Builders’ Risk Insurance Policy: Risks & Limitations

  • 5 min read

If you’re a builder or contractor it’s not just your client that has to deal with the supply chain issues and the higher prices, even though you pass it along as a cost-plus or a margin on your contract. You probably have higher costs as well or will have very soon. This is a great article from the insurance industry, where we have some involvement we own a commercial insurance agency, where construction projects are having issues with coverage. These supply chain challenges and inflationary pressures have left contractors and developers with soaring insurance costs amid a scramble to extend cover for delayed projects. 

So here’s what happens. You start a development project and you get a policy that covers the project builders’ risk, general liability, E&O, whatever it is maybe multiple policies. And it’s based on the contract amount of that particular development. As the project proceeds, you’re going to find that there may be increased costs. Maybe there are delays because you can’t get labor. Maybe the permits are taking longer. Maybe the materials aren’t available. Now your policy may have an expiration date. The dollar amount may now exceed the policy and your policy doesn’t fit the footprint of that project anymore. And so you have to go back to your insurer, and you might think well it’s just a small thing to get an endorsement or extension of cover. But you may find that the insurer, the insurance company behind it, may have other plans. 

If you bought a policy a year ago, you’re getting hit with delays. You’re going to have to extend that policy which increases the cost. Some carriers are not willing to extend past a certain amount date or amount. It’s going to put you in a bind if you’re in the middle of a project. And your insurer won’t extend so you have to write a new policy with a different carrier. Now they’re going to rerate and underwrite the entire policy and don’t blame your insurance company, they have to get reinsurance from another carrier to kind of back them up. And they’re facing difficulties acquiring that re-insurance. Those reinsurance companies they’re seeing what’s happening in the marketplace too. They know that there are supply chain issues, that there are labor issues, and that there are lumber price issues. And if it goes beyond a certain day or certain amount, it kind of rewrites the whole project.

Typically, policies are underwritten for you know 12-18 or 24 months and if it goes beyond that, then allocating more to that risk sometimes puts the policy in a different category that you might be priced out of. You might not be able to pass that along to your customer because your contract may have provisions in it for materials, increases, and delays but it probably doesn’t have the ability for you to pass along additional insurance costs. The worst thing is to not realize that at all. If you don’t recognize that your policy has a limit on it and you go past the date that your policy specifies for the completion date, you might be bare or without insurance and not even know it. We’ve had clients that we’ve seen that their policy only insured up to a certain dollar amount. Let’s say you know, a $2 million project, and their project now got bumped up because the costs went up, delays, labor costs. Now it’s maybe a $2.7 million project. Okay. Even if the client accepts those price increases if your policy only covers you for 2 million and now you’re at 2.7 if you have a defect in workmanship, builder’s risks, damage, or theft of materials, you may find that not only are you not covered on under that extra 700,000. If it’s over that amount it may trigger the policy now is no longer effective because your representations on the dollar amount were lower. And you might say well just cover me up to the 2 million. Well, what happens is insurance companies rate a project based on the total dollar amount. A $2.7 million project might be beyond a threshold that makes it a more complicated project where they have to do additional underwriting. So if you breach that threshold, your entire policy might be void. 

So check with your carrier as you’re doing your project. If you have to do an extension of time or to increase or rewriting of your contract with your client, make sure you’re also going back to your insurer or your broker to make sure you don’t have to make any changes to that underlying policy. Also, if you’re making any changes to the project itself to try to reduce costs, maybe you’re changing some of the engineering or architecture, make sure the insurer covers that. They may have covered it because you have a steel beam, but if you switch it to, you know a timber beam, that may not be covered. So check with your insurer anytime there’s a major change to your construction project to make sure you still have coverage for liability or damages down the road.

One more thing. Don’t forget Workman’s comp. Your work comp policy may also have some triggers that can be breached with more time, more complexity, or a higher price of the contract.

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