While experts now indicate the economy is very slowly pickingback up, deep problems in the construction industry will take manyyears to correct, heightening concerns among insurers, especiallyfrom the builders-risk perspective.

Empty homes, vacant buildings andunfinished construction projects are still common. Projectscontinue to stall due to insufficient financing, or they remain onbuilders risk after completion because of lagging sales or theinability to lease space.

For insurance professionals, underwriting such accounts isincreasingly complex as we juggle all the moving parts—from thefinancial and market variables to ensuring the correct checks andbalances are in place to minimize as much risk as possible. Intoday's climate, what seems like a straightforward builders-riskpolicy can quickly become a costly exposure.

Here are a few key best practices to keep in mind to controllosses.

Know The Insured

You may think you know the prospective customer because yourecognize the company, but in the current environment evenwell-known companies are struggling. It is critical to really dothe research. Look into the type of business the company handles,how many years they have been in that business and what sorts ofprojects they typically work on. If you find that the project theyare seeking to insure is not in their realm of expertise, it may bean indicator that the company is having financial difficulties.

Understand The Project

Builders risk is a unique policy because it is written accordingto job duration, rather than the traditional annual terms.Therefore, it is important to understand the specifics of theparticular job, whether it's a six-month duration or severalyears.

Pay particular attention to the nature of the risk. Is itspeculative and being built in phases, dependent on leasing spaceor selling units before subsequent phases can be built? Or arethere buyers already lined up with secure financing in place?

Be Wary Of Extensions

It is not uncommon for producers and insureds to requestextensions on their builders-risk policies. Large-scaleconstruction projects can be unpredictable with setbacks andchallenges, and they are often not completed exactly on time.

But before you grant an extension on a policy, investigate thereasons. While it is likely due to one of the many challenges thatoccur during a construction project, it could also be due to afinancial problem.

Keep The Clauses

Despite all your best intentions and research, the truth is youcannot account for everything. Sometimes the financials will fallthrough or a project will stall because of persistent severeweather. Although you cannot control those situations ornecessarily prevent them from happening, you can have a plan inplace in case they do. For example, clauses can be included in thepolicy that ceases coverage if:

• Payments stop.
• Work has stopped for a specified number of days.
• The insured no longer has financial interest in the project(e.g. if the bank forecloses).

Risk Control is Key

But what if, despite everything, you are faced with aconstruction project that is stalled and vacant? A vacant-buildingexposure can be worrisome because a half-finished building is morevulnerable to damage, theft and electrical or plumbing issues.

No matter the state of the building or project, it is imperativethat proper risk-control practices are put in place and theproperty is secured, with appropriate alarms if applicable.Additional precautions should include:

• Enclosing the site with fencing and adequate lighting.
• Utilizing a 24/7 watchman to make hourly, recorded roundsthrough the building.
• Locking and securing high-valued materials onsite, such ascopper, to prevent theft.
• Removing all refuse from the building.
• Testing, activating and properly monitoring sprinkler andfire-alarm systems (if already installed).
• Heating the building, if necessary, to prevent pipes fromfreezing or bursting.
• Securing the building from the elements if it is not yet fullyenclosed.

In the current real estate and construction environment, it isinevitable that you will face situations or exposures you did notintend to insure. You must take the proper precautions and accountfor as many circumstances as you can foresee.