What is Builders Risk Insurance?
Hello and thank you for watching this 5-minute tutorial on purchasing Builders risk insurance. At Farmerbrown.com and our sister companies, we believe in educating our customers, so they know what they are purchasing and are getting the best value for their money. So let’s begin.
In purchasing builders risk insurance, you are either building a home from the ground up or you are rehabbing an existing structure. Either way, you insure yourself to the finished replacement cost of the project. This amount is NOT the market value because it does not include the land.
The replacement cost is calculated on a square footage basis, so you should have a good idea of what it costs to build your project. A general rule of thumb for brick construction is about $200 per square foot for of the home and $150 per square foot in the south.
This is a very general ballpark! For super high end homes can go up to $1000 per foot and economy homes can be $80 per foot. The cost differs from the labor rates, taxes, laws and material costs in the area you are building and of course the type of materials you are using.
Once your replacement cost is determined, you need to decide your time frame. Policies are generally offered for 3 month, 6 months or 1 year. And for the record, many times it´s hard to renew a project after 2 years of work. Why? Simply because insurance companies look at them as a higher risk.
Also, please note these policies as with every carrier are “one shot” policies meaning if you cancel during the policy period your money is not returned to you. The premium is “fully earned” at time of purchase.
So now that you have the replacement cost and time frame of the policy period, you need to pick a deductible. This is the amount of money you are responsible for in the event of a claim. The higher your deductible, the lower your price will be.
So now that we have the basics down, lets look into common exclusions and limitations in the builders risk policy that many people do not know about.
1) Builders risk is a property policy and does not include liability coverage. If someone get injured on your property or your property were to damage someone else’s property you wouldn’t be covered. You can buy Liability Insurance separately for around $300 to $400 per year or you can add yourself onto your contractor’s general liability policy as an additional insured.
2) If you have a remodeling project, the existing shell of the building is only covered to actual cash value. The insurance company will not give you replacement cost on what it cost to rebuild. This can be a big cost if the building is old and burns down at the end of the project because they will give you a depreciated value of the existing structure.
3) Theft
Some policies offer coverage for theft and others don’t or have internal limits on it like $15,000. This is a big miss for many buyers in that they assume theft is covered like a homeowner’s policy. If you’re doing a remodeling, copper is often stolen or heater/air-conditioners for example. And, this is why it´s important that you know how much theft coverage you have or if you have any…
4) Wind/Hail
If you are in a coastal area or tornado area it is common for builders risk policies to not include wind hail or have a wind/hail deductible at % of building value which can result in a very high deductible. Example being 5% wind/hail deductible on a $500,000 policy would end up being a $25,000 deductible.
5) Flood
You have to buy a separate policy for flood. It is not covered.
6) Soft costs
In the event of a claim there is a good chance you will have extra attorney costs, expedition costs and maybe additional marketing costs if you are flipping the property. You can buy this coverage and it is not expensive.
7) Tools and equipment
Your tools and equipment are not covered by builders risk, but should be on your Business Owners policy.