Introduction to Builders Risk Coverage
The Builders Risk Coverage Form is a specialized property insurance policy designed to protect buildings and structures while they are under construction. In the context of the complete Commercial exam guide, it is categorized under Commercial Property insurance, though it shares many characteristics with Inland Marine forms.
Construction projects represent a unique risk profile because the value of the asset increases every day as labor and materials are added. Standard commercial property forms are often inadequate for these scenarios because they assume a finished, static value. The Builders Risk form ensures that the owner, contractor, and any subcontractors are protected against financial loss due to physical damage to the structure during its most vulnerable phase.
Eligible Property and Covered Interests
The form covers the building or structure while it is being built. This includes foundations and any fixtures, machinery, or equipment that are intended to become a permanent part of the structure. For example, a large HVAC system sitting on the ground waiting for installation would be covered.
Key items typically included in coverage:
- Building Materials: Supplies and equipment intended to be permanently located in or on the described building.
- Temporary Structures: Scaffolding, construction forms, and temporary sheds if they are located within 100 feet of the premises.
- Foundations: Unlike standard property forms that may exclude foundations, Builders Risk explicitly includes them.
It is important to note that land is never covered under this form. Additionally, trees, shrubs, and plants are generally excluded unless they are part of the building's permanent landscaping and specific coverage extensions apply.
Completed Value Form vs. Reporting Form
| Feature | Completed Value Form | Reporting Form |
|---|---|---|
| Premium Basis | Based on the final anticipated value | Based on values reported periodically |
| Administrative Effort | Low (set at start of project) | High (requires monthly reports) |
| Coinsurance Requirement | Usually 100% of completed value | 100% of the value at time of loss |
| Best For | Standard construction projects | Builders with many simultaneous projects |
Conditions for Termination of Coverage
On the Commercial Insurance Exam, one of the most frequently tested areas is the termination of coverage. Because Builders Risk is intended to be temporary, the policy specifies exactly when the insurer's liability ends. Coverage ceases at the earliest of the following events:
- The policy expires or is cancelled.
- The property is accepted by the purchaser (the buyer).
- The insurable interest of the named insured ceases (e.g., the owner sells the interest).
- The project is abandoned with no intention to complete it.
- 90 days after construction is completed.
- 60 days after the building is occupied in whole or in part, or put to its intended use.
Candidates should memorize the 60/90 day rules specifically, as they are common distractors on the practice Commercial questions.
Exam Tip: The Occupancy Clause
Be careful with the occupancy rule. If a building is partially occupied, the 60-day countdown begins immediately for the entire policy, not just the occupied portion. However, if the occupancy is merely for the purpose of finishing construction (like a contractor setting up an office in one room), coverage usually continues.
Standard Coverage Extensions
Causes of Loss and Valuation
Builders Risk is typically written using the Causes of Loss – Special Form, which provides open-perils coverage. This is preferred because construction sites are prone to unique perils like theft of building materials, collapse during construction, and windstorm damage to unreinforced walls.
Valuation is handled differently than a standard replacement cost policy. The insurer's limit of liability is the value of the building at the time of loss, but the premium is often adjusted based on the Completed Value. If the insured carries a limit lower than the actual completed value of the structure, they will face a significant coinsurance penalty at the time of a partial loss.