Fred and Wilma are working with a contractor to build their dream home, so they reached out to you to secure a builders risk policy. When construction was 95 percent complete, trespassers broke into the unfinished home and vandalized it, causing extensive damage that is expected to significantly delay completion and closing.
In addition to the costs involved in ordering and installing replacement materials to fix the damage, Fred and Wilma now find themselves responsible for unanticipated expenses including additional construction loan interest and new inspection fees, as well as additional premium costs to extend the policy due to the loss.
Fortunately, you recommended and secured soft cost coverage with their builders risk policy, so they won’t have to worry about paying these added expenses out-of-pocket.
Keep in mind: the items listed here are generally covered as soft costs, but each client’s policy terms will ultimately define soft cost coverage.
During the course of construction, contract plans are almost guaranteed to change, especially for residential new construction and remodeling. Changes to materials and equipment or the scope of a construction project often occur after construction has begun, resulting in a higher cost to the property owner.
In the context of builders risk insurance, these changes can result in a gap between the policy coverage limits and the actual value of the structure due to new or more costly materials or enhancements to the original design. These are commonly referred to as change orders. While this is not surprising, did the parties involved — including yourself as the insurance agent — anticipate and account for the change in project value? If the builders risk insurance policy does not reflect the right coverage limits to protect your client, some of the risks involved include uninsured or underinsured losses. That’s why it’s beneficial to discuss the advantages of a change order endorsement with your clients for their builders risk policies.
Jim and Pam decide to spring for an upgraded kitchen during their new home construction after you issued their builders risk policy. In all the excitement, they forget to tell you that the change in materials increased the project value. (Let’s be real: who really thinks about coverage when building a new kitchen?)
Now, Jim and Pam are underinsured and face potential coinsurance penalties should they experience a loss during construction, and you risk potential error and omission claims. But how do you prevent such a risky situation?
Adding a change order endorsement to their builders risk policy is an easy, proactive solution. These can be issued in increments of 10, 20, or 30 percent to help mitigate penalties for Jim, Pam, and your business.
Of course, home construction isn’t the only time when additional coverages could save the day. Businesses can benefit, as well. After all, commercial clients are also at risk for financial hardships if their construction plan is derailed.
Business income / loss of rents coverage offers insurance protection for lost income or rental income to the business owner (insured), resulting from a delay caused by a covered loss under the builders risk insurance policy when a previous contract for rental was established prior to the loss.
Extra expense coverage offers reimbursement to cover actual extra expenses needed to avoid suspending — or to minimize the need to suspend — business operations. It will also pay for costs associated with repairing or rebuilding to reduce further loss, even if such mitigation efforts are temporary.
This commercial policy endorsement is only available when the builders risk insured is the owner of the structure; coverage is not available to non-owner contractors. The owner must either have an insurable interest in lost income for their business, or a loss of rental income for commercial properties.
Your clients, Bob and Linda, are finally remodeling their family-owned burger joint, expanding the kitchen and dining area. They’ve already planned a re-opening extravaganza scheduled a few days after the expected completion date.
Unfortunately, lightning struck the nearly finished project, leaving significant damage to the building and putting their project more than two months behind schedule.
The damage itself was covered by their builders risk policy, but Bob and Linda can’t afford to lose additional months of income.
What builders risk endorsement could’ve offset this expensive delay?
Builders risk insurance with business income / loss of rents and extra expense coverage would provide additional funds to cover these types of unexpected losses so Bob and Linda could get back to business with as little interruption as possible.
Need more help understanding coverage definitions? Download our free resource, Builders Risk Insurance: Understanding 10 Optional Coverage Endorsements.
This is intended as a general description of certain types of insurance and services available to qualified customers. Any description of policy provisions is meant to give a broad overview of coverages and does not revise or amend a policy. Refer to the policy coverage form for a complete representation of the scope of coverage, terms, conditions, exclusions and more. The policy is the contract that specifically and fully describes your coverage. Some products may not be available in all states and may only be offered on a non admitted basis. Product availability is subject to change.