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Dream House: Avoid an E&O Nightmare During the Course of Construction

Builders risk coverage is a necessity for new construction, remodeling or renovation. Your knowledge of the coverage provided, extensions and exclusions is crucial to protect your client and your agency.
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dream house: avoid an e&o nightmare during the course of construction

Is your client building their dream home? Or have they taken on a renovation project at their home? Is your client expanding their business and constructing a new building? If the answer to any of these questions is “yes," then a builders risk policy should be discussed.

But first, make yourself familiar with builders risk coverage, or course of construction insurance as it is sometimes called, to avoid common pitfalls associated with procuring builders risk coverage. Key components of the coverage typically include:

  • Protection of both property owners and contractors and can be purchased for residential and commercial projects.
  • The ability to procure and pay for policies by either the project owner or the contractor.
  • Coverage of the actual property under construction and construction materials and supplies at or adjacent to the construction site.
  • Coverage of perils including theft, vandalism, lightning, hail, explosions, fire and acts of God.
  • Coverage for soft costs due to delays, which can include, but are not limited to, additional loan interest, fees for re-inspection of re-built portions of the project, and extending permits and licenses. Soft costs are only applied to the result of a covered loss.

If coverage is not offered or the offer and declination is not documented and the customer experiences an uncovered loss, an error & omissions claim is likely to follow.

For example, in one E&O claim the plaintiff alleged the agency failed to procure a builders risk policy. The plaintiff had hundreds of acres of land, but the agent was unaware there were structures on it. The plaintiff was constructing a building on the land and asserted that he contacted the agent asking for coverage for the building under construction. In the end, more than $60,000 was paid out for the E&O claim.

It is important to confirm the date that construction or renovation commences. In Nebraska, after a fire damaged a dwelling under construction, the carrier determined the project had started prior to the policy's effective date, and at the time of the loss, the project was more than 10% completed. The carrier refused payment for the fire damage.

Coverage extensions also may apply, such as debris removal after a covered cause of loss; ordinance and law coverage in the event ordinances or laws went into effect after the start of the project; property at other temporary locations; costs associated with reconstruction of the building due to a covered cause of loss; and delay in completion.

Like any policy there are also exclusions, such as mold and pollution; workmanship or professional services; losses arising from water intrusion and from earth movement; and settling, cracking and shrinkage.

The appropriate limit of insurance should equate to the project's anticipated costs. Recently, the cost of materials has increased significantly, and the selected limit of coverage should account for the increased price of materials. Overhead costs, such as taxes and permits, should also be considered when deciding the limit of coverage.

The premium for a builders risk policy is determined by many factors, including the limit of coverage; the completed value of the project including the cost of materials; the location of the project; coverage endorsements; and expected duration of the project, among other factors.

The two most common types of builders risk policies are the single policy and reporting form policy. A single policy is what it sounds like: a policy for one new construction or remodeling project. Contractors with multiple projects are better suited to the reporting form policy. Contractors must accurately, and in a timely fashion, report their projects during the policy period. The coverage limit is adjusted through the values submitted by the contractor to the insurance company.

Timely and accurate reporting of the stage of construction is important. One insured faced an E&O claim that included both allegations of underinsurance and occupancy of the property. A liability evaluation concluded that the agent knew about the occupancy of the property and had not contacted the carrier seeking a certification of occupancy. The insufficient limit on the building itself and building materials came to light during the process of determining the claimant's damages. Over $200,000 in damages were paid on the claim.

On the other hand, a Missouri E&O claim was made when the agent prematurely moved the building from a builders risk to a property policy, and then a fire occurred.

A builders risk policy can end at various times, such as policy expiration; when the project owner has accepted the building; when the project has been completed for a specific number of days; when the contractor abandons the project with no intent to complete; or when the building has been occupied or put to its intended use for 60 days. When the builders risk policy ends, it is time to procure a property policy.

Builders risk coverage is a necessity for new construction, remodeling or renovation. Your knowledge of the coverage provided, extensions and exclusions is crucial to protect your client.

Cara Gates is an assistant vice president, claims specialist with Swiss Re Corporate Solutions and a teleworker out of the office in Kansas City, Missouri. Insurance products underwritten by Swiss Re Corporate Solutions America Insurance Corporation, Kansas City, Missouri, a member of Swiss Re Corporate Solutions. 

This article is intended to be used for general informational purposes only and is not to be relied upon or used for any particular purpose. Swiss Re shall not be held responsible in any way for, and specifically disclaims any liability arising out of or in any way connected to, reliance on or use of any of the information contained or referenced in this article. The information contained or referenced in this article is not intended to constitute and should not be considered legal, accounting or professional advice, nor shall it serve as a substitute for the recipient obtaining such advice. The views expressed in this article do not necessarily represent the views of the Swiss Re Group (“Swiss Re") and/or its subsidiaries and/or management and/or shareholders.

Monday, December 18, 2023
Personal Lines
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