Builder’s Risk Insurance: What You Need to Know

Builder’s risk insurance provides protection for a structure that is damaged during construction. These policies are usually broad. In fact, the coverage is generally extensive enough to include construction equipment and machinery, as well as materials, fixtures and appliances – all vital parts of a completed structure. It can also cover temporary structures, such as office trailers, on a project site.

If a loss occurs, the insurance company will pay to repair the damaged property. However, keep in mind that the coverage is limited to losses that are clearly specified. Claims must fall within the policy’s definition of “covered property.”

Here are some basic features of a typical builder’s risk insurance policy:

• Most buildings can be underwritten including condominiums, dwellings, warehouses, office buildings, shopping centers and farm structures.
• A policy can be issued to the building owner, the contractor, or the owner and contractor jointly.
• The coverage continues until the insured party’s interest in the property ends, the building is sold, or the policy expires, whichever happens first.
• For an additional premium, some policies extend coverage beyond the expiration date. However, the general rule is that unless the policy expressly states otherwise, coverage ends when the building is either wholly or partially occupied, it has been put to its intended use, or 90 days after construction is completed.

This type of extensive coverage can be expensive, but there are factors that can mitigate the premiums. Here is a rundown of how the rate for a project is typically determined:

• The carrier begins with the type and quality of the construction. Although any kind of building can be covered, those made of concrete and steel receive a lower rate because they have greater resistance to damage.
• The carrier considers the type of materials the builder intends to use and the overall quality of the final product. These factors are matched against computerized rate tables to determine the premiums.

Your company can qualify for further discounts by providing security measures such as good lighting and fences around construction sites. If the property is in a particularly high crime area, the carrier may require that your company provide a security guard and possibly a guard dog before a policy is issued.

Premiums can also be affected by whether there are sprinklers in the building and there is sufficient access for fire fighting equipment to reach the site. The insurer may even look at adjoining properties: Do they pose a risk to your structure? And are there natural risks involved, such as high wind or brush close to the building?

Although a great deal of consideration is placed on tangible factors, such as those listed above, there are also intangible concerns that can affect how an insurer determines premiums. The experience, training and supervision of personnel, the builder’s expertise, and the subcontractors might be taken into account, especially when the policy is for a large-scale construction project.

Please contact Senior Tax Manager Tom Burton via our online contact form for more information.

Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.