Builder's Risk Insurance: Specialized Coverage for Construction Projects

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    • Contingent Coverage

      It’s not unusual to hear of project owners neglecting to obtain builder’s risk insurance. Sometimes owners are fortunate to have a commercial property policy in force at the time of loss, on which they can rely for coverage. Some of these policies may also cover the interest of contractors. If those interests are not covered, contractors could have a case against the owners, although litigating these issues can take a long time and entail considerable expense.

      Instead, contractors might be able to purchase contingent coverage, designed to apply when the party who is supposed to purchase the builder’s risk policy fails to do so, or obtains the coverage but fails to maintain it. If this happens and a contractor is unable to collect their interest following a covered loss, contingent coverage will apply — subject to the applicable limit and if the loss occurs during the course of construction.

    • Difference in Conditions

      Difference in conditions or “DIC” coverage was first introduced when only named causes of loss coverage was available. Applying above a property policy on a named peril basis, the DIC form covers losses from causes not caused by a named peril and not otherwise excluded by the DIC form.

      With many policies written to apply on a special causes of loss basis, including builder’s risk policies, the usefulness of the DIC has diminished. To the extent that it is available, DIC coverage is generally purchased to obtain additional causes of loss coverage over a high deductible, such as flood, windstorm in high-wind prone areas, and earthquake. Sometimes insurers of a builder’s risk policy will not provide DIC coverage, even when a construction contract requires it.

    Soft Costs

    Not covered by the basic builder’s risk policy is the delay in completion and resulting loss of business income, loss of rents, extra expense, interest on loans and other consequential losses incurred after an insured property loss. Any of these, which are known in construction circles as “soft costs,” can be covered by adding soft costs coverage to a builder’s risk policy. With its popularity increasing in recent years, some insurers automatically include soft costs coverage, which can be activated by designating the limit on the policy declarations.

    A challenge that must be overcome in providing delay in completion coverage and the other coverages that should be purchased is determining when the project will be completed. Since the exact costs of future operations of a new building or structure are not known, it might be necessary to project a worst-case scenario. In such cases, estimates should be made for the following:

    • How much money would be lost and how much extra expense would be incurred if the worst imaginable loss occurred at the worst possible time?
    • What benefits of occupying the completed building on schedule would be lost if completion was delayed by an insured loss? What additional expenses would be incurred to hasten completion and occupancy?

    Also determine whether consequential loss coverage is available for excluded losses such as a strike, which shuts down the construction, or a loss at a key supplier that prevents or delays the delivery of needed construction materials to the site.

    The answer to these questions will form the basis for estimating the amounts of the coverage to purchase.


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