Builder's Risk 101
Featuring Scott Boardman, CEO
Hickok & Boardman’s very own CEO, Scott Boardman CPCU joins us in this episode to talk about all things Builder’s Risk! How does it relate to your property insurance or inland marine insurance? What are the intricacies of the policy and who is covered? Listen for key insights on this unique type of coverage that often gets overlooked.
Intro – Ryan (Host): Welcome to Got You Covered presented by Hickok and Boardman Insurance Group, the podcast where we unpack the countless ways in which insurance affects our lives, and so you can properly manage your unique risk
Ryan: Welcome back, everybody to another episode of Got You Covered presented by Hickok and Boardman Insurance Group. I’m your host, Ryan Lee. I’m a client advisor with the firm. And today we’re talking about builder’s risk. What is builder’s risk? Why do you need it, and some of the intricacies around it. And to bring in his expertise, I brought in the very knowledgeable Scott Boardman, the CEO of Hickok and Boardman Insurance Group. Welcome to the podcast, Scott.
Scott: Good morning, Ryan. Thanks for having me this morning.
Ryan: Absolutely. Yeah. So, I mean, there may be some listeners out there who don’t even know what a builder’s risk is. I’m sure many do, but very, very quickly, for those who don’t know what it is already, what is a builder’s risk policy.
Scott: A builder’s risk policy is a policy that covers the property insurance during a construction project. So you’re building a new building. And during the construction period, you need to insure the property. And a builder’s risk accomplishes that. So, there’s no liability insurance, no other type of insurance, but it is a property policy.
Ryan: Okay, so why is that, why is that important? Why is that even a thing? I guess, why do we need builder’s risk policies? I mean, I assume people have property policies for their buildings already.
Scott: Yes, a lot of time, we just think about insuring our building that we have. And even when you start a new construction project, people don’t really think “Oh, I need to insure it during construction.” But you do, because you could be halfway through the building or two-thirds your way through building the building and have a catastrophic event of fire, a hurricane, something that would be a covered cause of loss. And you would lose that portion of the building that you had constructed. So, you want to protect the asset during the construction. And also you may have a loan on the project that the bank requires you to have the insurance during the construction project. So it would help you get your loan, doing a builder’s risk policy. But most importantly, it protects your investment that you’re making in this new property and addition or renovation to an existing property as well. That also applies. So, it’s very important to essentially insure your asset during construction.
Ryan: Is there a general rule of thumb for how big a renovation should be? I feel like that’s probably the most common situation where a business owner or whomever might be questioning if they even need a builder’s risk.
Scott: That’s always a good time to speak with your agent about the size and scope of a renovation, because oftentimes, you can endorse a current property policy to pick up for the nuances of property insurance during construction. So that gets a little bit more of a gray area, and each insurance company handles it a little differently. It’s a little more black and white, when you’re putting an addition on to a current building. Okay, you’re adding 50% more space, probably going to want to have a builder’s risk. And you’re probably going to want to do it with the same insurer that has the existing building. You can picture having a fire that takes down half of the new addition and the whole existing building, you’re going to want one insurer adjusting that claim and not having a different insurer on that builder’s risk. And then of course, a very popular time for builder’s risk is new construction, and that’s very black and white that you buy a builder’s risk for the new construction.
Ryan: That makes a lot of sense. So, I think of, you know, over in Plattsburgh, right, where I’m at, there’s been lots of construction here. Lots of new investments in the infrastructure and our roads and buildings and things but you’re always seeing multiple different contractors, subcontractors. And it seems like there’s a lot of different parties involved in these larger construction projects. So, my question for you is, when you have that scenario, who should buy the builders risk? And is everybody covered? On the project?
Scott: I love that question because you’re hitting a very important core of, of who is responsible for what. And you’re right, you have all these subcontractors: HVAC, plumbing, electrical, but then you have the GC, managing the job, maybe doing some carpentry. So, they’ve got building materials. It’s, it’s who’s insuring that property and who should be writing the policy? And typically what we see is, either an owner will take out a builder stress, or the general contractor will take out the builders risk. But in both cases, you need to protect the interests of all the parties involved. What I mean by that is, let’s say the owner buys the builder’s risk, then the owner should be the first named insured, they’re on the policy: “Owner.” And then they should add a second named insured, the general contractor. Literally put the general contractor’s name as the second named insured. Now, if the contractor buys, if the general contractor buys a builder’s risk, then that swap; the GC is the first name insured, and the owners is the second name insured. And then, to protect the subcontractor’s interests, You don’t need to list their names, you simply need to list subcontractors, comma, sub-subcontractors. And you may be like, okay, Scott, what, what do we got going here-
Scott: I’m sure it sounds really confusing. Well, what you’re doing is you’re putting these various parties on, so that their interests are protected. I can’t insure your home, because I don’t own your home. And I’m not listed on your policy. But if all four of those entities of sorts is listed on the policy, and there’s a claim, the subcontractor has to demonstrate that they owned all that copper piping that got stolen, and the policy will pay because the subcontractor had an interest, a financial interest in that piping. And they were also listed as a named insured. And so that protects, that protects all parties in case something goes awry. And I just digress for a second Ryan, builder’s risk policies, in those situations, whether the GC buys a policy, or the owner buys a policy, the way I like to look at it is builder’s risk is the project’s property policy. It’s not the GC’s, it’s not the owner’s. It’s not benefiting them. It’s, it’s benefiting the job. It’s part of the overhead costs of the job. So, it doesn’t matter who buys the policy, you want to get the correct limits. You want to have the right named insureds. And that will protect the property for that project. There’s no pointing fingers. Most all AIA Contracts, or all AIA contracts, have a waiver of subrogation against the negligent party who may have created the problem. So, let’s say a subcontractor’s employee threw a cigarette down on the site and it burned down. The builder’s risk will pay to replace what’s been burned, and then will not subrogate against that subcontractor because the builder’s risk policy took care of the problem. So, not to get too confusing with that waiver of subrogation on the property, but that’s a very important clause in a contract between an owner and GC and GC and subcontractors: To say that the builder’s risk will pay the claim and then not subrogate against any potential negligent parties on the job. So, it comes back to the point that that builder’s risk policy, regardless of who buys it, is the project’s policy, and not necessarily the owner’s or the GC’s
Ryan: Makes a lot of sense. And I’m sure you know, you got to trust the right agent to make sure that they’re setting that up correctly in the first place, because I could see where things could go the wrong direction if the builder’s risk was rushed or not carefully put in place with the right named insured structure, like you said. So, here’s a question for you. I’m that subcontractor who had that copper pipe you mentioned. And, you know, I’ve got a bunch of it for the job. I bring some onto the site, you know, it’s covered under the builder’s risk while it’s there, but what if I want some of that material covered while it’s off site or in transit?
Scott: Yes, many policies, but not all, have what we call sub limits, for off premise storage, and in-transit coverage. So, let’s say you buy a builder’s risk for a $2 million building. You may have a sub limit of $250,000 for off-site storage, which would cover that piping, stored off site of the job that’s waiting to come on to the job. And so that’s a that’s an important piece of the coverage. Not all builder’s risks automatically include sub limits for off premise storage and in-transit coverage. And again, that’s where you want to make sure you’re addressing all your, your needs. But you can ensure that property off premise within the builder’s risk.
Ryan: Nice. Okay, what about the next, next layer to the question? What if I have some contractor’s equipment on site for the job is that, is that part of it?
Scott: You bring a trailer full of your tools to install the piping?
Scott: And you leave it on premise. And let’s say it gets broken into and your tools get stolen. The builder’s risk will not cover for contractor’s equipment, not a subcontractor’s, not a general contractors, and in an odd situation, not an owner. So, an owner may – it’s very unusual for an owner to have any equipment on the site – but contractor’s equipment is specifically excluded off of the builders risk. Now, there are situations where builders’ roofs are broad enough to pick up things like scaffolding, that might be part of the job. Fencing, that might be part of the job. But you get the gist. That’s not contractor’s equipment, that’s part of the project. But again, not all policies offer that. You have to make sure if you have that exposure to make, make sure that would be covered. But contractor’s equipment is definitely not covered under the builder’s risk.
Ryan: Shout out to making sure your equipment and inland marine policy is up to snuff, I suppose.
Scott: Exactly. Exactly. There’s another way to cover that equipment, as you just stated.
Last question for you. So, we go through the process of the life of a builder’s risk policy. And at some point, the job’s going to be completed. Are there any concerns there? Like how does that transition work? How should it work between a builder’s risk back to, you know, just general insurance for the building or the project?
Scott: Sure, it’s an interesting question, because a builder’s risk has an effective date and an expiration date. But let’s say a month before the expiration date, the building is occupied. And you’ve got a few punch list items that might be done in the spring, so to speak, and, and the owner’s like, “Well, I’ve got this builder’s risk property insurance, I might as well keep it for another month and then transition it to my property policy.” No, once the builder’s risk ends when the project ends, and it’s put to its intended use – so if it’s occupied – the builder’s risk ceases and ends right then. Of course, it would also end if the policy expires. But there’s that nuance that you have to be careful. Once you have occupancy in a project, and you can get a waiver on that if, you know, for example, you’re doing a five-story apartment building and you’re literally releasing the top floors as done and the owner is leasing them up and you’re still working on the lease up of five and four, and you’re working on three, two and one. Well, you can get a waiver on the builder’s risk for that. But, you can see you have to pay attention to that because without getting some kind of endorsement, once it’s occupying of the building, you could cease to have builder’s risk. So, it’s important to be in touch with your agent about that.
Ryan: Nice. I think builder’s risk is really fascinating. You know, it’s a keystone policy to, you know, the development of our infrastructure and progress of, you know, building updates and what makes our communities thrive in a way. So, really cool to hear from you today, Scott on, you know, some of the intricacies of builder’s risk. Do you have any final thoughts for the listeners?
Scott: Well, let’s see, I would just say builder’s risk oftentimes, is overlooked. When a developer is funding their own project, they don’t have a bank requiring the insurance, oftentimes, builder’s risk can be overlooked. So, it’s just important when you’re doing any new projects to think about, “Okay, how is my property insurance going to respond to this? Oh, it’s new construction, I need to get a builder’s risk.” So, it’s just a reminder, when you have situations of new construction, major renovations, big additions to think of calling your agent and securing a builder’s risk. It’s oftentimes we get calls in from our clients and they’re midway through the project. And that is a very scary proposition, the exposure that you have, without a builder’s risk can be quite financially devastating. So, just keep it in mind when you have these projects coming up in the future.
Ryan: Awesome. Well, thanks for your time, Scott. Really enjoyed having you on. Thanks to all the listeners out there. This has been another episode of got you covered, presented by Hickok and Boardman Insurance Group. We’ll see you next time.