A lot can go wrong with a construction project, and if you are financially responsible for the project, at least in part, then you want to protect your investment with a builder's risk insurance policy. These policies can vary widely between insurers, so check with your agent to see how your insurer can best protect your construction project.
Direct Covered Losses
Buildings under construction face the same risks as completed buildings. They may burn, blow down, become vandalized or suffer from other losses. Course of construction insurance provides money to pay for these losses. Most insurance forms have a list of perils that the policy will cover, but some insurers provide this protection on an all-risks basis, meaning that it pays for all types of loss except those specifically excluded by the policy.
Sometimes, a direct loss to the building may cause other unavoidable losses. These are commonly called soft costs. Not all course of construction policies cover soft costs. Some examples of soft costs include additional interest on construction loans, additional attorney's fees and additional insurance premiums. While none of these things are covered by the policy during the regular course of business, direct losses mean the construction project will take longer than anticipated. Soft costs coverage pays the portion of these items you must pay as a result of a delayed project.
Certain parts of the building must be tested to make sure they work. Heating and air conditioning systems, for example, must be functional before the building is complete. If these machines malfunction, they can cause a fire, explosion or other kind of loss to the building. Testing coverage recognizes that contractors run a risk simply trying out machines they did not produce and may suffer a financial loss due to no fault of their own.
Many course of construction policies have a standard list of exclusions. You may be able to buy coverage for some exclusions with additional premiums, so check with your agent to see what your options are. Typical exclusions include earth movement, water damage, mechanical breakdown, war, employee theft, damage from automobiles and mysterious disappearance, or loss without proof.
Because each policy is drafted according to each insurer's guidelines, it is impossible to give an exhaustive list of things that course of construction policies always cover. Your policy may cover losses from fraud or deceit, increased costs of bringing existing construction to current building code during a remodel, contractor negligence and contract penalties. Also see if you have a replacement cost endorsement on your policy. This endorsement will replace damaged items with new ones without depreciating them according to their age and condition at the time of loss.
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