As you may have heard, The ALS Group is attending the annual IRMI Construction Risk Conference in Nashville, TN. I was happy to attend a workshop on Insuring Delay in Opening and Associated Costs, as the presenters hit on two of my pet peeves – declare all values at the beginning, before construction begins, and the contractor’s or construction manager’s fees (as part of its General Conditions) are included in the Hard Costs of the builder’s risk policy. Whether you are the owner/developer or the contractor buying Builder’s Risk coverage for a project, it is important that your values are detailed and reported up front. It’s at the beginning, when binding coverage, and certainly before any loss occurs, that you agree with your underwriter what’s included in the Hard and Soft Cost values for coverage.
Let’s begin with Hard Costs, which generally means any material, labor and associated costs with construction. This includes all costs included in the general conditions of a construction contract, including the contractor’s or construction manager’s fees. Soft Costs are everything else. The first is considered property coverage while financial damage, due to delay arising out of an insured loss, has a time element to it. Pure property coverage, insuring only to replace damaged property, can be purchased on a standalone basis, with no Soft Costs or Delay coverage. Insuring physical damage to property is fairly straight-forward: You need to know what the full construction value is, including the construction manager’s fees, architectural fees, consulting fees related to the rebuild, and developer fees related to the rebuild.
Soft costs are specifically defined as delay in startup costs that arise out of an insured loss, and include a time element to them. Coverage includes additional loan interests, marketing expenses, legal and other additional expenses, additional premiums, additional taxes, and loss of rents or other income. There are also special soft cost that can be considered for coverage, if identified and declared up front. Claims do not get considered for payment until after the deductible period has passed – typically 30 days after the project should have been completed. This means that the underwriter will expect, as part of binding coverage, a project schedule, and in the case of a long project, will also require regular updates to that schedule.
It goes without saying that the property damage claims are related to and paid to the contractor, while the delay claims are related to and paid to the owner – this is regardless of who purchases the coverage. Communication is key – if the contractor or construction manager has the responsibility for purchasing coverage, the owner must be in contact with contractor and his/her broker to confirm what, if any, delay coverage is needed. Otherwise, it is most certain that only property coverage will be purchased.
The soft costs element of a builder’s risk policy can be quite complex and needs special attention up front so that all elements of financial loss can be evaluated for coverage. A risk management consulting firm like the ALS Group can help owners navigate the landscape with their insurance providers and contractors as part of a project’s start up.
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