The Ultimate Guide to Construction Risk Insurance

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Do you worry that your building under construction may catch fire? Or get vandalized? Does the thought of stolen heavy equipment or construction materials make you nervous?  

You’re not alone. In fact, a study from the Chartered Institute of Building found that 92% of respondents in the construction industry suffer from regular site theft. One in five of these respondents added that theft takes place on a weekly basis from their sites.

The NICB (PDF) adds that the average value of a stolen piece of construction equipment is $46,273. They add, “Annual estimates of the cost of equipment theft vary from about $300 million to $1 billion, with most estimates in the range of $400 million.” What’s worse? “The estimates don’t include losses from business interruption. Those losses include the cost of rentals, project-delay penalties, and wasted workforce and management time.”

In other words, construction site theft is a prevalent and expensive problem in the industry.

How can you prevent it?

construction_risk_insurance

Construction risk insurance.

What is construction risk insurance?

Ever heard of construction risk insurance?

It is a type of property insurance, also known as builder’s risk insurance. The insurance is applicable for buildings under construction or renovation. Construction insurance helps transfer your risks to an insurer.

Using construction risk insurance, you can insure the structure, raw materials, and workers present on the site. A standard policy usually covers damages from fire, theft, explosion, or lightning. You can also get additional coverage for natural calamities such as earthquakes, floods, etc.

Damages from faulty design, workmanship or poor materials are not covered.

The insurance covers all types of construction—residential and commercial. You’ll be the primary insured party. Your subcontractors, lenders, and customers will be the other insured parties.

Want to know how many of your peers use construction insurance? More than half (57%) of construction professionals use insurance to mitigate risks. The insurance costs roughly one to four percent of the construction cost.

Is it legally mandated?

Courts vary in requirements from country to country. For example, the Wisconsin and Ohio Supreme Court referred to builder’s risk insurance documents for their rulings in the Fontana Builders, Inc. v. Assurance Company of America and Westfield Ins. Co. v. Custom Agri Systems, Inc. cases, respectively.

The Supreme Court of Canada describes the function of builder’s risk insurance as:

<quote>To provide to the owner the promise that the contractors will have the funds to rebuild in case of loss and to the contractors the protection against the crippling cost of starting afresh in such an event, the whole without resort to litigation in case of negligence by anyone connected with the construction, a risk accepted by the insurers at the outset.</quote>

You’ll find the concept of builder’s risk insurance in other countries also. The Institute Builder’s Risk Clauses (ILU clauses) govern builder’s risk insurance in the UK. People’s Insurance Company of China builder’s risk insurance clauses (PICC) regulate it in China.

Industry contract codes (AIA A201) also offer guidelines on construction insurance. It advises insuring all those who have a financial interest in the project. This legislation covers contractors, subcontractors, and owners, among other parties.

Risk insurance policies help to solve legal issues as well. The policy clauses help administer compensation payments. It also takes care of time coverage of the policy.

How can construction risk insurance benefit you?

There are many benefits of covering your risks with a construction insurance.

  • A construction insurance policy can ensure your business’ financial security. It will compensate you for any damage or loss from a covered cause. The insurance will pay you for any structural damages or loss of materials.
  • Extended policy coverage can insure you against earthquakes, floods, etc. It can also offer coverage for temporary structures and scaffoldings. You may have to pay extra for these.
  • There is no standard format for a construction insurance form. You can customize it and pay a premium according to your coverage requirements. A risk manager or insurer can help you decide the policy format.
  • A builder’s risk insurance can cover more than one party. It can cover anyone who has a financial interest in the property. The insured list can include contractors, subcontractors, and owners. It may also cover real-estate developers and lenders.
  • A builder’s risk insurance may be a prerequisite for a bank loan for the property. Purchasing this insurance can improve your credibility and protect lenders’ money.
  • Any damage to the property can lead to disputes about compensation and responsibility. A builder’s risk insurance helps solve disputes. It can also solve issues such as the proportion of compensation, coverage period, etc.

What are some concerns to look out for when buying construction insurance?

Some  key concerns:

  • Do complicated legal terms such as indemnity, waiver of subrogation etc. intimidate you? If so, it’s better to seek the help of a risk manager. They will be able to guide you to buy the right policy at reasonable prices.
  • You’ll need to insure both existing and new structures in case of renovation projects. Some risk policies offer only depreciated value coverage for old buildings. This may not be enough to cover your losses. Consult with your risk manager or insurer to understand your policy well.
  • Besides the building structure, remember to cover the foundations, pipes, temporary structures etc.  These can be expensive to replace.
  • You may have to bear extra costs due to project delays in form of insurance premiums and labor costs. The need to renegotiate leases may strain your finances. Taking coverage for such time element losses caused due to covered perils would be a wise choice.
  • You should also be aware of the contract tenure and any other terms and conditions. Coverage issues can arise if tenants occupy the structure while some final work remains. There can be also confusion about coverage when you are building a group of structures.

Can construction software help?

Does managing construction insurance seem tough? Do you tend to forget your policy payment due dates?

A construction management software program could be of use. Tools such as eSUB and UDA ConstructionSuite, for example, can help track insurance certificates. You can also manage renewal dates using the software. Construction management software helps to perform due diligence checks while subcontracting work. It allows you to track the risk insurance policies of your subcontractors.

You can also opt for construction estimating software; these kinds of construction-specific tools help automate claims processes. The software also enables damage estimation and data management. You can use the software for claim documentation as well. iScope, Simsol, and Maxcon are some examples of solid estimating software with claims management.

While selecting a construction management or estimating software, take care to select one that offers insurance tracking options as well.

If you are in the initial stages of choosing a risk insurer, you might consider one of these reputable companies:

You can also contact any other insurer or risk manager and discuss your requirements.

Conclusion

A builder’s risk insurance policy can protect you against select risks. But you’ll still need to address issues such as types of insurable items, coverage period etc. A construction insurance policy can protect you against potential financial losses. Construction management software can help you track the insurance policies and estimate damages. The software helps make the whole process lot easier and better organized.

Please share your thoughts on construction risk insurance below—and definitely let us know if there are any construction risk insurance companies you particularly like or dislike.

Looking for Construction Management software? Check out Capterra's list of the best Construction Management software solutions.

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Rachel Burger

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Rachel is a former Capterra analyst who covered project management.

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I would recommend Zurich, a very reliable insurance company

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