Builder's Risk Insurance: Specialized Coverage for Construction Projects



Soft Costs Case Study

“Soft Costs” are essentially extra expenses incurred as a result of a delay caused by a covered loss. Some of the more common soft costs are interest charges on project financing, realty taxes or other assessments, workers overtime, advertising and promotion, costs associated with lease renegotiations and accounting, legal, architectural, or engineering fees.

Typically these costs are not applicable on smaller projects such as individual dwellings. On commercial projects, however, these unplanned expenditures can be rather costly.

In some instances an insured may find the carrier reluctant to pay what it considers a covered soft cost. The following language, as taken directly from a basic builder’s risk policy, highlights this point.

Expenditures, during the period of indemnity, which would not have been incurred by the insured if the delay had not incurred include:

It is plain to see that during the adjustment process the language in “B” gives the carrier the discretion to include, or more importantly exclude, costs as it sees fit. When such ambiguous language exists, the insured would be wise to come to an understanding with the carrier before a loss occurs.

In the case of a delay in opening, the insured should be aware that the estimated completion date may be what triggers coverage for soft costs. The following example will help to illustrate this point.

Assume a two-year project had an estimated completion date of December 1, 20XX. It is now August 1, 20XX and the project is expected to be completed in one month, on September 1, 20XX, putting the project three months ahead of schedule. Unfortunately, a fire occurs the evening of August 1, 20XX. It is expected to take two months to effect the repairs necessitated by the fire. On October 1, 20XX, the fire repairs are completed and the final 30 days of the project can now be resumed. On November 1, 20XX, the project is completed one month ahead of the schedule instead of three.

Because the delay occurred prior to the original completion date, allowing the builder to finish the entire project before that date, the carrier will take the position that no delay has occurred. If this were the case, soft costs incurred during the two months of the fire restoration would not be covered.