Top 2 Tips for Hassle-Free Builders Risk Claims

When clients contact you about builders risk insurance for their residential or commercial course of construction project, you know they’re ready to hit the ground running. Before they kick off their plans, there are two key policy aspects they must grasp to avoid complications with claim payouts: project changes and occupancy.

Let’s explore these topics and reveal how clients can navigate their builders risk policy term without errors.

Project Changes – From Value to Completion Date

When your clients are in the middle of remodeling their restaurant or building a new home, unscheduled changes that alter the construction timeline (shorten or extend) and / or the total completed value (which happens a lot) should be reported to underwriting. If you don’t properly endorse the policy to reflect these adjustments, your clients could end up underinsured or with unpaid losses.

Here’s an example when the construction timeline happened faster than originally stated at policy issuance.

Imagine your client is remodeling their restaurant, and construction is ahead of schedule by two months. However, your client doesn’t inform you about the adjusted completion schedule.

Then, a week before the restaurant is supposed to be finished, a storm rips off the roof, damaging flooring, drywall, counters, and more. While the damage is covered under their builders risk insurance, the repairs take an extra three weeks, finishing a month before the expected completion date stated on the policy. Your client planned a big grand opening and had to reschedule it because of the repairs. They filed a claim for loss of business income. But because they were ahead of schedule and hadn’t reached the original anticipated completion date, coverage could not be triggered.

Depending on the project type, coverages that could be affected by changes to the construction timeline include soft costs for residential and commercial clients, as well as business income and extra expense for commercial clients.

With the Builders Risk Plan insured by Zurich, your clients can also add a contract change order endorsement, which gives them expanded coverage in case project upgrades affect the total completed value. This can be added in increments of 10, 20 or 30 percent. While change orders aren’t as common on commercial projects, they happen frequently for high-value residential new builds and remodels.

Here’s an example when an unendorsed change in materials led to a costly loss.

Imagine your client is a homeowner building a new, $750,000 home. Among the many finishes they’ve planned are quartz countertops and hand-painted tiles. But, once the materials arrived, the homeowner didn’t like them and selected more expensive replacement materials — driving the cost up to $800,000. But they never tell you about the change. 

A few months into the build, a windstorm knocks a tree into the roof — knocking a hole and crashing through part of the kitchen. In addition to the roof and electrical damage, it impacted a large section of the counter and tiled floors. Your client filed a claim.

Because they were certain of their material choices at the time you secured the policy, they refused the change order endorsement. Without it, they have to pay a coinsurance penalty of 6.6% applied after the deductible is applied, reducing their payout significantly.

Takeaway: If the construction timeline and/or total completed value increases, contact underwriting to endorse the policy to reflect the changes. 

Occupancy

Whether your client’s project is residential or commercial, occupancy can affect their builders risk coverage during the policy term, and ultimately, a claim payout decision. 

If their one-shot or single-structure policy is secured using our online 40471 form for projects valued up to $10M, coverage would end 90 days after someone first occupies the covered property unless the structure is:

·       Being used as a model home

·       Being remodeled and is a single-family dwelling

·       Being used as a "model home leaseback"

Other occupancy-related conditions that would terminate coverage on the 40471 form include:

• The property being leased to or rented to others
• Two, three or four-family dwelling: 50% or more of the units in the structure are leased or rented to others
• Small commercial up to $10 million: 75% or more of the square footage space is leased to or rented to others. This does not apply to pre-leases established prior to construction.
• Once the covered property is accepted by the owner or buyer and:
  • The contractor has been paid in full; or
  • The transfer of ownership has taken place.

Here’s an example when occupancy changes impacted coverage.

Imagine your clients live in North Carolina and are building their new home in Florida to be closer to their family. While the house was under construction, there was a great deal on appliances and your clients purchased them early. With four months left on the project timeline, the new appliances are delivered to the house. Without notifying you, your clients have their daughter stay at the home to keep an eye on things until construction is complete. Given she was staying to protect the appliances, there was no lease agreement or payment of rent.

With only one month left in the construction timeline, a huge storm rolls through and causes significant damage to the roof. Your clients file a claim. However, the claims adjuster finds the structure had been occupied for more than 90 days, so coverage was no longer in place.

If your client’s policy is for a large commercial project valued over $10M and secured through our 40660 form, coverage would end 60 days after the property is occupied — in whole or in part — or put to its intended use.

Another occupancy-related condition that would apply on the 40660 form is:

• Once the covered property is accepted by the owner or buyer and:
  • The contractor has been paid in full; or
  • The transfer of ownership has taken place.

Takeaway: If occupancy of the structure is expected to change for any reason, consult the policy form for an explanation of coverage interruptions and contact underwriting with any questions.

Wrap Up

When it comes to helping clients avoid issues with claim payouts, it pays to communicate proactively with clients about their coverage conditions. Talk through these factors with clients and encourage them to reach out to you if something changes with their construction project. 

By guiding them through these crucial details, you’ll help ensure they maintain the coverage they’re expecting. On top of that, you’ll position yourself as a trusted, knowledgeable advisor in an ever-evolving market.

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.