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Builders Risk Insurance coverage provides temporary property insurance to protect the house while it is under construction against the perils of theft, vandalism, fire, severe weather, etc. Coverage should start on the day the materials are delivered to the job site and normally ends when the house is accepted as complete by the owner or occupied by the owner or a tenant.
The quality of Builders Risk coverage varies greatly by insurance company and you should insist that your policy covers theft of building materials before they are permanently attached, collapse, and reasonable profit. A separate windstorm policy should be purchased in beach zones. Also, a separate flood policy must be considered in areas susceptible to flooding.
It is strongly recommended that you should take out Builders Risk coverage on a custom job instead of leaving it up to the homeowner. If you leave it up to the homeowner, they may forget to take it out or they may buy a policy with inadequate coverage.
Imagine how it would feel to frame a large house and have it collapse during a windstorm (before it can be properly braced) and then to find out that the homeowner’s policy did not cover collapse.
The better Builders Risk programs allow coverage to be extended to model homes and model home contents. In addition, they allow re-reporting of an unsold home in inventory for a second year at no increase in rate.
4 Ways to Structure a Builders Risk Insurance Policy
1. A Single Shot Builder’s Risk Policy
This is a separate policy issued on each house being built. There is a minimum premium (usually $350) and there is no refund if the house is completed before the policy expires. The builder must provide all of the specifics of the house (street address, construction, square footage, etc.) before the insurance agreement can be issued.
This type of insurance policy is usually issued for builders doing custom construction with high values, or builders with five or fewer homes per year. This policy is not recommended for volume builders. The disadvantages to the single shot are 1) a builder could forget to call his agent to have the policy issued, 2) more communication is required between the builder and his agent (must supply information to agent each time in order to complete the application and secure coverage), and 3) no coverage if the policy is not issued and rates are usually somewhat higher. This can be an administrative hassle for volume builders.
2. Monthly Reporting Form – Monthly Rate
The builder completes a report each month listing all existing inventory for the prior month. The builder applies the rate to the total inventory values and computes his monthly premium charge and sends his check to the insurance carrier along with the monthly report.
Once a house is completed/sold it is no longer listed on the next monthly report. The advantages to this type of contract is the lower rate and the builder pays less if he is able to complete the house in under five months. He also doesn’t have to contact his agent each time a new house is started. This type of policy works well for volume builders who turn over houses quickly.
The disadvantage is keeping up with the inventory each month and remembering to list each house in progress.
3. Monthly Reporting Form – Annual Rate
The builder completes a report each month listing all new starts for the prior month. The builder applies the rate to the total value of all new starts and computes his monthly premium charge and sends his check to the insurance carrier along with the monthly report. The new starts are covered for 12 months, and don’t need to be reported again unless construction isn’t finished by the end of the 12 month term. This policy works well for builders who usually take more than six months to complete their houses.
The advantage of this policy is that the builder doesn’t have to list his entire inventory each month; only new starts need to be reported. Also, the builder doesn’t have to contact his agent each time he starts a new house.
The disadvantage is that monthly reports still have to be completed.
4. Blanket Annual Deposit
This is the easiest of all Builders Risk policies. The builder estimates the completed value of the number of new starts anticipated for the coming 12 months plus homes that will be in existing inventory for more than 12 months. The insurance company applies the rate to the total estimated annual values. Most insurance carriers offering this type of contract offer a payment plan. The policy is subject to audit at the end of the contract term. If the builder starts more or fewer houses than originally anticipated, the difference is picked up during the audit.
This type of policy greatly reduces the administrative hassle of other types of policies, and also eliminates the risk of forgetting to report a new start and going without coverage.
Money-saving Tip for Builders
Many builders unnecessarily overstate the values to insure, which results in significantly higher premiums. Most builders risk coverage forms do not require builders to insure those costs that are not subject to loss or that would not have to be incurred again as a result of a total loss.
Examples of costs that may be deducted from the estimated completed values include real estate sales commissions, closing costs, water taps fees, sewer taps fees, blueprints, engineering studies and land clearing/grading. In addition, the builder may also deduct profit as long as the builder does not expect to be reimbursed for lost profit upon filing a claim.
Prefer to talk with an agent by phone? Call 800-622-7370 to talk with our contractor insurance department. We are here to help whether you have a question, want a quote, or want more information about Builders Risk Insurance discounts.