Construction is taking place everywhere we look – both commercial and residential projects including new construction, tear down and rebuilds, and remodeling projects both large and small. Construction projects are insured (or thought to be) by an insurance policy or a combination of insurance policies such as: Contractors Property and General Liability Policy, Owners & Contractors Protective (OCP) Liability Insurance, Inland Marine Policy, Homeowners Policy, or a Builder’s Risk Policy.
HARD COSTS
Various parties to the construction project can purchase a Builder’s Risk Policy, including the Project Owner (building owner or homeowner), General Contractor, Subcontractor, Lender, or Architect. These policies typically provide coverage for damage to the building under construction, materials used in construction, and project-related construction equipment. These types of exposures are often referred to as “Hard Costs” or coverage for the actual “Sticks and Bricks.”
SOFT COSTS
In addition to Hard Costs, Builder’s Risk policies can be structured to provide coverage for “Delay in Opening” expenses or “Soft Costs.” Soft costs are those items that not physically part of the project under construction. Nevertheless, when the structure is physically damaged, there are extra costs incurred in putting building back to its pre-damaged condition.
Soft Costs from construction delays can include:
- Architect Fees to redraw the plans to meet new building codes
- Additional Real Estate Taxes
- Additional Interest on Loans
- Additional Municipal Fees to extend Permits and Licenses
- Additional Insurance Premiums
- Additional Temporary Office Space Expenses
- Additional Equipment Rental Fees
- Additional Labor and Material costs
- Additional Expenses Incurred to protect the building from further damage until permanent repairs are made
- Debris Removal and Disposal of the damaged portion and potentially the undamaged portion of a building that may need to be removed, before rebuilding
- Scaffolding that is damaged or that needs to be taken down and reinstalled
- Contract Penalties for delayed construction
In addition to extra costs to related to reconstructing the project, there can also lost income and profit resulting from delays including:
- Lost Sales as construction delays mean delayed transfer of ownership
- Lost Rents as construction delays mean delayed tenant occupancy
Builder’s Risk policies that provide Soft Costs typically provide coverage from the date the project would have been completed, had no loss occurred, until the date the construction is completed. It assumes reasonable and diligent effort in completing the project after the loss occurs. Much like Business Income coverage on a standard Property policy, this can provide coverage for operating profit, post-loss expenses, and additional expenses incurred to mitigate a delay in opening.
SAFEGUARDING YOUR SUCCESS
Determining Builder’s Risk Limits and Coverages needed can be difficult. It requires a good understanding of the size, scope, costs, timeline, and delay implications of the project and related contracts.
You must also consider additional perils that may impact a given project, such as earthquake or flood exposure as well as the anticipated Period of Restoration (time needed to complete repairs) and Period of Indemnity (time needed for the insured to recover financially had no loss occurred). Completing a Soft Cost Worksheet can be useful tool in determining coverages needed to make the insured whole, in the event of a loss.
Your team at Sentinel can be instrumental in assisting you with the total insurable exposure at risk for each project. Contact us today to Safeguard Your Success.
