Builders Risk Insurance Policy Risks

  • 3 min read

As a builder or contractor, the challenges of navigating the construction landscape have multiplied in recent times. Beyond grappling with supply chain issues and increased material costs, there’s a lesser-known concern that is silently affecting construction projects—insurance complexities. In this blog post, we’ll unravel the intricacies of how supply chain challenges and inflationary pressures are leading to soaring insurance costs for contractors and developers.

The Unseen Impact: Soaring Insurance Costs

A recent article in the insurance industry sheds light on the unexpected consequence of supply chain disruptions and inflation—a surge in insurance costs for construction projects. Contractors and developers, embroiled in the complexities of delayed projects, are finding themselves scrambling to extend insurance coverage.

The Initial Dynamics: Project Commencement and Insurance Policies

Construction projects typically commence with a suite of insurance policies—builders risk, general liability, errors and omissions (ENO), and more. These policies are tailored based on the contract amount of the development. However, as the project progresses, unforeseen challenges such as labor shortages, permit delays, and material unavailability may emerge.

The Dilemma Unveiled: Exceeding Policy Limits

In a scenario where construction costs escalate or project timelines extend beyond the policy’s expiration date, contractors face a dilemma. The initial policy, which was meticulously crafted to fit the project’s specifications, may no longer align with the evolving footprint of the construction.

Insurance Extension Challenges: A Complicated Process

While seeking an extension of insurance coverage might seem straightforward, it is far from simple. Some insurance carriers are hesitant to extend coverage past certain dates or monetary thresholds. This reluctance can place contractors in a precarious position, especially when in the midst of a project.

The Domino Effect: Re-Rating and Underwriting

If an insurance carrier declines an extension, contractors may find themselves needing a new policy with a different carrier. This triggers a chain reaction—re-rating and underwriting the entire policy. The insurance landscape is witnessing challenges in securing reinsurance, as even reinsurers are wary of the uncertainties posed by supply chain disruptions, labor shortages, and inflation.

The Hidden Pitfall: Unrecognized Policy Limits

Contractors must be vigilant about policy limits, as exceeding them can have severe consequences. Unbeknownst to many, breaching policy limits may render the entire policy ineffective. This oversight can expose contractors to risks related to defective workmanship, builders’ risks, theft of materials, and damages, leaving them without adequate coverage.

A Word of Advice: Proactive Communication with Insurers

To navigate these insurance challenges successfully, contractors must maintain open lines of communication with their insurers or brokers. Whether seeking an extension of time, facing increased project complexity, or encountering rising costs, consulting with insurers ensures that the underlying policy remains aligned with the evolving dynamics of the construction project.

Workman’s Comp: Another Crucial Element

Amidst the intricacies of insurance extensions, contractors should not overlook the implications on workers’ compensation (work comp) policies. More time, increased project complexity, or a higher contract price may trigger specific conditions within work comp policies that demand attention.

A Balancing Act for Builders

In the ever-evolving landscape of construction, builders are tasked with a delicate balancing act. Navigating supply chain challenges, inflationary pressures, and insurance complexities requires a proactive and informed approach. By staying abreast of policy limits, engaging in timely communication with insurers, and recognizing the potential pitfalls, builders can fortify their projects against unforeseen insurance challenges, ensuring a smoother journey amidst the construction uncertainties.

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