Builders Risk Exposures

08/13/2015

3 Exposures to Consider on a Builder's Risk Insurance Policy

Hard, Soft and Business Income Expenses


The resurging construction industry means that builder’s risk submission activity is on the rise. As such, it’s important to understand this line of business. Here’s an overview of some things to consider on a builder’s risk policy.

Construction contracts generally require the building owner or the contractor to purchase and maintain a builder’s risk policy. The policy provides coverage for loss or damage to the unfinished building’s construction materials on the work site during the course of construction, subject to certain restrictions and exclusions. The policy can also be extended to cover existing structures if the project is a renovation. Exposures are broken down into three general parts: hard costs, soft costs and business income or loss of rents.

Hard costs are the tangible assets that comprise the construction project; quite simply, the costs of material and labor associated with a project - also known as "sticks and bricks."

Soft costs, also known as Delay in Opening Expenses, are usually covered and limited by special endorsements to builder’s risk property policy. Coverage is provided for additional construction loan interest, real estate taxes, marketing and re-leasing expenses, administrative expenses, and architectural/engineering fees which are incurred as a result of a covered loss – one that causes delay in completion of a project. These expenses can be further broken down into two sub-categories: construction expense and additional soft costs.

Construction expenses are fixed costs incurred during the delay in construction, and additional soft costs are costs that are more likely affected by the length of the delay. Construction expenses include but are not limited to: additional advertising, public relations, or promotional expense, architectural/engineering fees, inspection fees, loan fees and non-interest financing fees, and cost to extend permits and licenses. Additional soft costs include but are not limited to: additional loan interest, real estate taxes, expense to lease equipment and temporary office space, operational expenses (salaries, utilities, etc.), and insurance expense.

Builder’s risk policies can also be extended to provide the owner coverage for Business Interruption (BI) or Loss of Rent due to a delay in start-up. Much like BI on a standard property policy, the extension typically covers operating profit, fixed costs, expenses that continue post-loss, and expenses incurred to reduce or avoid a delay in opening.

In the event of a covered loss, the typical soft cost provisions in a policy provide coverage for the costs incurred from the date the construction would have been completed (had no loss occurred) until construction is completed, and is subject to the insured exercising due diligence and dispatch.

Calculating the delay period is complex and requires the broker to be knowledgeable about the specific and unique attributes of a project, as well as a deep understanding the coverage form.

For example: what is the difference between the Period of Restoration and Period of Indemnity? The Period of Restoration refers to the time necessary to perform repairs, whereas the Period of Indemnity refers to the time required for the insured to financially recover had no loss occurred. This is just one example of how being knowledgeable about builder’s risks policies can make you, the broker, a more informed resource for your insured client.

Whether an insured is able to obtain adequate recovery or not depends heavily on how these three coverage parts and extensions interact in the event of a claim. Choosing a wholesale broker in the construction field with this specialized expertise and experience is a critical part in the marketing and placing your client’s builder’s risk coverage.






This article was authored by Harry Tucker, Grant Chiles and Frank Catalano, members of AmWINS’ national Property Practice.
Contact Us

To learn more about how AmWINS can help you place coverage for your clients, reach out to your local AmWINS broker.  If you do not have a contact at AmWINS, please click here.

Legal Disclaimer. Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.

(c) 2017 AmWINS Group, Inc.

Most Popular Insights

State of the Market - Q2 2020

06/15/20

Our Q2 2020 State of the Market report provides a holistic view of highly impacted industry segments as well as overall market trends. This report is designed to help our retailers gain the knowledge they need to retain accounts, write new business, overcome challenges and capitalize on opportunities that do exist.

On-Demand Webinar: COVID-19 Economic Impact and Future Outlook

05/15/20

As a result of the COVID-19 crisis, our industry is facing a broad array of challenges that impact insureds of every size and in every industry. In the first of a series of webinars, we hear from an economist on the financial impacts of COVID-19 and what we can expect in the future. This webinar is intended to complement your conversations with clients about how to plan for the next 12 to 24 months.

Insurance Impacts of COVID-19 on the Healthcare and Senior Living Industry

03/30/20

As the healthcare industry remains on the front lines of battling the COVID-19 pandemic, staying abreast of the changing landscape and how the insurance market is adapting is critical to ensure new exposures are covered and renewals are successfully placed. In this article, our specialists share what they are seeing in the Healthcare and Senior Care markets, tips for risk control and mitigation, and how to get the best results for insureds.

COVID-19 – Are Your Clients Covered?

03/19/20

The disruption to business and everyday life caused by the coronavirus (COVID-19) pandemic is resulting in an economic impact for insureds. Much of this disruption is likely not covered by insurance. We have consulted with several AmWINS insurance specialists across the Property, Casualty and Professional Lines sectors and offer a COVID-19 update.

How Parametric Products Benefit Catastrophe-Driven Risk Transfer

03/19/20

Parametric insurance is an innovative product that functions differently than traditional insurance by covering the impacts of an event and not just losses sustained to an asset. Proceeds of the policy are paid quickly and can be used flexibly to cover any expense associated with the triggering event. Coverages can be designed to capture the impacts of natural perils and other forms of non-damage business interruptions such as future epidemics. Learn how the parametric landscape has and will continue to play a major role in improving coverage and the recovery experience.

From Seed to Sale: The Top 5 Issues Impacting the Cannabis Insurance Industry

09/19/19

​Over the last few years, the legal cannabis industry has seen rapid growth and had a significant impact on the U.S. economy. With states continuing to legalize its use, insurance needs for cannabis-related businesses are becoming a popular topic of discussion. This article examines the evolving cannabis industry by exploring five key issues impacting coverage.

Four Key Additional Insured Endorsements for Contractors

Construction contract negotiations, which determine the kind and amount of insurance required for a construction project, can be time-consuming, complicated and frustrating. Project owners require contractors on a project to name the project owner as an additional insured on the contractor’s casualty insurance program. It's important that both project owners and contractors understand the coverage provided by these additional insured endorsements. This article discusses four common ISO additional insured endorsements related to commercial general liability policies purchased by contractors, including their limitations, conditions and exclusions.

Understanding Property Theories of Recovery and Ensuing Loss Clauses

​The theories of recovery, as well as the ensuing loss provisions, contained in property insurance policies are often complex and, at times, seemingly in conflict. Although a policy may not directly address these theories, their application by courts plays a significant role in the coverage determination process after the claim. It is essential that brokers understand the primary theories of recovery – Efficient Proximate Cause, the Concurrent Causation Doctrine, and the Anti-Concurrent Causation Doctrine – in order to navigate the challenging post-claim process and effectively serve their clients.

Sign Up For Our Monthly Newsletter

Sign Up