Stalled Construction Projects Heighten Exposure For Builders-Risk Insurers

While experts now indicate the economy is very slowly picking back up, deep problems in the construction industry will take many years to correct, heightening concerns among insurers, especially from the builders-risk perspective.

Empty homes, vacant buildings and unfinished construction projects are still common. Projects continue to stall due to insufficient financing, or they remain on builders risk after completion because of lagging sales or the inability to lease space.

For insurance professionals, underwriting such accounts is increasingly complex as we juggle all the moving parts—from the financial and market variables to ensuring the correct checks and balances are in place to minimize as much risk as possible. In today's climate, what seems like a straightforward builders-risk policy can quickly become a costly exposure.

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

Know The Insured

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

Understand The Project

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

Pay particular attention to the nature of the risk. Is it speculative and being built in phases, dependent on leasing space or selling units before subsequent phases can be built? Or are there buyers already lined up with secure financing in place?

Be Wary Of Extensions

It is not uncommon for producers and insureds to request extensions on their builders-risk policies. Large-scale construction projects can be unpredictable with setbacks and challenges, and they are often not completed exactly on time.

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

Keep The Clauses

Despite all your best intentions and research, the truth is you cannot account for everything. Sometimes the financials will fall through or a project will stall because of persistent severe weather. Although you cannot control those situations or necessarily prevent them from happening, you can have a plan in place in case they do. For example, clauses can be included in the policy 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 a construction project that is stalled and vacant? A vacant-building exposure can be worrisome because a half-finished building is more vulnerable to damage, theft and electrical or plumbing issues.

No matter the state of the building or project, it is imperative that proper risk-control practices are put in place and the property 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 rounds through the building.
• Locking and securing high-valued materials onsite, such as copper, to prevent theft.
• Removing all refuse from the building.
• Testing, activating and properly monitoring sprinkler and fire-alarm systems (if already installed).
• Heating the building, if necessary, to prevent pipes from freezing or bursting.
• Securing the building from the elements if it is not yet fully enclosed.

In the current real estate and construction environment, it is inevitable that you will face situations or exposures you did not intend to insure. You must take the proper precautions and account for as many circumstances as you can foresee.