When clients purchase a builders risk policy, they are buying coverage for a construction project to protect against losses that could occur. However, when clients don't understand how a policy works, what it covers and what is excluded, there may be unpleasant surprises after a loss occurs.
One area of confusion centers around changes to the materials installed after issuing the builders risk policy. Changes in value to a construction project already underway can dramatically raise the amount at risk should a loss occurs. When clients fail to notify the insurer about upgraded materials and a loss subsequently occurs, the client may not be happy to learn that their losses are not fully covered. To avoid this scenario, agents should discuss adding coverage through a change order endorsement.
Similarly, agents should ask clients about whether the construction project will be a “green” project. “Green” generally implies high-performance buildings in which environmentally friendly principals, materials and techniques are applied that promote occupant and public health safety as well as conserve resources and minimize detrimental impacts on the environment. The label of “green” project includes everything from energy-efficient and/or recycled roofing to alternative energy, windows, building materials, HVAC systems and water usage efficiency. If a project is certified as green, but the policy isn’t structured with that in mind, the potentially higher losses that can come from meeting higher environmental standards may not be covered correctly, leaving the client with unexpected expenses.
Clients may also mistakenly assume their policy includes coverage for any type of water damage. In reality, water intrusion is not covered unless the endorsement is specifically purchased with the policy. Likewise, coverage for losses sustained from floodwaters are also not automatically covered.
It is also important that agents educate clients about any applicable deductibles and deductible periods for their policies, so there are no surprises or unhappy clients later. For example, when clients choose the optional business income and extra expense endorsement for their policy, coverage only kicks in after the deductible period and must be triggered by a covered event. Clients need to understand and be prepared to self-insure for losses during any such applicable deductible periods.
A client who doesn’t understand how a builders risk policy is structured is not only at risk; there is also potential risk for the insurance agent who may need to file E&O claims. By better understanding the policy yourself, you will be well prepared to discuss coverage needs and solutions with your clients.
To learn more about builders risk insurance so you can explain policy coverage and optional endorsements to your clients, watch our short webinar Best Practices for Insuring New Construction. In less than ten minutes, you'll learn more about how to properly insure a client's project and design a policy to meet your client's needs.
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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