However, policies are more nuanced than that and often include multiple conditions that determine whether the insurer considers a loss as a covered event. Those caveats are embedded in the policy’s sublimits, extensions, and definitions in the endorsements.
To avoid having a claim denied due to these conditions, contractors should pay close attention to water damage sublimits, delay-related extensions, and a handful of policy terms that may narrow coverage substantially. Here’s what every contractor should know about covering their bases.
Water damage sublimits
Water damage is one of the most common source of builders risk loss, and it’s also where coverage may be thinnest.
Whatever the cause of water damage, policyholders should look carefully at their policies to understand what is covered and which deductibles and limits will apply. Insurance coverage usually distinguishes between damage caused by rising or overflowing water (i.e., flood and storm surge) and all other water damage whether it be from onsite sources, precipitation such as wind-driven rain, or otherwise. Flood and storm surge are not necessarily covered by all policies.
Standard forms typically distinguish between water damage from an internal source–such as a broken pipe–or external source like a roof left open during a storm. Flood or named-storm water damage is often excluded outright or capped by a separate, much lower sublimit.
On coastal or flood-zone projects, named-storm deductibles can run into the millions on large jobs. Flood coverage usually requires a separate endorsement or a standalone flood policy.
That said, there are two things you should confirm before policy binding:
1. Whether the sublimit applies per occurrence or in the aggregate for the policy term
2. Whether the insurer, as a condition of coverage, requires specific mitigation protocols such as temporary water shut offs, moisture monitoring, and weather tighten closure of the building
Failing to follow those protocols can jeopardize a claim even when the sublimit itself would otherwise respond.
Delay and soft cost extensions
Standard builders risk only pays to fix the physical building. It does not pay for extra bills or lost income during the repair. To cover soft costs related to project delays caused by a covered peril, you’ll need a delay in completion or a soft costs endorsement.
Without this endorsement, if your project suffers delays not related to a physical damage event, your firm could be left responsible for associated costs.
Common soft costs include:
- Interest on construction loans
- Real estate taxes
- Architect and engineering fees for redesigns
- Legal and accounting fees
- Permits and license fees
- Advertising and marketing costs for the new building
Other terms that can create coverage gaps
- Faulty design, materials and workmanship. Nearly all builders risk policies contain exclusions for faulty design, materials and workmanship. However, most also include an ensuing loss exception which states that if the loss is caused by an otherwise insured peril, the resulting loss may be covered.
- Coinsurance. Most builders risk policies include a coinsurance clause, and it’s crucial that policyholders understand how it works. Coinsurance requires you to maintain a coverage limit equal to a specified percentage of the property’s value, commonly 80% or 90%. If you don’t meet that threshold, the insurer reduces your claim payout proportionally, even for small losses that fall well below your policy limit. The simplest way to avoid this pitfall is to insure the project for 100% of its completed value from the start.
- Occupancy. Standard forms typically exclude or terminate coverage once any part of the building is occupied. If phased occupancy is planned, a permission-to-occupy or beneficial-occupancy endorsement needs to be in place before move-in.
- Definition of completion and reporting. Coverage end dates, extension procedures, and any value-reporting requirements should be checked against the actual project schedule. Policies that lapse or trigger reporting penalties because of an outdated completion date are a common, avoidable source of disputes.
None of these terms are unusual by industry standards, which is why they often get overlooked.
To avoid coverage issues, contractors should revisit their builders risk policy whenever the project timeline, occupancy plan, or site risks change.
