Design on a Dime, Property Brothers, Man Cave, This Old House, Flip or Flop — These popular TV shows draw millions of viewers with stories featuring renovations of run-down or dated homes.
Television producers don’t tell you that the contractor and property owner all face risks in the renovation process — risks that are distinct from those typically covered under a homeowners policy. If a fixer-upper show episode covered insurance, it would prominently feature builders risk coverage.
A builders risk policy, also known as course-of-construction insurance, insures a person’s or organization’s insurable interest in materials, fixtures and/or equipment being installed during construction or renovation should those items sustain physical loss or damage from a covered cause. Builders risk policies provide distinct coverages for new construction and remodeling that are not always found in a standard homeowners or permanent property policy.
Here are three common questions insurance agents ask me about builders risk.
Depending on the terms of the construction contract, the individual or organization with the insurable interest in the project may be required to purchase builders risk coverage. This can include personal or commercial lines clients, such as contractors, developers, business owners, homeowners, house flippers, or even financial institutions.
From a project standpoint, it might be the contractors or developers building new structures or renovating existing residential or commercial property. It could even be a homeowner having a new house built or undergoing a sizable renovation project.
When it’s a homeowner or property owner, many agents smartly ask: Does the property owner need to purchase builders risk insurance if their contractor is willing to buy it? The answer: It depends on whether or not the owner wants to personally manage their insurance coverage, essentially controlling the policy.
It’s common for the contractor to purchase the policy in their name. However, if they are taking an unreasonable amount of time to complete the project, leave mid-way through the job or have financial issues interfering with completion, then the homeowner could be in a pickle. Few contractors want to pick up a project that’s partly done, and some carriers won’t provide coverage past a certain point of completion. This means it’s up to the agent to do what’s best for their customer, and that may well include selling a builders risk policy to a property owner so they have control over the policy for the entire length of the project — no matter who the contractor is.
Builders risk coverage is based on the project’s total completed value (TCV). The best way to identify the total completed value or project cost is to review the construction agreement that was established between the property owner and contractor.
“Total estimated completed value” can often be described as all the costs associated with the building and designing of the covered property including labor, “overhead” and materials and, if included, “profit.”
Examples of covered TCV costs include but are not limited to:
Changes to the completed value commonly occur during the course of construction. Because coverage is based on total completed value, any changes that occur to increase the value of the structure should be reported to the carrier. Also, the policy should be endorsed to reflect the correct value, which will help ensure proper coverage for upgrades and other structural enhancements to reduce co-insurance penalties and errors and omissions claims by your client.
Schedule a checkpoint with your client during the policy term to ensure the total completed value is still correct. Rise in material costs or contract change orders are just two factors that could alter the project value.
Most policies are purchased prior to or on the start of construction when the contract is finalized, which means you’ll need to act promptly when your client requests coverage. You want to make sure coverage is secured before materials are delivered to the job site.
In the event your client begins construction without securing builders risk coverage, you will need to not only provide the percentage of construction completed during the application process but have access to a carrier willing to insure a project that is already underway.
Source – InsuranceJournal.com