In 2017, the projected revenue of the commercial construction industry is approximately $147 billion in the United States alone.1 This presents a sizeable opportunity for brokers and agents to proactively speak with clients on future plans for commercial construction and renovation.
“However, construction may not be a common area of expertise for most brokers. Some brokers and agents assume it falls under Commercial General Liability (CGL) or Vacant Dwelling, rather than Builder’s Risk,” says Steve Hrab, Senior Construction Underwriter, Burns & Wilcox Canada.
Typically, property policies such as Commercial or Homeowner’s exclude buildings that are under construction. “A Builder’s Risk policy on commercial property provides coverage for a building being built from the ground up or for buildings that are being repaired, reconstructed or renovated,” explains Roxanne Logan, Underwriting Manager, Special Risk Division, Burns & Wilcox. “It may also include the materials and supplies being used on site, in transit or within a certain distance of the building.”
Construction is a fast growing industry and is filled with opportunity. To assist brokers and agents in capitalizing on this growth, Hrab and Logan discuss four topics brokers should know when discussing coverage with construction clients:
1. General liability is not enough.
CGL policies are long-term, renewable policies while Builder’s Risk insurance covers a new build or renovation project specifically for upgrades being made to the building before it becomes a permanent part of a site.
“The industry is seeing a lot of rehab of old commercial buildings, like factories that are being turned into multi-level residential units or split-use facilities,” said Hrab. “Instead of trying to cover the renovation under a CGL or Vacant Dwelling program, using Builder’s Risk offers more flexibility and better premiums.”
Once a building’s renovation is complete, it would be at that point that a CGL policy would be updated for the new insurable market value of the commercial property.
2. Before construction starts, insure.
Clients should look to gain coverage before work actually begins and know who is responsible for what job. “If a building owner secures a general contractor to do the build, both the owner and contractor have the option to obtain Builder’s Risk insurance,” said Hrab. “Many times, owners and contractors point fingers at each other and neither ends up having Builder’s Risk insurance. The most frequent question we hear from brokers is what to do if the owner is stranded in the middle of a project without insurance.” It is important that the owner purchases a Builder’s Risk policy to protect their property, making sure that the contractor carries their own CGL policy.
“On occasion, underwriters receive requests for Builder’s Risk insurance where an owner has failed to get coverage for one reason or another,” Logan said. “It usually occurs when the lender or mortgagee asks for a copy of the policy and the owner realizes they do not have one.” If this is the case and work has already begun, it is important that the client has kept the same contractor from the start of the project. Logan added, “If they are using a different contractor, brokers and agents should ask why, to better understand the risk.”
3. Check contractor credentials.
Clients should make sure contractors are experienced, licensed and insured. Logan said, “Hiring an uninsured contractor could cause potential problems, in the event of a loss to the property.” Using contractors who have a strong backlog of experience and carry a CGL policy will help minimize risk during the course of construction. Owners should hire a contractor with a $1,000,000 CGL policy. Hrab added, “In the case of gross negligence, mandatory CGL policies make subrogation much easier.” This requirement should be a factor when considering contractors of all major trades working on a project, including electrical, framing, plumbing and more.
Sometimes, due to contractor setbacks, a project will go beyond its initial Builder’s Risk policy timeframe. “Brokers should work with the client to make sure the project is on schedule,” said Hrab. “Few carriers cannot provide extensions beyond 18 months.”
4. Know what the underwriters look for.
Beyond looking into the insurance requirements of contractors, underwriters look at a large variety of items that brokers and agents should be aware of. Underwriters prefer to start with permits and construction plans for the site to determine the level of structural changes. “The level of investment into a property usually raises a red flag on the amount of structural changes,” said Logan. “In addition, if an older building needs new wiring, underwriters want to make sure the contractor is not using electricity until the wiring is redone to prevent a fire.”
Trespassing on the worksite is also a large concern. The property should be fenced and secured against unauthorized entry. Most Builder’s Risk policies require a security watchman service to be on-site. “Advanced monitoring systems that use the likes of motion and heat detectors can be far superior to a watchman,” said Hrab. “Most underwriters require the on-site presence of a security guard to walk the site every 15 to 45 minutes, and will not consider the superiority of a 24-hour monitoring system.” This is a legacy concern that may arise when measuring risk.
Brokers and agents do not have to pretend to know everything. “Brokers should look at the extent of renovations or construction being done,” said Hrab. “If it is outside of their knowledge, brokers should contact an underwriter directly.” Brokers and agents can capitalize on this growth through further discussions like these with a surplus lines underwriter.