Save money—and sleep soundly—with proper builder’s risk coverage for single-family home construction

In today’s world, everyone is looking for ways to save on construction costs. With increases in material costs from lumber to light switches, the financials of home building are a challenge for even the most seasoned contractors. Just like all other line items on the budget sheet, builder’s risk policies are also getting more expensive. 

However, it’s not just supply chain issues that are causing these increases. It’s hail, fire, theft, wind, and other exposures that are causing losses for builders and therefore builder’s risk carriers.  

So how can you reduce spending while improving builder’s risk coverage and lowering exposures? It starts by tailoring your builder’s risk program to your business’s size, scope, and risk tolerance. To get started ensuring you’re properly covered, there are several factors related to builder’s risk policies to keep in mind. 

1. Policy structure 

A fear often expressed by home building companies is that there will be a substantial claim on a house that lacks proper coverage.  

One solution used by smaller-volume builders, high-value custom builders, and others is one-off builder’s risk policies. The advantage is that they are easy to purchase, easy to tie to an individual project, and can often be cancelled pro-rata—meaning you could get a percentage of money back if you cancel because the house sold prior to the expiration date. 

While these policies can be great if you have 10 or fewer projects going at any time, they come with logistical challenges of their own and can be administratively difficult. Additionally, many include hidden wind/hail deductibles. A 1% deductible on a $2 million house that is nearly complete can be a large unexpected financial cost that wasn’t in the budget sheet calculation, suddenly reducing the profit of the project. 

A potentially more effective way to insure your builder’s risk exposures is through a blanket policy. A blanket is a single policy that is designed to cover all projects in progress. These too come with a set of important considerations.  

These policies often require monthly reporting of projects, progress and values. As with the one-off policies, this can be a lot to track. However, this can be mitigated by annual reporting that gets audited at the end of policy. This covers all projects under construction—no matter where or when they are started—and just requires a work-in-progress report at renewal.  

2. Deductible structure

As with most types of insurance, many carriers are willing to lower your premium if you take on more of the cost of claims. Homebuilders are often not reporting all their potential claims because they don’t want their rates to go up. For them, it’s a reality of their operations as they would rather just eat the smaller cost to maintain their current program. 

This begs the question, then, why have a $1,000 deductible if you won’t report anything under $10,000? Insurance carriers will nearly always provide rate relief for that trade-off. Evaluate what you are willing to pay and then set the deductible accordingly.  

Most critically, you should know if your deductible is per structure or per occurrence. Simply put, a per structure deductible means each event requires paying your deductible, while per occurrence means the deductible is paid once based on the event as a whole. You definitely don’t want to find out which applies to your situation after a major storm hits 10 of your projects at once. 

One-off policies are always per structure and blanket policies will often function in the same manner. However, if you have multiple projects in one area or are building an entire neighborhood, having a per occurrence deductible is huge. Imagine eating a $5,000 deductible for each of the 20 houses blasted in a hailstorm.  

Essentially, make sure you understand how your deductibles are set up and adjust accordingly.  

3. Additional coverages and services

It should be clear at this point, but there’s no one-size-fits-all solution for your builder’s risk coverage. A builder’s risk policy can be customized to meet your specific needs. Just remember, with each addition or modification comes different coverage terms that may or may not fit your operations.   

• Does your company have model homes that are furnished? A blanket builder’s risk policy may be designed to include coverage so that you don’t have the substantial expense of including a vacant house on your property policy.
• Do some houses sit for a while after they are completed but not sold? While many policies cease coverage when the project is completed, a blanket policy may be structured to cover those houses even when completed and not occupied.
• What happens if there is a flood or earthquake? Those exposures are typically excluded, but a blanket policy may include coverage in certain circumstances, though it’s usually subject to a higher deductible. 

These are just a few examples of things to consider, but there are many more. An experienced and knowledgeable broker partner will be able to guide your team and ensure you are getting the best coverage available. Thankfully, that’s where Marsh McLennan Agency comes in. 

Reach out to your MMA representative today to learn more about a customized builder's risk program for your construction company.