Builders Risk Insurance: Lessons Learned from Claim Setbacks

Lessons Learned from Claim Setbacks
Lessons Learned from Claim Setbacks
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Imagine this: you have a client, Helen Homeowner, who wants to secure builders risk for her new home construction. You discussed the project, secured the policy and she walked away satisfied knowing her risks are covered. Or are they?

Disaster strikes at the job site. So, she files a claim and is anxiously awaiting payment. Then the call comes. She is only being paid a small portion of the payout expected. Why? An error made during the policy issuance process.

We’re about to reveal real claim stories and lessons learned to help you avoid mistakes that could cost your clients.

Example 1: Fire during renovation

An agent secured remodeling builders risk insurance for the renovation of a two-year-old, vacant single-family home. The renovations were 80% complete when a fire broke out. The policy listed the value of the renovations to be completed at $600,000.

Unfortunately, the client was expecting the existing structure to be insured for $400,000, with the remaining $200,000 for renovations.

But, the policy wasn’t secured correctly. While the agent should have secured remodeling including the existing structure, they instead chose the option excluding it. So, coverage was only triggered for 80% of the $200,000 renovation work and the $400,000 existing structure coverage was denied.

To avoid a situation like this, be sure to confirm with clients that they want existing structure coverage and select that item on the application, and note these values separately on the application.

Example 2: Vandalism during renovation

An agent secured remodeling insurance for a 26-year-old, single-family home at the beach. A bypasser threw a Molotov cocktail at the structure and set it on fire. Fortunately, it did minimal damage.

When the client presented the project to their agent, it was described as a second story addition to an existing home. The agent selected a remodeling policy, insuring both the renovation and existing structure. The application stated it was structural work and that a structural engineer would be involved during the construction.

Seems straightforward, right? Not quite.

As many people would, the agent assumed the additional story was going to be built on top of the existing structure.

As it turns out, the additional story was being built under the existing building.

After the claim was submitted, the adjuster visited the project site and discovered the existing structure was lifted more than 15 feet in the air and supported on what looked like pallets. Because the policy had been in place for a long enough period, cancellation was not an option. A nonrenewal was issued on the policy, and it was not insured for a second year.

To avoid a risky project like this, make sure to ask even the seemingly “silly” questions, and if possible, visit the site. If that’s not doable, request recent pictures of the site and the existing structure, if any and if coverage is needed.

Example 3: Hurricane during new construction

A ground-up, new construction policy was written for a $350,000 home. During construction, a hurricane came through, ripped the roof off and caused major water damage inside the structure.

The insured paid their premium in full and coverage was in effect, so everything appeared to be routine.

However, the adjuster uncovered that the construction start date on the project had been the year before, and the project was 75% complete at the time of the loss.

The remaining work to be done on the project with the policy in effect totaled less than $50,000, including flooring, cabinets, trim work and landscaping.

At the time of the hurricane, the flooring was in place, trim work had started, and cabinets were present, but not yet installed. The loss was settled only for the work that had been performed on the home from the policy’s effective date until the hurricane hit, which was two weeks of coverage.

Because the policy has an exclusion for structures that are over 30% complete (unless underwriting approval is granted), any work performed prior to the policy’s inception date will not be covered if a loss occurs. Only $15,000 in work was triggered for coverage.

While the agent had an application signed by the client, it’s critical to confirm with your client how much, if any, construction has been completed prior to the effective date and to share that information with the provider during the application process. And make sure they understand how coverage exclusions may come into play if those project details are inaccurate.

Example 4: Theft during new construction with reporting form coverage

An agent secured a monthly builders risk reporting form policy for their contractor client. The agent printed off a blank report and instructed the contractor on how to report starts. Then, a theft occurred.

Upon review, the adjuster found the insured reported multiple months for this loss location, and coverage was triggered because we’d received at least one report.

However, upon reviewing the number of reports, the adjuster found the insured missed two months of reports. We had only four out of the six needed. According to the coverage form, the insured must pay a portion of the loss.

Because just 66.7% of the inventory reports were submitted (four out of six), that percentage of the loss could be paid and then the deductible applied on that total loss amount. The loss was 66.7% of $11,230, less the $2,500 deductible on the policy, for a total payment of $4,990.41.

To avoid a similar situation, educate clients about reporting expectations, and the consequences when it’s not done properly.

Example 5: Fire at commercial storage facility

A commercial one-shot policy was secured for a commercial storage facility, which would later be rented to store non-refrigerated food products. Toward the end of construction, a fire occurred.

During investigation, the claims adjuster noticed a lot of boxes of food products in the warehouse, along with a forklift. They learn that the building was almost finished, with only minor touch-ups remaining. So, the owner decided to allow the tenant to start storing goods, and had been doing so for the past four months.

Unfortunately, “When Coverage Ends” in the builders risk coverage form states that coverage ends 60 days after the property is occupied in whole or in part, or put to its intended use.

As a result, the claim was denied since the coverage ended before the fire occurred.

An effective way to prevent this misunderstanding is to educate your client about the conditions that can signal coverage to end. It may even be impactful to highlight this section in the policy document, or copy and paste the information it in your email when you send it digitally.

And there you have it!

A properly secured builders risk policy is like a tailored raincoat, you get unbeatable coverage in all the right places on the darkest days.

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.

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