What is Builder's Risk and Why is it Important?
Builder's risk insurance is a specialized type of property insurance that is intended to protect buildings and structures that are under construction. Builder's risk typically covers property damage of “work in progress” occurring from fire, lightning, hail, explosions, theft, vandalism, and acts of God (such as hurricanes). This coverage protects project owners, general contractors, and subcontractors.
Additionally, builder's risk policies can be written to include coverage for loss of income and additional expenses. This would apply if the completion of a project is delayed due to property damage caused by a covered loss. It is important to note that there is no standard form of builders risk insurance, meaning the policies can vary between insurance companies.
These coverage terms can be negotiated. Builder's risk is critical to contractors, as it protects you from detrimental property losses during a project.
Market Forecast
As mentioned, builder's risk is a specialized type of property insurance. The property market has been in one of the hardest (increasing rates) cycles in recent history. After the events of Hurricane Ian, damage surveys indicate it is one of the costliest storms in U. S. history, with increased insured losses of $53 billion to $74 billion.
In recent years, the frequency and cost of extreme-weather disasters is now about one event every 18 days, compared to one event every 82 days between such disasters in the 1980s. Another challenge to consider with these property losses are inflation pressures when rebuild time comes into play. Costs of materials continue to be on the rise into 2023.
As a result of poor losses arising from difficult types of projects, especially frame and CAT-prone construction projects, market conditions are declining which means rates are expected to further increase for all construction types. Generally speaking, rates fluctuate depending on the exposures of the project and job site (construction type, location, construction hard/soft cost, etc.).
We anticipate these dynamics to further deepen and lengthen the current hard market cycle, which will equate to more pain for many buyers of property insurance in the coming quarters. You may ask: “I don’t have exposure in Florida, or Wildfires in California (etc), or Midwest hurricanes… so why does this affect my builder’s risk/property insurance?” Great question…it does indirectly because the reinsurance that the carriers bought to insure their portfolios of risk (called a reinsurance treaty) may be the same reinsurers that insure your carriers’ book.
In short, the market is highly correlated at the top of the food chain (capital markets and reinsurance) so this pain will continue for the foreseeable future.
To help you drive the best Builder's Risk outcome, follow the below suggestions:
If you have a Master Builder’s Risk policy, do not use the rates from that policy if your project will exceed the maximum value provided by the policy. Rather, contact your agent who should provide you with rate indications that you can use for bidding.
Keep your agent/broker in the loop, both during the bidding process (to obtain rate indications) and when you know you will need a policy placed.
Prior to securing builder's risk coverage, complete a detailed inventory of all potential exposures that may arise during a project.
Be prepared to gather more information to secure a builder’s risk quote. With tight underwriting standards come requests for more information than has been required in the past. Keep in mind the following list of insurance items typically needed for any sizeable project:
Completed application
Construction budget: if your project has phases it may be more cost-effective to break out policies by phase, so please provide hard and soft costs broken out by phase.
Statement of Values split out for all the buildings of every phase (if applicable)
Gantt chart.
Project drawings/architectural renderings & the name of the firm that provided the services
Site plans.
Site photos.
Geotech reports.
In Conclusion
The 2023 Insurance Market Forecast for builder's risk is anticipated to further harden. Considering the unique characteristics of the policy and project is necessary. There is no standard builder's risk policy, so it is important to know what is covered in your policy. We recommend partnering with an insurance broker who understands the construction industry – allowing you to maximize your understanding of the coverage and complete projects with a piece of mind.
For any additional information or questions please contact your Cottingham and Butler representative.