Understanding Builder’s Risk Insurance for Developers

Author: Andrew Cartwright 

A Builder’s Risk or Course of Construction policy is purchased to provide coverage against physical damage or loss over the course of a construction project. In addition to the actual building being constructed, this may include the contractor’s interest in the materials, equipment and property related to the project.

When is a Builder’s Risk or COC policy required?

A Builder’s Risk or COC policy is often required for a few reasons. The most obvious being the protection afforded to the Developer in the event of a loss. Related third-parties such as the project owner and lenders will also stipulate that the builder carry a policy in order to protect their financial position.

The type of policy can be purchased for a wide range of projects, including additions to an existing home or major renovations. It can also be utilized for more complicated risks such as a high-rise condominium, row of townhomes or entire subdivision developments.

Coverage for the Hard Costs of the project

The basis of any Builder’s Risk policy is to cover physical damage to the newly constructed structure. Those with a financial interest in the project will require 100% of the hard costs to be insured in order to cover all claims. For example, let’s assume a fire breaks out at a subdivision development causing two single detached homes to burn down. The Builder’s Risk policy will cover the labour and materials costs to rebuild those structures back to the same position they were at before the damage occurred.

The importance of insuring Soft Costs on your Builder’s Risk Policy

Softs costs are the indirect costs associated with a project outside of the physical construction. This often includes non-tangible items such as design work, inspection fees and interest on loans. While these costs may be substantial, coverage is not always provided under a standard Builder’s Risk policy. It is critical that Developer’s partner with an experienced insurance broker who will ensure their interests are adequately protected.

The general rule is to insure 25-35% of soft costs, however the lender may require a higher limit. This differs from hard costs in the sense that only those recurring project fees will need to be covered.

Using the example above, the most obvious soft costs would include the project’s financing fees and any additional required inspections. With soft cost coverage in place, the Builder’s Risk policy would cover these additional costs.

Understanding Delayed Start-Up Coverage for Project Developers

While not always required, Delayed Start-Up coverage is intended to cover the loss of real or potential income in the event that the construction project is delayed due to physical loss or damage.

For example; a high-rise developer has retained the ground floor commercial units of a condominium development to be leased. A ruptured water line resulted in damage to the units which require significant repairs. This then delays the tenant’s move-in date while subsequently resulting in a loss of potential rental income to the developer.

The Delayed Start-Up component of the policy would then cover the rental income that would have been realized had the water damage not occurred and the commercial units been finished on time.

What information will be required in order to get insured?

The insurance company underwriting the project will need to understand the full scope of the work, in order to gain an understanding of the potential for loss. To that end, they will require:

– A Completed Builder’s Risk Application
– Site Plan
– Construction Budget
– Construction Schedule
– Geotechnical and Related Reports
– Phase 1 and 2 Environmental Site Assessments

Project Insurance Requirements within the Lender Agreement

Another key document is the lender or loan agreement. The lending agreement will stipulate the level of insurance required before any funds are disbursed. This includes the type of policies, limits, extensions and warranties that must be purchased on behalf of the Developer. Oftentimes, the lender will hire an insurance consultant to ensure that these requirements are satisfied. It is important to provide this document to your insurance broker well in advance of the project start date so they can provide policy terms that will be accepted by the lender. It is critical that these requirements are met to avoid unnecessary delays in the draw and project schedule.

The role of the Construction Manager or General Contractor

The experience of the Construction Manager or General Contractor is crucial to not only the success of the project but the impact it can have on pricing. The insurance company would like to see that the company running the site has the relevant competence and experience in managing a similar type of project. The insurance company may also require a letter of experience from the Construction Manager or General Contractor, highlighting any claims they may have had on previous projects.

Partnering with the right Insurance Brokerage

Understandably, these projects are a significant undertaking in terms of both time and financial resources. All parties want the project to run smoothly and be successful while protecting their financial position. It is essential that Developers partner with a brokerage that has both the market relationships and experience design a comprehensive policy which protects the interests of everyone involved.