The Construction Lending Podcast by Land Gorilla

Construction Lender’s Guide to

Builder’s Risk Insurance


Morris and Garritano Insurance on The Construction Lending Podcast
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Episode 18 | The Construction Lending Podcast

This episode will guide construction lenders through the critical world of builder’s risk insurance with expert Daniel Gilman from Morris and Garritano Insurance. Our comprehensive discussion covers everything from the essential coverage builder’s risk insurance offers for materials and property during construction to the importance of having both property owners and general contractors named on the policy. Daniel brings his extensive experience in underwriting builder’s risk policies for projects ranging up to $55 million, sharing insights on coverage essentials, cost implications, and policy management throughout the construction process.

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Questions Answered

  • What are the key considerations and common pitfalls that construction lenders should be aware of when involving builder’s risk insurance in their lending decisions?
  • How does builder’s risk insurance cover stored materials both on-site and off-site, and why is this crucial during construction?
  • What are some of the most common events that are covered by builder’s risk insurance, and what are examples of when these might typically occur during a construction project?
  • How might builders risk policy rates vary across states and what factors influence these differences?
  • What is the relationship between general liability and workers’ compensation in the context of contractors’ insurance?
  • How does one influence the other?
  • Is it necessary to provide detailed breakdowns of hard and soft costs before the policy is issued, especially for smaller-scale projects?

Episode Recap

The Essential Guide to Builder’s Risk Insurance and Construction Lending Considerations

When embarking on a construction project, whether commercial or residential, understanding the ins and outs of builder’s risk insurance is crucial. This episode of The Construction Lending Podcast, featuring commercial risk advisor Daniel Gilman, provides a comprehensive look at what builder’s risk insurance covers, important considerations in construction lending, and expert advice for negotiating insurance policies.

Understanding Builder’s Risk Insurance

Builder’s risk insurance, also known as course of construction insurance, is designed to protect properties from damage during construction up until a certificate of occupancy is issued. The policy covers physical damage to the structure. It can include coverage for materials stored on-site and off-site, materials in transit, and specific high-risk items like trusses in transit to the construction site.

Commonly Covered Events

Depending on the policy, insurance typically covers events such as fire, theft, vandalism, and weather-related damages. However, it is crucial to note that builder’s risk insurance does not cover liabilities to third parties, which should be addressed under separate policies.

Premium Cost Factors and Underwriting

Insurance premiums and the ease of obtaining coverage vary significantly based on location-specific risks such as fire and crime scores. For instance, areas with higher risks of wind and hail might see adjusted premium costs and deductibles. Daniel Gilman highlights the importance of transparency in representing the project during the application process to avoid future complications.

Insurance Requirements in Loan Agreements

In most construction loans, an obligatory clause requires the borrower to maintain a builder’s risk policy. To enhance risk management, this policy is recommended to be initiated as soon as the first materials arrive on-site—well before vertical construction begins.

Role of Construction Lenders

Construction lenders play a pivotal role in ensuring that appropriate insurance coverage is in place. They should familiarize themselves with the relationship dynamics between the owner and general contractor and understand the project’s scope to make informed decisions. It is vital to emphasize the importance of solidifying a working relationship rather than just focusing on the financial bid.

Daniel advises lenders to remain stringent about minimum insurance requirements. The industry standard for general liability is a minimum of a million-dollar policy, with workers’ compensation aligning proportionally based on the project size. Ensuring these minimums are met can safeguard against contractors who might be cutting corners.

When to Engage with Insurance Providers

Potential buyers of builder’s risk insurance should initiate conversations as early as possible. Asking if the provider offers tailored builder’s risk policies and inquiring about additional agency resources can provide deeper insights and more comprehensive coverage options.

Inflation and Additional Costs

Given the fluctuations in material costs and potential delays, discussing coverage for additional costs due to inflation is crucial. If the project experiences significant delays leading to increased costs beyond the policy’s standard terms, securing additional funds or renegotiating terms may become necessary.

Ensuring Sufficient Coverage

It is advisable to ensure that the insurance policy covers the total hard cost of the construction project. Daniel points out the necessity of also considering soft costs such as architectural fees, engineering fees, and legal costs, which may fluctuate and need careful assessment and coverage.

Special Considerations for Large-Scale Projects

Managing soft costs in large-scale projects involves multiple parties and can get quite complex. Daniel stresses the importance of reaching a consensus among all stakeholders on what constitutes reimbursable soft costs, which requires detailed discussions and agreement.

For larger projects, Daniel recommends ensuring that the insurance coverage matches the stated costs in the project breakdown. This alignment helps appropriately manage risks and funding in case of claim scenarios.

Best Practices and Expert Insights

While builder’s risk insurance seems straightforward, the nuances in coverage types, policy negotiations, and alignment with construction lending practices require careful consideration. Through the podcast episode, Daniel demystifies these areas and emphasizes the necessity of thorough understanding and strategic negotiation in securing the right coverage. For anyone involved in construction, whether you’re a property owner, contractor, or lender, staying informed and vigilant about insurance practices is imperative to protect your investments and ensure legal compliance.

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