Understanding The Builders Risk Policy

In contrast to a traditional property insurance policy, which is typically an annual renewable policy, the policy term of a builders risk policy matches the entire construction project term.

A builders risk policy also offers a broad definition of named and additional insureds including owners, contractors, subcontractors and their employees, while the standard property policy typically only insures the policyholder.

In preparing an existing building for conversion from a densely occupied office property to a highly desired residential address, developers need to address the engineering and architectural issues, the financial security of the overall project, and ensure that their interests are protected throughout the renovation and the offering to the buyers. A builders risk policy can provide this financial protection through soft cost endorsements and delay-in-startup coverage endorsements.

The costs to build the actual building and improvements, known as hard costs in the industry, are things like supplying and erecting the brick and mortar. The costs incurred that are not tied directly to the brick-and-mortar elements, such as advertising, interest, permits, fees and insurance, are known as soft costs.

Another form of soft cost is anticipated rental income, which can be covered by a delay-in-completion endorsement to a builders risk policy.

Soft cost coverage is triggered by a physical damage loss. The insured can then be indemnified for a scheduled soft cost loss less any applicable deductible, which is generally expressed as an agreed number of days waiting period.

A solid builders risk product should be designed to indemnify–or hold harmless– the developers from a covered loss. To properly protect an investment, developers need to know and insure the replacement cost of the existing structure. This cost may differ significantly from market value and may not even resemble the acquisition cost.

If a developer wants a builders risk policy that insures the existing structure, then the developer should present a thorough engineering report to the insurance underwriter, along with a replacement cost valuation prepared by a reputable party such as an independent appraiser or possibly the developer's insurance broker.

The underwriter will then use the replacement cost value to establish premium and may reflect the replacement cost in the policy as a sublimit of liability. In addition, underwriters will ask developers to detail their plans to address the engineering challenges inherent in a conversion project.