Design on a Dime, Property Brothers, Man Cave, This Old House, Flip or Flop — These popular TV shows attract millions of viewers with stories of renovations of dilapidated or dated homes.
Television producers don’t tell you that the contractor and owner of the property all face risks during the renovation process — risks different from those typically covered by a homeowners policy. If an episode of a fixer-upper show covered insurance, it would play a prominent role in builders’ risk coverage.
A construction risk policy, also known as construction insurance, insures an individual or organization’s insurable interest in materials, fixtures and/or equipment installed during construction or renovation if those items suffer physical loss or damage from an insured cause. Builders’ risk policies offer a variety of new and remodeling coverages that aren’t always found in a standard homeowner’s or permanent property policy.
Here are three common questions insurance agents ask me about construction risks.
- Who buys construction risk coverage?
Depending on the terms of the construction contract, the person or organization with the insurable interest in the project may be required to purchase the builders’ risk coverage. These could be personal or commercial clients such as contractors, developers, business owners, homeowners, homeowners, or even financial institutions.
From a project standpoint, it could be the contractors or developers who build new structures or renovate existing homes or commercial properties. It could even be a homeowner building a new home or undergoing a major renovation project.
When it’s a homeowner or property owner, many agents ask smartly: Should the owner of the property purchase construction risk insurance if his contractor is willing to buy it? The answer: It depends on whether the owner wants to personally manage their insurance coverage, essentially checking the policy.
It is customary for the contractor to purchase the policy in his name. However, if they take an unreasonable amount of time to complete the project, leave halfway through the job, or have financial problems hindering completion, then the homeowner could be in trouble. Few contractors will want to take on a project that is partially completed, and some carriers don’t offer coverage beyond a certain point of completion. This means that it is up to the real estate agent to do what is best for their client, which may include selling a construction risk policy to a property owner so that they have control over the policy for the entire duration of the contract. project – regardless of who the contractor is.
- How is the project value determined for a construction risk policy?
Builders’ risk coverage is based on the project’s total value completed (TCV). The best way to identify the total value completed or project cost is to review the construction agreement entered into between the owner and the contractor.
“Total estimated completed value” can often be described as all costs associated with building and designing the covered property, including labor, “overhead” and materials and, if included, “profit”.
Examples of covered TCV costs include, but are not limited to:
- Materials such as windows, landscaping and swimming pools.
- Design costs such as architect’s fees, site lighting, analysis of existing facilities and zoning changes.
- Overhead payments such as payroll, utilities and administrative costs.
Changes in the completed value often occur during construction. Because coverage is based on total value completed, any changes that occur to increase the value of the structure must be reported to the carrier. Also, the policy must be approved to reflect the correct value, which will help ensure proper coverage for upgrades and other structural improvements to reduce co-insurance penalties and errors and negligence claims by your customer.
During the policy term, schedule a checkpoint with your customer to ensure that the total entered value is still correct. Increase in material costs or contract change orders are just two factors that can change project value.
- When should the policy be purchased?
Most policies are purchased before or at the start of construction when the contract is finalized, meaning you need to act quickly when your client asks for cover. You want to make sure coverage is secured before materials are delivered to the job site.
In the event that your client begins construction without taking out the builders risk coverage, not only must you provide the percentage of construction completed during the application process, but you must also have access to a carrier who is willing to project that is already underway.
Agents who carefully help their clients insure themselves against the pitfalls of construction can star in their own TV series. We call it Construction risk: the challenge.