Who Needs Builder's Risk Insurance?
Builders risk insurance is also known as course of construction insurance, and covers damage to or destruction of a construction project. In a traditional construction project, the contractor, the subcontractor and the project owner have interests that are protected by builders risk insurance. If there is financing on the project, the lender also requires and benefits from builders risk insurance. Any project engineers or architects will also look to builders risk insurance for protection in the event of a claim.
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Project Owner
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A project owner requires builders risk insurance as the ultimate beneficiary of the completed construction project. If a project is damaged or destroyed, builders risk insurance will reimburse the owner the cost to repair or replace the project. The owner may also insure soft costs associated with the project, such as ongoing interest expenses or loss of potential income that arise out of a covered damage claim. Without insurance, the owner is forced to seek recovery from the responsible parties, which may be costly and time-consuming.
Contractors
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All contractors involved in the construction of a project benefit from builders risk insurance due to the potential of damage claims. Builders risk insurance protects contractors from liability claims that are a distraction from the construction activity. First party builders risk insurance does not first seek fault or liability before paying a claim. The insurer proceeds with the restoration and repair of the project in a timely fashion, which is to the benefit of all involved parties.
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Architects and Engineers
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While architects and engineers are not actively engaged in the physical construction process, they nonetheless have an interest in a project. Their income relies on a construction project moving forward, and an event that damages the project will impact their income stream. Architects and engineers may also be implicated in a damage claim as being a cause of the loss. Requiring builders risk insurance to cover their interests protects the architects and engineers from liability in the event of a claim.
Project Lenders
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Many construction projects are funded by loans that use the project itself as collateral. In the event of damage that is not covered by insurance, the project owner may not have the financial resources to rebuild, or to rebuild on a timely basis, which results in a loss of expected income. The lost income may result in the project owner's inability to repay the loan principal and interest. By requiring builders risk insurance, the lender is protecting its loan.
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References
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