Are you considering building, expanding or remodeling your veterinary hospital? Before starting any construction or renovation project, make sure you have the proper insurance coverage in place. Your property will be at risk of several exposures significantly different from those associated with an operational veterinary facility. Many of these exposures are typically not covered by a standard commercial property insurance policy.
What you want to purchase is a builder’s risk policy, which addresses the additional exposures of buildings under construction. You might hear it called a course of construction, or COC, policy.
Builder’s risk is by definition temporary insurance, so knowing when the coverage begins and ends is important. Coverage typically should begin on or before the date that work commences unless specific provisions define an alternate date for your project.
Coverage ends when one of the following occur:
- The work is completed and approved for occupancy and operation.
- The owner takes possession of the property.
- After a specific number of days of occupancy.
- The project is abandoned.
- The project sits idle for 60 days.
- 90 days have passed since the completion of construction.
Don’t Delay
As a rule, insurance companies will not write a builder’s risk policy after a construction project is more than 50% completed. The coverage limit is the contract value of the completed project.
Builder’s risk premiums are fully earned. This means that once the premium is paid, all the money belongs to the insurance company and reimbursement will not occur if the policy is canceled before the project’s completion.
Individual builder’s risk policies address the specific exposures of each construction project; therefore, these policies often differ significantly in their coverage. Typically, builder’s risk policies cover standard property losses to the physical structure due to fire, lightning, hail, explosions, wind, theft, vandalism, vehicles or aircraft.
Additional potential exposures that should be considered in a builder’s risk policy include:
- Damage to foundations, machinery, installed fixtures, equipment, scaffolding, construction forms, temporary structures and landscaping.
- Fire department charges.
- Pollutant cleanup.
- Debris removal and disposal after a loss such as a structure fire.
Coverage often can be extended to include disasters such as earthquakes, floods, tornadoes and hurricanes, even in high-risk areas.
Other Things Can Go Wrong
Common construction-related claim examples include:
- “Hot work” fires linked to power tools used for welding, cutting or grinding.
- Ruptured natural gas lines.
- The use of solvents and flammable paints or gasoline storage containers for small equipment.
- Building collapse from improper bracing or shoring and even damage from cranes.
- Copper wire theft.
- Water damage from ruptured water supply lines or broken sprinkler heads.
In addition, some “soft cost” exposures might arise from project delays, such as vandalism of the construction site. Therefore, a builder’s risk policy should provide additional coverage for liabilities such as loss of sales or rental income, additional interest on loans, real estate taxes, and other ongoing expenses. These soft costs can escalate when the construction timeline is delayed. A good builder’s risk policy can minimize or eliminate the financial harm of these unforeseen additional costs.
Conduct an Inventory
Remember to work with your lending organization, insurance agent and general contractor to conduct an inventory of all anticipated exposures related to the construction process. Make sure to include materials and equipment that will be located at the construction site, in transit or in temporary storage.
Builder’s risk policies typically exclude the cost of repairing faulty workmanship or errors in design by subcontractors. Some policies cover damage to other property as a result of faulty workmanship.
Keep in mind that builder’s risk policies do not provide general liability protection. As the property owner or leaseholder, be sure to have adequate general liability coverage that protects you during the construction process. I recommend discussing the options with your contractor and insurance agent.
Frequent examples include:
- Trespassers. A presumption of liability exists when minors are injured in or around a vacant property. The legal system tends to ignore whether the minor was trespassing or engaged in illegal activity.
- Fire legal liability. A property owner might be liable for fire damage to adjacent buildings when the event originates in the owner’s vacant building.
Take the Initiative
Who should purchase the builder’s risk policy? The best practice oftentimes calls on the property owner or leaseholder to be the policyholder. If a loss occurs, the property owner or leaseholder will have the legal right to report the claim and work with the insurance company throughout the settlement process. The other parties with a financial interest, such as the project contractor, can be reimbursed for damages once the insurance company has paid the policyholder.
In many instances, the contractor desires to provide the builder’s risk policy. At face value, this represents a value-added service to the busy property owner, but in reality, the contractor then becomes the primary policyholder. This seemingly minor detail means the contractor would control direct access to the insurance company throughout the claims settlement should a loss occur.
In a worst-case scenario, a contractor that held the builder’s risk policy and filed a claim could file for bankruptcy or keep the claim money that should have gone toward repair, replacement or owner reimbursement.
Who should be shown as an additional insured on a builder’s risk policy? The answer is any individual, company or organization with a financial interest in the construction project. This includes a general contractor and any subcontractors who await payment for their completed labor and materials. If the project is being financed, the lender likely will require coverage, and so might architects and engineers.
I recommend you take these four steps when purchasing a builder’s risk policy:
- Select an insurance agent familiar with the construction of veterinary facilities.
- Purchase from an insurance company that specializes in builder’s risk policies.
- Purchase the builder’s risk policy with you, the property owner or leaseholder, as the primary policyholder.
- Make sure you have general liability coverage in place to protect your exposure during the construction process.