(June 2019)
The traditional property underwriting concerns of Construction, Occupancy, Protection, and Exposure (C.O.P.E.) also apply to builders risk insurance.
Related Article: ISO Commercial Property Program Underwriting Considerations
However, builders risk insurance involves a number of additional underwriting issues and concerns.
New construction is considered better than renovation work for several reasons:
Every construction project has a definite start and end date. Longer construction projects require more monitoring and attention than shorter ones. Construction delays can extend construction beyond the original completion date which can lead to various disputes and possible abandonment. Longer projects are also more subject to changes in the economy so financial underwriting becomes more important.
Related Article: ISO Commercial Property Program Underwriting Considerations
The contractor is the factor that most affects the project’s success. Its background, involvement with similar projects in the past, financial strength, type of job site supervision it provides, and the number and types of subcontractors it uses are all critical elements that must be considered.
The owner drives the project and provides the funds necessary to keep it moving forward. Any financial problems on the owner’s part may result in the project not being completed on time or at all. The owner has a vested interest in the project and in having it finished on time and so should be actively involved. It should monitor the contractor’s activity, require periodic progress reports, closely evaluate quality issues, and generally assist as needed to keep the project moving forward on time and on budget. Owners with lackadaisical attitudes encourage the same attitude in contractors. This can result in not meeting time frames, inferior quality of work, and greater potential for accidents and losses on the job site. Owners that have financial problems may suddenly abandon their projects or they may suddenly have a rash of convenient “accidents.”
Buildings under construction usually do not have fire suppression systems or fire cut offs to stop or reduce the spread of fire. Frame buildings are more likely candidates for a total loss than fire resistive buildings, simply because of the type of construction materials used. Public fire protection is important because fire departments extinguish fires or keep them from spreading. Frame structures being built at remote locations with no public fire protection are much more likely to sustain a major fire loss than fire resistive buildings under construction in downtown areas of major cities.
Construction jobsites can be attractive nuisances to children in neighborhoods adjacent to them. They can also be warm places for homeless persons to sleep or readily available sources of building materials for thieves when construction crews leave for the day. Both owners and contractors must be sensitive to conditions and take appropriate steps to provide the level of security needed. Security initiatives may include independent contracted watch services, employees who act as watchpersons on the site after working hours, fencing, cordoning off or in some other way isolating the job site, or a combination of these. The level and extent of the security provided should be in direct proportion to the project’s size, duration, location, and the types of construction materials involved.
Some building projects are based on the contractor's speculation that there will eventually be a purchaser. This approach can be very profitable during a building "boom" but disastrous during an economic downturn. Speculative building adds to the risk of any project and underwriters should be extremely careful and thoroughly evaluate any speculative construction project and its contractor.
The Insurance Services Office (ISO) CP 00 20–Builders Risk Coverage Form covers on a completed value basis. This means the limit of insurance when coverage begins must be the final completed value of the building on the date that construction is complete, and coverage ends. The limit must also include the value of all permanent fixtures and decorative materials that become part of the building. Not providing an adequate limit of insurance can lead to the named insured sharing in a covered loss to the extent that the limit is inadequate in proportion to the building’s final value. The longer the project the higher the possibility that the limit will need to be revised because of changes in the anticipated completed value. Regular limits reviews should be considered to be sure the limit is tracking with the projected final completed value. If the limit of insurance must be increased during the policy term, the premium charged to do so is calculated from the inception date and is not pro-rated. The effective date of the limits change is also the inception date.
The rating formula and approach includes an adjustment factor. It acknowledges that the building value at inception is zero and increases during the policy term and construction period to the final completed value when construction is complete.
Related Article: ISO Builders Risk Coverage Form Rating Considerations
CP 00 20 is only one of a number of coverage forms available that insure buildings under construction. It might be the best choice in some cases but not in all cases.
Inland Marine Builders Risk Coverage Forms may be an attractive option in some cases. Unlike CP 00 20, they are not standardized and often have features that respond better to certain circumstances and conditions. Because they are not standardized, they have certain limitations and restrictions. In addition, their pricing is more subject to underwriting judgment and policy-writing minimum premiums compared to CP 00 20.
Related Articles:
AAIS Builders’ Risk Coverage Forms
ISO Builders’ Risk Coverage Form
The named insured’s existing commercial property coverage arrangement is another place that might provide coverage. Most property coverage forms provide at least limited coverage for additions, improvements, and renovations to existing structures. That coverage may be just what the named insured needs in certain cases and/or under certain circumstances.