You discussed builders risk with your contractor or property owner client. You walked them through the coverage options for their new home construction project, and secured a policy. Then, disaster strikes on the job site and causes tremendous damage to the structure under construction. When they file a claim to their insurance carrier, they discover that the percent complete was incorrectly reported on their policy, so the claim was denied. And, it was simply due to an honest mistake made during policy issuance.
It’s a very common situation, and a story we hear all the time. We’re all human, after all. Fortunately, with just a little more awareness of common pitfalls during policy issuance, insurance agents can easily avoid these uncomfortable conversations and unhappy clients. With this in mind, we asked our in-house builders risk expert to share the most common residential builders risk claim mistakes, and how agents can avoid them. Here’s seven easy tips they recommended!
- Get the correct address for the new construction project.
When your client is building a single-family home in a new neighborhood, determining the correct address can sometimes be delayed until a formal street name is established. Often, subdivisions won’t have an available legal addresses right away, but may have a lot number.
In instances where a legal address is not yet available, ensure the subdivision name and lot number is correctly listed. The claims department uses this information to match claims to the proper location. If the address cannot be identified, the claims department cannot pay your client.
- Double-check your math when calculating the percent complete.
Whether clients are looking to insure ground-up new construction of a duplex or simply undergoing a kitchen, having a policy that doesn’t accurately reflect the scope of work and construction progress can lead to a denied or reduced claim payment.
To properly calculate the percent complete, just divide the amount invested in the project by the total completed value. (E.g. Clients are building a $100,000 structure. They’ve spent $25,000 into it so far. The project is thus considered 25 percent complete.)
- Confirm you and your clients are using the correct valuation type.
When residential construction clients are renovating, those looking to protect the existing structure would receive actual cash value (ACV), while a renovation project excluding the existing structure would receive replacement cost valuation.
Rather than inflating the value of the existing structure with the value of the renovation or using purchase price (which can be lower than ACV), use the existing structure value. There are several tools available to help calculate these values, such as Marshall & Swift’s valuation calculator.
- Walk clients through how to correctly report project value.
For residential remodeling clients, neglecting to calculate the value of the existing structure and the value of the renovation separately can cause a great deal of trouble. Either you might overcharge the premium (which might lead to unhappy clients who don’t receive the value they paid for) or underinsure the project (which could lead to a coinsurance penalty and cost you the account).
To avoid these headaches, ensure that the value of the existing structure is not included in the project value if clients are not paying for existing structure coverage.
- Ask clients specific questions about the project and write detailed project descriptions.
Plainly put: don’t assume a single thing about residential clients’ construction projects. So, if your client says, “We’re adding another story to our home,” ask them exactly what they plan to do. We heard from an agent who secured a builders risk policy for a homeowner who added a new first floor by raising the entire structure off its foundation — an automatic disqualifier for builders risk coverage. The agent assumed the new floor would be added to the top of the home (as most would) and didn’t clarify — so they were unaware of the severity of the risk.
When it comes to any project you’re planning to insure, ask a lot of questions and write very detailed project descriptions. Gray areas can lead to very unhappy clients when they thought they were covered for something, but their project turns out to be ineligible.
- Communicate with clients the benefits —and responsibilities— of reporting form polices.
Reporting form policies — like those available through the Builders Risk Plan insured by Zurich — are designed for builders with multiple projects in a 12-month period. However, these policies require a diligent contractor who submits regular, accurate reports according to the established period.
In the event of a loss, a contractor who hasn’t submitted their reports in a timely manner could learn that the carrier has denied coverage never reporting or reduced claim payment for missing reports. Additionally, existing inventory is only covered if it’s reported within five days of the policy’s effective date. So agents must send reports at the time of issuance and accompany it with payment to receive coverage for any losses. Overall, the reporting form policy can make securing policies for multiple projects much easier to manage, but it requires the judgment of the agent to determine whether their client is the right fit. If a client doesn’t have organizational habits, they may be better suited to a policy type that doesn’t require frequent reporting (like single-project policies, which give agents peace of mind and take minutes to quote, issue and print). If clients insist on a reporting form policy, ensure they are fully aware of what to report and when to report, as well as the repercussions if they don’t do so.
- Get a signed and dated application at the time of issuance.
If there’s one lesson we hope you’ll take away, it’s this: always have your client sign and date a copy of the application at the time of issuance. This application will detail exactly what information was provided to you to generate the policy and should be kept in that client’s file at all times. While the carrier may eventually need the application, it’s also crucial to protect yourself from a potential “he said, she said” situation in the event of an E&O claim.
When an agent secures any type of insurance on behalf of their client, it leaves the agency open to the potential risk of errors and omissions claims. For additional information about protecting your business, download our free resource, Avoid Costly E&O Mistakes: Identifying Builders Risk Exposures.
This is intended as a general description of certain types of insurance and services available to qualified customers. Your policy is the contract that specifically and fully describes your coverage. The description of the policy provisions gives a broad overview of coverages and does not revise or amend the policy.
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