Builders Risk Insurance

Project Delay under Builders Risk Insurance

Jeffrey Segall | January 4, 2023

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We have all heard stories of projects being completed early or on time, but let's face it, this is not a regular or even frequent happening. In fact, with supply chain and availability issues, tightening of finances, permitting, and other delays, late completions are more the norm.

A survey conducted by IDC on behalf of Procore during May and June 2021, Owners at the Leading Edge, found that 75 percent of projects were over budget, and 77 percent were delivered late. It seems the larger/longer projects tend to be the ones that are the latest.

These statistics are important to contractors for a number of reasons, but for this article, we will concentrate on the risks and costs associated with late project delivery from an insurance standpoint. What will it cost to extend a policy? That will depend on a number of factors, such as which policy, when the request is made, how many insurers are involved, the amount and type of reinsurance underwriters placed when binding the policy, and the reason for the delay.

Builders Risk Insurance

The cost of builders risk insurance is typically based on the amount of exposure to loss during the project period. On a completed value builders risk program, this is the anticipated final cost of the structure. Note that, over time, this value may change, and the insurance company has a right to audit the policy at any time to determine if this amount has changed and alter the premium based on the revised values. Additional limits in most builders risk policies do not happen automatically, and in those that do increase, the percentage granted is usually in the form of an inflation or escalation clause that contains a specific allotment of increase.

A 1-year project has little, if any, risk of loss in the 1st month and has a 100 percent chance of loss in the 12th month. Some underwriters will price the risk, contemplating an average possible loss pick of half. So, a 1-year $20 million project may have an underwriter approach the pricing as though the average value at the time of loss may be $10 million. An astute underwriter will review the schedule and consider their average loss cost based on an analysis of the buildup of values over time. A very seasoned underwriter will go a step further and establish their average loss cost from a peril perspective. This approach considers the location of the project and its susceptibility for damage by certain perils. Perils like windstorms might impact costs differently for different types of projects at different times of the year.

For example, take a building in South Florida that will be built over two hurricane seasons (June–November). The 1st season only sees excavations at risk, but by the 2nd season, the schedule sees the building 85–100 percent complete. If the pricing underwriter was concerned with a catastrophic windstorm loss, their pricing consideration would probably contemplate a full-value wind claim in the 2nd year but have very little rate associated with windstorm in the 1st year. Similarly, extending a policy into an additional hurricane season may not result in a proportional additional premium.

There are a number of factors controlling how underwriters will look at granting a project extension and how they would charge for that extension. As mentioned above, the amount of values at risk at the time of the extension and the perils covered will go a long way in determining appetite and cost. Another major consideration is the current underwriting appetite of the insurer. Part of that is a factor of the project's experience to date and its overall book of business.

Availability of reinsurance is another concern. Builders risk policies for smaller-to-moderate-sized projects rely on the insurance company's capacity, bolstered by their treaty reinsurance. Treaties renew annually, and if they change substantially, may impact the ability of an insurance company to extend them and would have a detrimental effect on the price. Larger project placements may involve facultative reinsurance that was negotiated for a particular project. In this case, any changes to the policy term will require the builders risk insurance company to negotiate with its reinsurer(s) before they can make their decision. In lieu of facultative reinsurance, many builders risk policies have relied on a layering and quota sharing of limits among several insurance companies. This type of placement requires even more time to piece together a decision on extensions.

General Liability and Excess Coverage

General liability insurance costs are typically determined as a rate applied to payroll or cost of construction, or a combination of both. When this coverage is not on a project-specific insurance program, like a wrap-up, each contractor brings its own insurance to the project. A project delay has no effect on the contractor's insurance costs in the year that no work is performed. The insurance rates in effect of the actual work will be what is added to a project cost.

Unlike contract clauses that have been negotiated into newer contracts that provide relief for material price inflation, many contractors have not taken future premium costs into account when bidding or negotiating their contracts. A project extension just means shifting payrolls and premiums to the new policy year, so the cost adjustment, if any, may be up or down. That is not necessarily the case with project-specific policies.

A project-specific policy provides two distinct types of liability insurance that cannot be separated. First, the coverage applies to injury and damages resulting from the construction operations. Arguably, if no work is/has been performed, there is very little opportunity for liability beyond someone injuring themselves on the project site. Decisions as to the acceptability and cost of extending this portion of the coverage should be reasonably limited to changes in risk appetite, changes in reinsurance, and changes in an insurer's overall actuarial rate need.

The second portion of the liability policy provides coverage for injuries and damages caused by the work that had already been performed once the project is complete or abandoned. Depending on the location of the worksite, this coverage could need to extend for up to 10 years beyond project completion. Delayed projects could mean that previous work may become damaged or negatively impacted due to a lack of maintenance or delayed scheduling.

An example where a delay caused significant deterioration of some structure components was a bridge over the intracoastal waterway near Clearwater, Florida. Failure to timely connect the standing supports with the roadway caused the supports to lose some structural integrity. Fortunately, the engineers recognized the problem and both replaced and added additional supports to make the bridge safe. Had they not, there could have been a resulting loss. For the reasons mentioned and the difficulty in extending completed operations coverage, or any coverage beyond 10 years, extensions may be difficult to negotiate.

The best suggestion for securing extensions is to share any meaningful delays with underwriters as they become known. It is much easier to obtain an extension early in the project when there are fewer exposures to loss than at the end when a chance of a major loss is most likely. Provide underwriters with the reason for the delay and the current status of the project and known losses, as well as the scope, cost, and time line for completing the project.

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