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Understanding Builders’ Risk and Construction Insurance

Joe Tejeda, a Practice Leader from PCF Construction, provides a look at builders’ risk and construction insurance.

The construction industry is a complex ecosystem with various stakeholders—each facing unique challenges, particularly when it comes to insurance needs. Having spent years working closely with different actors in the field, we've gained insights that could benefit anyone navigating this intricate web. In this blog post, we're aiming to shed some light on the different needs, complexities and strategies related to construction insurance and builders’ risk.

Builder's Risk Insurance in Home Building

Builder's risk insurance is crucial for home building projects, serving as a safety net in case of unexpected events like fires or natural disasters. The specific risks often vary depending on geographic locations; earthquakes are a primary concern in California, while hurricanes are more relevant on the Texas coast.

What sets PCF Construction apart is our attention to the unique risks of different regions. Many insurance brokers may not specialize in construction, leading to potential coverage gaps. For example, some may offer limits on a per-project basis, missing important aspects like soft costs, model home coverage or homes and inventory coverage. Simply having a policy isn't enough; it's crucial to address these specific gaps, which our specialized program aims to do.

Another factor to consider is the role of financial institutions or lenders, who often require builder's risk insurance for construction loans. This requirement applies whether the project is a lavish custom home or a larger housing tract. Therefore, understanding the intricate details of builder's risk insurance is not just a checklist item but a necessity, and our program specializes in this area.

Market Adaptations for Carrier Capacity and Project Initiation Disparity

The insurance market is adapting to challenges between carrier capacity and large-scale construction projects. For residential home builders, the risk is typically spread over multiple homes, allowing carriers to cap the limit per home. This "rolling builders’ risk" approach works well for larger residential ventures.

However, it's a different story for grander projects, especially those valued over $25-30 million. Options for coverage are limited, and costs have soared. These projects often require layered insurance programs involving multiple carriers, or they rely on surplus lines from a single carrier. Preliminary estimates for insurance costs can sometimes be two to three times higher than initially budgeted. These high costs are influenced not just by the risk of major damages but also by associated costs like loss of income and interest payments on loans. As a result, insurance companies are increasingly resorting to reinsurance, which in turn is driving up costs across various insurance domains, including auto insurance.

Adding to the complexity, construction costs have doubled over the past five years, often surpassing insurance limits for larger projects. This has led to more reliance on surplus lines, indicating a turbulent market landscape.

Regional Complexities in Construction Insurance

The landscape of construction insurance is being shaped by a range of factors, like regional risks. One significant concern is the limitations in coverage found in builders’ risk insurance. For instance, insurance carriers are increasingly restricting coverage for water intrusion, either through exclusion clauses or higher deductibles. In addition, carriers in Florida often limit or exclude wind and hail coverage, despite the state's high level of building activity and associated risks. Meanwhile, in California, wildfire coverage is frequently excluded given the state's vulnerability to such disasters.

However, these coverage restrictions are not the only regional challenges affecting the sector. Geographically specific risks such as hurricanes in Florida or wildfires in California significantly influence underwriting decisions. Advanced systems are deployed to assess these risks, down to specific addresses, determining not only the rates but also what gets included or excluded from the coverage. The regulatory environment adds another layer of complexity. For example, delays in rate filings in California have forced many insurance carriers to withdraw from the state.

Recommended Resources for Accurate Construction Insurance Information

Choosing the right broker is crucial when seeking accurate and tailored construction insurance information. The competency of the broker often outweighs the reputation of the insurance company. While competition is encouraged to get the best deal, specialization in the construction industry is vital for navigating complex risks and market trends. Industry-specific associations like the Associated General Contractors of America (AGC) also offer valuable insights. Therefore, when choosing an agent, it's essential to find someone with a deep understanding of construction risks and current market conditions, especially during challenging times.

For instance, at PCF Construction, we have a division that started in the warranty business, but they have since specialized in the construction sector. Their approach is geared toward understanding the intricacies of construction risks and the fluctuations in market trends. This kind of specialization can provide a significant advantage in navigating the complexities and challenges of construction insurance. Therefore, when choosing an agent, look for someone who not only has general insurance knowledge but also deeply understands the specific risks and trends in the construction industry.

Choosing The Right Insurance Partner

The complexities of construction insurance requires more than a general understanding of policies—it demands a specialized approach that considers the unique challenges and risks specific to this industry. 

Our focus on regional-specific risks and our ability to tailor insurance solutions to the unique needs of each project set us apart. Whether it's addressing the intricacies of large-scale projects, understanding the implications of regional hazards like earthquakes in California or hurricanes in Texas, or navigating the shifting landscape of insurance regulations, PCF Construction provides an invaluable service. 

By partnering with us, clients not only ensure their projects are adequately protected but also benefit from the peace of mind that comes with knowing they are working with experts who can save them time, stress, and money. With PCF Construction, you’re not just insuring your project—you’re securing it with the nuanced understanding and specialized care it deserves.

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