When you placed your client’s Builders Risk policies, did you offer the best coverage available to your client?
By NIP Specialty Brokerage
Builders Risk – Property in the Course of Construction
With the economy showing signs of improvement and funds from the government’s economic stimulus package starting to roll out, construction projects are once again picking up pace, as evidenced by home starts increasing 3.6% from May to June. At the same time, hurricane season is here, underscoring the need for specialized attention when insuring these emerging construction projects, which can be a difficult placement for brokers.
Many brokers don’t worry about placing Builders Risk/Renovation projects because there are standardized online solutions available at a reasonable cost. How many times have you gone to a website, printed out of quote and bound coverage? The problem is, how can you be confident that the quote met all of your client’s needs? Did you even get to speak with the underwriter who offered the quote? Construction projects are complex, with complex exposures; cookie-cutter online tools may not be the best solution. Your clients need specialized attention in order to ensure that their ventures are fully protected. If their true exposures have not been evaluated, is your agency prepared for an E&O claim? Yes, price is an important factor when placing Builders Risk coverage, but an uninsured loss can be far more costly for your client, and for you.
A wide range of possibilities need to be taken under consideration, including perils such as flood, wind and earthquake, as well as other exposures such as duration of project, capacity (large insured value) and type of construction (framed or fire-resistive).
For example, have you offered an annual policy when the true project duration is more likely to be 18 months? What if the carrier refuses to extend coverage? We all know how difficult it is to replace builders risk coverage once the project has begun. An easy solution is to insist on reviewing the construction timeline with your client before coverage is placed. If the project is estimated to be completed in 2 years, make sure that the policy term is for 2 years. It is never a good idea to leave your client exposed midway through a project without coverage. Extensions are not automatically granted and there is no guarantee that they will be granted at the inception premium. By writing the appropriate policy term, you can lock in the price at inception. Simply relying on a “soft market” is very risky.
Specialized attention to a builders risk policy takes into consideration the hard costs of the project (such as the physical building, materials and labor), as well as the soft costs, which can come into play when there are delays due to loss. While hard costs are more apparent, soft costs are often overlooked, and underinsured, just as business income is often misunderstood as respects property placements. It is important to offer coverage for these potentially recurring soft costs such as architects and engineer’s fees, inspection fees, legal fees, audits, surveys, interest expense, advertising extra expense, marketing, website design, signage, insurance and contingencies? These additional costs can ultimately undermine the project without insurance to recoup these expenses.
To demonstrate how quickly soft cost expenses can add up after a loss, here’s an example using a project to build new condos: Architects and engineers will charge a fee to re-draw changes to plans. Legal fees will continue as well during this time and new permits may need to be pulled. The site may need to be resurveyed if there is pollution as a result of the loss and soil borings might need to be performed. Insurance costs will increase if the term needs to be extended as a result of delay from a loss. Additionally, in our new condo building example, there may be a loss of potential buyers when construction is delayed from the loss.
So, how do you know what soft costs should be insured? Reviewing the construction budget is a solution. Also, study the financials, plot plans and contracts. And remember, you must be sure to specify the soft costs needed, as coverage is based on the costs that you request for your client. If you request engineering fees and loan interest, but do not request coverage for real estate taxes, for example, you may be offering limited coverage to your client. It is important to remember that just asking for soft cost coverage does not automatically grant every coverage that may be needed. You need to get specific.
In addition to Soft Costs coverage, you should also consider Business Income/Rental Value coverage. Certain expenses may not fit the soft cost definition, but there may be an exposure under loss of business income. An example of this would be loss of rents due to a delay in constructing an apartment building. Should a loss occur near the end of the project, future operations are immediately affected.
Along those lines, one way NIP Specialty delivers complete coverage is to obtain Permission to Occupy so that the insured may use completed portions of the building while the work continues.
Even with the best, most conservative project timeline, delays may still occur due to weather. You can cover your client by insuring against the perils of wind, hail and flood. (Important to note: In this difficult economy banks are now mandating flood coverage before they will consider funding a project.) Flood coverage typically does not apply to the building until it is walled and roofed, however, at that point, project values are usually near the maximum. Additionally, projects located in California, Washington and states along the New Madrid fault line should consider earthquake/earth movement coverage.
These very real scenarios demonstrate that generalized coverage available from online sources may not be providing comprehensive coverage to suit the particular needs of your client, leaving them uninsured or underinsured.
You may be thinking that all this extra coverage comes at a higher cost. Not necessarily. A good wholesale broker has ways to keep costs down without sacrificing the comprehensive coverage your client needs. At NIP Specialty Brokerage, our expertise allows us to negotiate the best pricing available, using our product knowledge to work with carriers best suited for the risk at hand. This knowledge enables us to turn quotes around quickly. Our goal is to ensure that our underwriters are comfortable with the risk and receive comprehensive data to ensure that the best policy is issued. We focus on the details, which ultimately produces the broadest coverage.
NIP Specialty provides specialized attention to each account to ensure the most comprehensive coverage. Give us a call if you need help with large or small, residential or commercial projects. Whether inland or near the coast, we have carriers that are willing to write this business. Our latest placements in these areas range in premiums from $2,500 to $600,000.
You can contact NIP Specialty Brokerage at 800-446-7647 ext. 611. Or email: NIPSpecialty@NIPGroup.com
About NIP Specialty Brokerage
NIP Specialty Brokerage is a wholesale brokerage operation targeting non-standard commercial risks underwritten by admitted and non-admitted specialty carriers, with a focus on the Construction Industry. NIP Specialty Brokerage assists agents and brokers in the structure and placement of complex insurance risks throughout the United States by accessing NIP’s brokerage expertise and relationships with global insurance markets.