Thanks to the ongoing U.S. construction boom, the builders risk insurance market is currently a viable source of revenue for your agency.
But in order to play, you first need to understand what you’re getting into. Although some trends are finding their way into many policy forms, builders risk policies are above all unique, varying often significantly from carrier to carrier.
“Each insurer develops their own form—I actually feel builders risk policies are much more complex than traditional property policies,” says Steve Coombs, president of Risk Resources, a risk management and insurance consulting firm. “You can line up four different proposals from four different insurance companies and the coverage can run the gamut. Agents have to be very careful in scrutinizing the terms and conditions of those policies.”
That includes carefully reviewing your builders risk clients’ design and construction contracts—before you even seek out a quote. “Those agreements are going to dictate what the minimum requirements are,” explains Coombs, who routinely sees situations in which an owner tells an agent they have a project coming up and requests a builders risk policy.
“The broker says, ‘How long’s the project? What are the hard costs?’ They get some basic information and go out and get quotes. And then there’s a loss, and they find out the policy does not conform to the requirements that are set forth in those agreements,” Coombs explains. “Hence, one of the parties will be in breach.”
If you secure a builders risk policy without first examining the contracts, “the chances of that fully conforming to those contracts are pretty slim,” Coombs says. “It’s really by luck. It takes a lot of work.”
Here are four trends to keep an eye on when placing coverage for your builders risk clients this year:
1) One-stop shopping. Alexander McGinley, vice president, marine underwriting at XL Group, canvassed 10-15 different coverage forms ranging from general ISO to very complex proprietary forms. He discovered a growing trend toward one-stop shopping.
“It used to be that you would have a separate installation, riggers liability, difference in conditions and builders risk forms,” McGinley recalls. “You could go after different parts of the construction market accordingly.”
Not anymore. “The more sophisticated insurance companies develop a product that insures just about any kind of construction operation,” McGinley says. “As an insured, particularly if you’re a complex construction firm, you don’t want to have to worry that your coverage is adequate. You’re going to trust that the broker is recommending an insurance company that will cover all your construction operations, within reason.”
By the same token, some of your larger contractors may request a master builders risk policy form. “The idea there is if you have a contractor out in the marketplace, you would provide coverage for all their projects over a given period—usually a year—that fits into a predetermined rating structure,” says Joe Vierling, vice president, construction at XL Group, who works with larger risks above $100 million in value. “That would be negotiated at one time up front.”
“That works optimally for all three parties from an insurance standpoint—the insurer, the broker and the underwriter,” McGinley adds. “If you write a single builders risk project, by nature it doesn’t renew. The underwriter next year has to replace that premium, the broker has to replace that income and the insured, when they have another project, has to go out to market again. If they can get a master policy that will cover all their projects, it will renew, the terms and conditions will be consistent, and generally you can spread the risk among various construction jobs over that entire policy.”
2) Flexible limits. Particularly in additional builders risk coverages, McGinley notices heightened demand for changeable limits. “It used to be that you would have a fixed limit for each, and you’d have to tweak each of them by way of manuscript endorsement,” he explains. “But what we’re finding increasingly is that there’ll be a set limit, and then it’ll just be easy within the policy declarations to change that limit of insurance.”
McGinley observes this trend in sublimits for landscaping, ordinance and law, and temporary structures. “It’s for the benefit of the insured and the broker,” he explains. “If they provide an application and it includes a specific limit for those particular areas, they don’t want to worry that suddenly there’s a lower limit on the policy.”
For example, if the limit for landscaping is $1 million, “the insurance company shouldn’t just offer a $100,000 sublimit without trying to understand the insured’s needs,” McGinley says. “It should be willing to cover the $1 million amount and make it part of the premium charge.”
3) Delay and soft costs. According to Coombs, who co-wrote “The Builders Risk Book” with Don Malecki, perhaps the most complicated coverage in all of property and inland marine insurance is delay and soft cost. With delay coverage, “think of it as business interruption coverage,” he explains. “Soft cost, think of that as extra expenses coverage.”
Insurers are getting more sophisticated when it comes to delay and soft costs, Coombs says. “They’re becoming more willing to customize what soft costs mean,” he explains. “When you buy soft costs, it only applies to six or seven or eight specified kinds of costs—for instance, legal and accounting fees and interest expense.”
The problem? “There’s probably 100 different kinds of soft costs that might be incurred, and the chances of all the soft costs exposures an owner would have being included in that preset list of soft costs the insurance company uses is pretty low,” Coombs says.
Coombs says as an agent or broker, your job is to scrutinize a builders risk project and pose what-ifs. “What happens if we have a fire halfway through the project and it’s delayed by six months or a year? What loss of revenue would be incurred and what additional expenses would be incurred? You have to customize that,” he points out. “Generally, I see that that does not get much attention. It isn’t until after there’s a loss that things get scrutinized.”
Get out in front of this issue by conducting meetings with your builders risk client—usually the owner that buys the builders risk policy. “Agents and brokers need to ask those kinds of questions, because generally most owners are unsophisticated when it comes to builders risk unless they are constantly building new projects,” Coombs says.
4) Policy warranties. Coombs also sees more warranties finding their way into builders risk proposals and policies. “By warranties, I mean an insurance company will provide a proposal and it will be subject to a warranty,” he explains. “In the warranty, it will list one or more things that you as an insured must have as part of the construction project.”
For example, some warranties might require properties to be lighted or fenced. Others might require hot works programs or a round-the-clock watchman. “It’s one way that insurance companies are imposing loss prevention techniques that a contractor may or may not have on the site,” Coombs says.
As an agent, you can seek out value-added services from carriers that help mitigate losses, says Anthony Gadaleta, vice president of inland marine’s property and construction practice at Travelers. Potential exposures abound—Gadaleta cites theft, transit, time element and fire where appropriate hot works programs have not been implemented. But he says the most often overlooked threat to a builders risk project is release of water.
“If you don’t have a good water mitigation plan in place, you’re really putting things at more risk than they should be,” Gadaleta says. “The key is to eliminate or reduce the risk factors as much as possible. When you don’t, it has an impact on the completion dates of the facilities.”
Jacquelyn Connelly is IA senior editor.