Construction is a risky business, which is why builder’s risk insurance can help your business. Unforeseeable forces, like fire or other natural disasters, can destroy or damage new construction. They can also push back the timeline causing financial harm to owners and subcontractors.
What is Builder’s Risk Insurance
Builder’s risk insurance is a type of property insurance. It indemnifies, or secures against legal responsibility, against damage to the buildings. So it covers a person, group, or organization insurable interest in a building. This can be materials, equipment, fixtures and other things used in constructing or renovating a building. Builder’s risk insurance specifically covers physical loss and damage from the construction or renovation process. This can be incredibly helpful for project owners because it covers if something happens during the construction project like a fire or vandalism. With all it covers, is it necessary for every party on the site to have builder’s risk insurance?
Who Should Consider Builder’s Risk Insurance?
There are many reasons why a business would consider builder’s risk insurance. Most often it’s to protect their own economic interests and investment into a project. For example, an owner might choose to get builder’s risk insurance in order to ensure that they’re covered for issues. This can even include the loss of rent as well as physical damage to the building from natural disasters. However, it can be unclear of whether subcontractors and general contractors need to get builder’s risk insurance. Some contracts specify builder’s risk insurance, so it isn’t a choice for those involved. Here are some reasons why contractors should consider builder’s risk insurance.
The first step in determining whether a contractor should consider builder’s risk insurance does the person or group have an insurable interest in the property. Insurable interest is a financial interest in the building or object. So they would have some sort of financial loss if the building or object was damaged or destroyed. An owner clearly has a financial interest in the building, since they own it and stand to lose money if it is damaged or destroyed. Usually, the general contractor and subcontractors do have a financial interest since if the building is destroyed they might not get paid the full expected amount.
The owner will probably be one of the only groups to hold builder’s risk insurance through the entire construction or renovation. General contractors and subcontractors generally only have it for the times they are working on the project until their last payment.
A common way to determine whether a specific party has a financial stake in the building is to ask a series of questions. Does the party have a direct exposure to damage during the time of construction? Is it from funds expended for labor and supplies or payments to suppliers?
Builder’s Risk Insurance and Subcontractors
Subcontractors might have their own insurance provider. So they can choose not to be a part of the general contractor’s or owner’s builder’s risk insurance. This means that subcontractors can and sometimes do ensure their exposure outside of the policy using an installation floater. This is complicated because sometimes builder’s risk insurance doesn’t cover specific parts or pieces or installation that the subcontractor needs it to cover.
The only real risk to subcontractors is they will include their insurance cost in the bid which could raise the price of the bid compared to other companies. For some subcontractors, this is unavoidable because whatever they’re installing isn’t covered by many builder’s risk policies.
These policies are generally annual; however, with each new job site, a new piece is negotiated. This will set limits on the average and/or maximum exposure per site. This helps cover specific parts that could cause financial damage to multiple parties if something was to happen. Since it’s negotiated per site, it is easier for subcontractors to know how what amount needs to be incorporated into their original bid amount. That way their bid remains competitive.
Builder’s risk insurance is an easy way for owners, general contractors, and subcontractors to protect their interest. Though, it might not be the best option available for every company. The only way to know for sure is to do further research or talk to your risk management team or consultant. Risk management professionals know how to calculate your risks and determine the best insurance and protection for your business. There is much that can’t be accounted for, but insurance can be an easy way to protect every business.