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Builder’s Risk Insurance, Part 2

By Michael D. Grady, Adjusters International New Jersey, and Paul O. Dudey, CPCU

Alternative Builder’s Risk Options

Rather than the Builder’s Risk coverages discussed above, it is also possible to provide comparable, or perhaps even broadened, coverage under various Inland Marine forms.

Limited Builder’s Risk coverage can be achieved in some cases under the BPP (Buildings & Personal Property) form’s Additions or Renovations extension, provided there is other property insurance in effect under the form.

HPR Risks

On “Highly Protected Risk” (HPR) properties, commonly insured by the Factory Mutuals and others, Builder’s Risk coverage is available at a greatly reduced rate under their forms, which also offer somewhat broader coverage in a few respects.

Difference In Conditions Coverage

In addition to the primary Builder’s Risk Policy with its many exclusions and limitations, the buyer may wish to obtain a Difference in Conditions (DIC) policy. This is a very broad policy that dove-tails with the basic policy to pick up such additional perils as flood, earthquake, and others.

As with any other policy, however, attention should be given to any exclusions and limitations, and to the language used to dove-tail the DIC and basic polices to be sure that the policies fit properly.

Wrap-Up Coverage

On major projects, a “Wrap-Up” may be used, principally involving Liability coverage for all the participants, but it can also be expanded to include Workers Compensation, Builder’s Risk and other coverages on behalf of the entire group of participants in the project.

Some insureds prefer Wrap-Up coverage, as it protects their own coverages from adverse loss experience that may be encountered in the construction project. Others prefer to avoid Wrap-Ups as they find they and their own insurers can lose control under a Wrap-Up program.

Business Income / Extra Expense / “Soft Costs”

Not covered by the Builder’s Risk policy is loss of Business Income, Extra Expense, or other Consequential Loss incurred after an insured property loss. Any of these, known in construction as “Soft Costs,” may be included by adding Business Income, Extra Expense, or Consequential Damage forms to the Builder’s Risk Policy.

A problem that must be overcome is determining the amounts of any of these coverages to purchase. Since there are not any exact costs available on future operations in the new building, it is necessary to project a worst loss scenario. Estimates should be made for the following: How much money will be lost and how much extra expense will be incurred in the worst loss that could occur at the worst possible time?

What are the prospects for occupying the completed building on schedule that would be lost if completion is 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 loss at a key supplier, preventing or delaying delivery of needed construction materials to the site.

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

This article originally appeared in Adjusting Today, published by Adjusters International. Reprinted with permission.

Read Builder's Risk Insurance (Part 1)

riskVue | The webzine for risk management professionals
October 2004