All the moving parts in the construction process can make staying on schedule and within budget a challenge, even with the most iron-clad plans. Change requests 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 a higher valued structure due to new and/or more costly enhancements to the original design. These are commonly referred to as change orders.
Agents writing builders risk insurance should educate clients as to how change orders submitted during construction impact the insurance coverage when the project value is increased by the changes.
Change orders are commonplace in residential construction. However, often as a practical matter, homeowners and residential contractors do not always connect the change in construction plans as a need to alert their insurance agent.
Commercial projects certainly have the potential to add enhancements during the course of construction; however, this occurs less frequently due to the pre-defined project scope, and is generally not necessary. These projects have fewer changes in value during construction because of more detailed planning and budgeting, and greater involvement from architects, engineers, risk managers and contractors. When changes do occur during commercial construction, it is more likely that the contractor will need to obtain a revised certificate of insurance from the insurance agent, who then has the opportunity to adjust coverages as needed.
Contract change order endorsements allow needed flexibility when residential construction project changes occur. US Assure’s contract change endorsement provides additional insurance in increments of 10, 20 or 30 percent. Sometimes a client will suggest alterations to the project after the original contract is executed. These changes could be due to a change of plans for the eventual use of the completed project, a demand to comply with building code requirements, or simply due to a homeowner’s changing vision of the completed work.
Ideally, it is best to encourage policyholders to always contact their agent if an increase occurs so that the final project value can be adjusted on the builders risk policy. However, if that step is missed, this endorsement will help protect the policyholder until the change in project value is properly reported to the insurance provider.
The endorsement can also be important to help agents avoid any potential errors and omissions claims. Regardless of the type or value of the construction project, insuring for the total completed value is always advisable because no one knows if or when a loss will occur.
Additionally, coinsurance penalties may apply with some policies. Coinsurance, which is a form of insurance where the insured pays a share of the payment made against a claim, can often be a source of frustration. Even if the policy does not have a coinsurance penalty, the contractor or homeowner could be penalized on a sizable loss if the project value exceeds the amount of insurance at the time of loss and the limit is less than the loss amount.
By better understanding how various policy options and endorsements work, agents will be better prepared to help clients protect against unforeseen losses. Watch our webinar: Best Practices for Insuring New Construction to learn more about properly insuring a new construction project.
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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