Builder’s risk insurance can be described as coverage that protects an organization’s or an individual’s insurable interest, for example, fixtures, equipment, or building materials being applied in a new building’s construction or an old building’s renovation, should the insured materials sustain physical damage or loss from a particular covered cause.
In this sort of insurance policy, the term ‘builder’ may be very misleading because the insurance coverage may not only include building materials and equipment but also the owner of the construction, the lending institution, among other interests and interested parties. Note, however, despite suppliers of construction materials having an insurable interest in construction activities, they are often excluded in builder’s risk insurance policies.
A construction project covered by a builder’s risk insurance policy is sheltered against destruction from the particular perils specified in the insurance policy only. In most cases, the policy will cover risks such as vandalism, fire, and theft. In some instances, however, the builder’s risk insurance policy will be an all-risk policy, which implies that all foreseeable perils of a particular construction site will be covered in that policy. It is advisable that one consults with their insurance agent in the event that they find any of the clauses included therein difficult to understand prior into entering into contract. This is in order to avoid future misunderstandings with the insurance company in the event of an incident.
Persons allowed to take out a builder’s risk insurance policies in any construction endeavor are project owners, lenders, subcontractors and so forth. The rule is that a builder’s risk insurance policy holders have an insurable risk and interest in the construction project in order to be allowed to hold such a policy. This means that the building must be already under construction and that these persons must own part of the property or have a financial investment connected to the property.
As mentioned above, a builder’s risk insurance policy will only pay the insured parties for any loss or damage up to the limits specified in the policy. In some cases, there may be a per occurrence limit specified in the policy. This means that a builder’s risk insurance policy for 500,000 with a 20,000 per occurrence limit will demand that the insurance company pay the insured party a maximum of 20,000 for each incident that occurred during the period in which the policy was in force. These incidents would be paid for by the insurance company during the period that the policy is in force until the 500,000 limit is reached. After this limit has been reached, no further damages would be paid by the insurance company for any further incidents.
Risk management professionals have to consider a specific construction’s exposure to various potential damages and direct that the policy be tailored to protect the insurable interests of the invested parties. It is critical that one understands the level of exposure that their construction has to loss or damage in order to come up with suitable coverage options, and to have the insurance company’s underwriting posture prior to commencing that construction.