Builders Risk: Follow the Property Through Construction

Introduction

A finished building is insured as one fairly stable thing. A building under construction keeps changing. On Monday it is a concrete slab, and lumber is stacked beside it. By Friday that lumber is a wall frame, and a rooftop air-conditioning unit is waiting on a pallet.

Builders risk is property insurance written for a building while it is being built. It follows the project as loose materials turn into a finished structure. This lesson shows you how to decide what that coverage reaches, which values matter, and when it stops.

What You Will Be Able to Do

By the end of this lesson, you should be able to:

• Name the property exposures that exist during construction. An exposure is a way something could be lost or damaged.
• Decide whether an item counts as covered property under a builders risk form.
• Apply the extension for building materials owned by someone else, including its separate limit.
• Tell apart three values: the project's current value, its value at completion, and the value used to settle a loss. Then calculate a payment from stated assumptions.
• Identify which listed event ends builders risk coverage first.

Before you start: This lesson builds on Commercial property: build the package, classify the loss. It also helps to know the basic ideas in Value damaged property correctly and Calculate deductibles, limits and coinsurance.

Where the rules come from: The policy rules in this lesson come from one standard builders risk coverage form, ISO's CP 00 20 (06/95 edition). Other forms and editions can use different wording. For a real policy, the policy's own wording decides. All people, projects, dates and dollar amounts below are fictional.

The Project We Will Follow

Mara Okafor is having a single-story veterinary clinic built on an empty lot. Mara is the named insured, the person the policy lists as the insured. In the form's wording, Mara is "you."

The policy's Declarations are the summary pages of the policy. Mara's Declarations list:

• the clinic's address (the premises, meaning the insured location)
• the building being insured
• the limit of insurance
• which causes-of-loss form applies

Here is what the construction site holds over a few months:

• a poured concrete foundation
• framing lumber, first stacked on the ground and later nailed into walls
• a rooftop heating and cooling unit waiting to be installed
• scaffolding put up on site
• the contractor's portable generator and power saws
• the lot itself

All of these can be damaged. Builders risk does not cover all of them. The next section shows how to sort them.

Covered Property: What Builders Risk Insures During Construction

Covered property is the property the policy agrees to pay for when it suffers direct physical loss or damage. Direct physical loss or damage means the property itself is destroyed, harmed or lost, not just a financial setback.

Under the examined form, covered property is the building described in the Declarations while it is in the course of construction. That includes:

1. Foundations. This is the base the building sits on.
2. Fixtures, machinery, equipment that services the building, and your building materials and supplies used for construction. This property counts only if it is intended to be permanently located in or on the building, or within 100 feet of the premises.
3. Temporary structures built or assembled on site, but only if they are not covered by other insurance. The form's examples are: - scaffolding: temporary platforms workers stand on - cribbing: temporary stacked supports - construction forms: molds that hold wet concrete in shape while it hardens

The form also lists property that is not covered. Land, including the land under the building, is one example.

Why the Items Sort the Way They Do

The controlling question is: Is this property becoming part of the building, or is it here to help build it?

Apply that question to Mara's site:

• The foundation is named directly in the form, so it is covered.
• The rooftop unit is equipment that will service the building, and it is meant to stay there permanently. It qualifies even before installation, because the form looks at what the property is intended to become.
• The framing lumber is Mara's building material, used for construction and meant to stay in the building. It qualifies.
• The scaffolding is a temporary structure assembled on site. It qualifies only if no other insurance covers it.
• The lot is land, which the form excludes.
• The portable generator and saws belong to the contractor and will leave when the job is done. They are tools for building, not parts of the building. They do not fit this form's description of covered property.

That last point has a limit. It does not mean every policy excludes every tool. It means only that portable equipment does not fit this covered-property description. Contractors' equipment can be insured another way. Equipment floaters for contractors' equipment are one inland marine option; see Inland marine: match valuable or mobile property to the right floater.

Change One Fact

Suppose a second rooftop unit sits on Mara's lot, but it is meant for a different job across town. It is the same kind of machine, and it sits in the same place. It still fails the test, because it is not intended to be permanently located in or on this building. Intent and destination matter, not just where the item happens to sit.

Check Your Understanding

A pallet of windows has been delivered to Mara's site. They will be installed next week. Separately, the contractor's laser level sits in a truck parked on the lot. Which one fits the examined form's description of covered property, and why?

Materials Owned by Someone Else: The Extension

So far, every material belonged to Mara. Now suppose an electrical supplier delivers spools of wire on credit, and the supplier still owns them until they are paid for.

Under the main coverage description, the form covers your building materials. "Your" means the named insured's. Wire owned by the supplier is property of others.

The examined form handles this with a coverage extension. A coverage extension is a provision that stretches the policy to reach something the main coverage would not, usually with its own conditions and its own limit.

The extension for building materials and supplies of others applies only when all four of these conditions are true. The materials must be:

1. owned by others
2. in your care, custody or control, meaning you are responsible for them because they are in your keeping
3. located in or on the building, or within 100 feet of the premises
4. intended to become a permanent part of the building

The limit is smaller. The form pays at most $5,000 at each described premises under this extension, unless the Declarations show a higher limit. Any payment for others' property is made "for the account of the owner." In other words, the money is meant to make the owner whole, not to give the named insured a windfall.

Why Ownership Changes the Answer

Who counts as "others" depends on who the named insured is.

If Mara is the named insured, lumber the contractor bought and still owns is property of others. If the contractor were the named insured instead, that same lumber would be "your" materials.

Before you decide which part of the form applies, ask: Who owns this, and who is the named insured?

Check Your Understanding

Mara is the named insured. The supplier owns $8,000 of wire stored 60 feet from the building. The wire is in Mara's care, custody or control and will be installed in the walls. Assume the Declarations show no higher limit for this extension. A covered fire destroys the wire.

Does the extension apply? What is the most it pays?

The Name "Builders Risk" Does Not List the Causes of Loss

A cause of loss, also called a peril, is what produces the damage: fire, wind or theft, for example. The examined builders risk form does not list its own causes of loss. It says to see the Causes of Loss Form shown in the Declarations. That is a separate form that names which causes are covered and which are excluded.

So builders risk answers one question: What property is insured during construction? The causes-of-loss form answers a different one: What caused the damage, and is that cause covered?

To decide a claim, you need both answers.

• If Mara asks, "Does builders risk cover theft of materials?", the label alone cannot answer.
• You have to read the causes-of-loss form named in Mara's Declarations.

For practice separating causes from conditions, see Read a loss scenario: peril, hazard and cause.

Three Different Values: Current, Completed, and Settlement

Because the project grows, a builders risk claim involves three different values. Each one answers a different question. Mixing them up is the central mistake in this topic.

1. Current value: What is the project worth right now? - It rises as materials arrive and as work is installed. - Count each item once. When stacked lumber is nailed into walls, its value moves from "materials on site" into "the building." Adding it in both places is double counting.

2. Value at completion: What will the finished building be worth? - The examined form uses this value to test whether the limit is high enough. That provision is called Need for Adequate Insurance. - The insurer pays no greater share of a loss than the limit bears to the value on the date of completion.

3. Actual cash value (ACV) at the time of loss: How much is the damage worth? - ACV is the policy's measure of what the damaged property was worth. It is not automatically what brand-new replacement would cost. - The examined form values covered property at ACV as of the time of the loss. - How ACV is figured is covered in Value damaged property correctly. In the exercises here, the ACV of each loss is simply given.

Keep the three apart:

• The current value is not the required limit.
• Neither one is the settlement basis.
• Other forms can use different valuation methods or a reporting approach. The examined form's rules are not a universal formula.

Worked Example

Assumptions for Mara's policy, all stipulated for this exercise:

• Value of the clinic on its date of completion: $1,200,000
• Limit of insurance: $900,000
• Value of the work in place on the day of the loss: $500,000
• A covered fire causes damage with an ACV of $160,000
• Deductible: $2,500

The calculation below follows the order shown in the examined form's own example: apply the proportion first, then subtract the deductible.

Step 1: Compare the limit to the value at completion, not to today's value. $900,000 ÷ $1,200,000 = 0.75. The insurer pays no more than 75% of the loss.

Step 2: Apply that share to the loss valued at ACV. $160,000 × 0.75 = $120,000.

Step 3: Subtract the deductible. $120,000 − $2,500 = $117,500.

Check the result: The payment is less than the $160,000 loss, which makes sense because the limit is only 75% of the completed value. The payment also stays under the $900,000 limit, which caps any payment.

The tempting wrong approach: Someone might compare the $900,000 limit to the $500,000 current value, decide the project is "fully insured," and expect $157,500. The examined form does not test adequacy against the current value. It tests against the value at completion. The $500,000 figure is real, but it answers a different question.

Change One Fact

Keep everything the same, but raise the limit to $1,200,000, equal to the completed value.

The ratio is now 1.0, so no reduction applies: $160,000 − $2,500 = $157,500.

The loss did not change. Only the relationship between the limit and the completed value changed.

Check Your Understanding

A project's value at completion is $800,000, and the limit is $800,000. Halfway through construction, the work in place is worth $350,000. A covered windstorm causes a loss with an ACV of $50,000. The deductible is $1,000.

Assume the windstorm is a covered cause under the applicable causes-of-loss form. What does the insurer pay? Does the $350,000 figure change the answer?

When Builders Risk Coverage Ends

Builders risk is tied to the construction period, so it needs a clear end point. The examined form ends coverage when the first of these events happens:

• The policy expires or is cancelled.
• The property is accepted by the purchaser.
• Your interest in the property ends. For example, the named insured no longer has a financial stake in it.
• You abandon the construction with no intention of completing it.
• Unless the insurer states otherwise in writing, a stated number of days passes after construction is complete, or after the building is occupied in whole or in part, or put to its intended use.

The key word is first. A later expiration date does not keep coverage alive after an earlier ending event has already happened.

There is no single coverage period that applies to every builders risk policy. The actual policy's dates and terms control.

Worked Timeline

Mara sold the finished clinic to a veterinary group. Mara's policy expires September 30. The buyer accepts the building on August 14. On August 20, a fire damages the lobby.

1. List the ending events that have happened: purchaser acceptance (August 14).
2. List the ones that have not happened yet: policy expiration (September 30).
3. The earliest one controls. Coverage under this form ended August 14.
4. The August 20 fire falls after that date, so this builders risk form does not respond.

Change one fact: Suppose the buyer has not accepted the building, and no other listed ending event has happened before September 30. The same August 20 fire now falls within the coverage period. The fire did not change. The ending event moved.

A tempting mistake: Partial occupancy does not end coverage on the spot. Under the examined form, occupancy in whole or in part starts a countdown of a stated number of days, unless the insurer specifies otherwise in writing. Coverage ends when that countdown runs out, or earlier if another listed event happens first.

Neighboring Terms, Side by Side

These terms describe different parts of the same builders risk analysis. They are not competing choices.

• Covered property asks: Is this item part of the building being built, or headed into it?
• The materials-of-others extension asks: Is the item owned by someone other than the named insured, and does it meet all four conditions? If so, a separate, smaller limit applies.
• Causes of loss asks: Was the damage produced by a cause the named causes-of-loss form covers?
• Value at completion asks: Is the limit high enough for the finished building?
• Actual cash value at the time of loss asks: How much is the damage worth for settlement?
• When coverage ceases asks: Did an ending event happen before the loss?

Practice on Your Own

Use the examined form's rules from this lesson. In each case, assume the damage comes from a covered cause of loss unless the problem says otherwise.

1. Custom granite countertops for a project are stored at the contractor's warehouse three miles from the job site. They are destroyed there. Does the examined form's main coverage, which pays for loss to Covered Property at the premises described in the Declarations, pay for this loss?

2. Value at completion: $600,000. Limit: $450,000. Current value of work in place: $250,000. The ACV of a covered loss is $40,000. Deductible: $1,000. What does the insurer pay?

3. A policy expires December 31. On October 3, the named insured stops the project and has no intention of finishing it. Vandals damage the structure on October 20. Does this builders risk form cover the vandalism?

4. A client says, "I have builders risk, so any damage to my project is covered." What is missing from that statement?

What to Remember

• Builders risk insures a building while it is being built: foundations, permanent fixtures and equipment, the named insured's materials intended to stay in or near the building, and qualifying temporary structures if no other insurance covers them.
• Ask "Is it becoming part of the building?" Being located on the site is not enough. Portable tools do not fit the examined form's description, but that does not mean every policy excludes every tool.
• Others' materials fall under a separate extension. It has four conditions and a $5,000 limit per described premises, unless the Declarations show more.
• The causes of loss come from the separate form named in the Declarations, not from the builders risk label.
• Keep three values apart:
• current value, which measures progress
• value at completion, which tests whether the limit is adequate
• ACV at the time of loss, which values the damage for settlement
• Coverage ends at the earliest listed event: expiration or cancellation, purchaser acceptance, end of the named insured's interest, abandonment, or the post-completion or post-occupancy countdown.
• Real policies vary by form and edition. Read the actual wording.

To practice applying this alongside other commercial coverages, try Solve mixed cases and repair your weak spots.