Builder's Risk Part 1: Advantage to the Developer
When a developer or owner (we will refer to both collectively as “developer”) hires a general contractor, they’re paying for the peace-of-mind to know that the contractor is going to take care of all aspects of the construction project from pushing dirt to punch list. Within these responsibilities often lies the purchase of insurance for the project. However, there are distinct advantages for the owner to purchase the builder’s risk (P.S. – check out our blog post that explains what builder’s risk is) and they’re as follows:
Lender Compliance – The developer is the party making the deal with the lender. The contractor is an outside party in this relationship and not part of the loan agreement. Does the contractor know that their reporting builder’s risk program is not accepted by the lender? Did the lender’s insurance department know to ask? Did the contractor know the lender requires income replacement? Most contractors don’t include income as they don’t have an estimate of income or, worse still, aren’t able to include as they don’t have insurable interest. By placing the insurance the developer has confidence they’re in compliance with their lender which is in their interest when default is on the line.
Construction Contract Compliance – Similar to lender compliance, but worse, since the contractor is party to the contract this time. The same income challenge that applies above, applies here. Often times the contract will read “limits as required by contract” and it’s up to the contactor to determine the correct amount for hard cost, soft cost and income. The hard cost is a distinct number in the budget, but this number can change as the contract and designs are finalized. Soft cost covers expenses that the project would incur during a delay such as additional advertising, design fees or lease administration. Often times the contractor would have no way to estimate these costs. The developer has direct access to project budget and income projection which give the developer the ability to properly select these limits.
Claims Control – When there is a claim for the “first named insured” – and they’re able to submit information and communicate with carrier’s claims adjusters. If the developer/owner doesn’t place this coverage, they have to rely on the contractor to communicate and negotiate the proper amount of payment in a loss.
Cost – Contractor programs are often purchased as a master program over many projects. These programs generally are priced based on the overall contractor’s portfolio of projects and performance of the contractor. By placing the program the developer makes sure the project is priced based on the individual characteristic of the project and not other unrelated projects. However, this also allows for the positive benefit of the contractor’s good performance. This yields better rates for the premium pricing.
Certainty, cost and control – the advantage goes to the developer when placing builder’s risk insurance on their projects.
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