When You Might Need Builders Risk for Your Vacation Rental Investment

Builders Risk for Vacation Rental Properties

Owning and managing a vacation rental is no small feat. Tackling a major renovation or building a property from the ground up is even more of an undertaking. As we know, construction projects are complicated with no shortage of things that can go wrong.

Builders risk insurance, also sometimes referred to as course of construction insurance, is coverage that assists with various expenses that may result from property damage amid construction projects. Understanding builders insurance can be complex as every home construction project is unique and coverage needs vary.

What Is Builders Risk Insurance?

Builders risk insurance is a specialized type of property insurance that is intended to provide protection for buildings and structures that are under construction. These policies protect project owners, general contractors and subcontractors against direct physical loss or damage to covered property. Builders risk coverage ends when the project is complete.

Who Needs Builders Risk Insurance?

Determining who should purchase and pay for builders risk insurance usually depends on the nature of the construction project or fixer-up renovation and its elements. Any party with a financial interest in a construction project should have this coverage including the project sponsor, property owner, general contractor, lender, subcontractors and architects. Regardless of who secures the coverage, all involved parties must be identified as insureds within the policy.

What Builders Risk Insurance Covers

Most builders risk policies provide construction project protection for hard costs — also called “sticks and bricks.” This refers to expenses directly related to a project's physical building or structure and tangible assets. Hard costs are often quantifiable via third-party inspections from lenders and may include:

Building materials & supplies (e.g., lumber, metal framing, insulation, concrete)
Labor needs (e.g., temporary workers, subcontractors)
Construction tools & equipment
Utilities (e.g., water, gas, electricity)
Landscaping needs
Safety enhancements (e.g., installing or updating sprinklers, smoke detectors. fire alarms) & other building improvements
Project enablement operations (e.g., waterproofing, onsite restroom facilities)

Apart from impacting hard costs, property damage losses amid construction projects can also affect soft costs, particularly when causing project delays. These expenses are not directly related to the physical building or structure or tangible assets of a project but are still necessary to complete the task.

Soft costs do not require third-party reviews to be quantified and may include:

Architectural, engineering & consultant fees
Inspection & permit expenses
Accounting, advertising, marketing & project management services
Real estate payments & property taxes
Equipment unrelated to construction (e.g., computers)
Interest on project loans
Post-construction legal fees & insurance premiums

Soft costs are typically only covered by builders risk insurance if they are clearly stated in a policy. Even then, protection for these expenses is generally only available if they are incurred as a direct result of a covered loss and subsequent project delay. Some insurers may also require a minimum deductible (based on the length of the project delay) to be met before coverage for soft costs kicks in.

Tips to Secure Builders Risk Coverage for Your Vacation Rental Business

To ensure sufficient protection, a builders risk policy should be customized based on the characteristics of the construction project at hand and the unique needs of the parties involved in the project.

Understand Project Exposures

Complete a detailed inventory of all potential exposures that may arise throughout the property construction project. Then determine the level of protection needed for these exposures and select a policy that limits the likelihood of coverage gaps.

Know When Coverage Begins & Ends

Since builders risk insurance is a temporary form of coverage, it’s critical to be aware of the exact dates associated with the policy period — namely, when the coverage begins and ends. Usually, a builders risk policy starts on the same date contracts are signed for a construction project and concludes upon the project’s completion. However, a policy may include specific conditions regarding what triggers the beginning and end of coverage such as the policy expiring or getting canceled. Regardless, confirm the policy start and end dates to have a clear understanding of when coverage applies.

An inaccurate estimated completion date could lead to coverage not kicking in during project delays and increasing the risk of facing out-of-pocket costs.

Review the Policy

Make sure to closely assess all policy language and details to ensure full comprehension of coverage capabilities, conditions and exclusions. Specifically, it’s vital to confirm what is and isn’t covered under the policy. Consider purchasing policy extensions and endorsements if any coverage gaps remain.

Consult Trusted Insurance Professionals

Work with a qualified and experienced insurance broker to further discuss specific coverage needs and secure a builders risk policy that can offer ample protection for a given construction project and the various parties involved.

CBIZ Vacation Rental Insurance is Here for You Every Step of The Way

With everything that can happen during the construction process, it is essential to have adequate insurance in place. Builders risk insurance is a valuable form of coverage that can offer much-needed protection when properties or other structures are under construction. We can help you verify whether you should require this from your contractor, based on your renovation project. Connect with a team member today at CBIZ Vacation Rental Insurance and request a free quote today!

This blog may contain scenarios that are provided as examples only. Coverage is subject to the terms, conditions and exclusions of the policy issued. The information provided is general in nature and may be affected by changes in law or the interpretation of such laws. The reader is advised to contact a professional prior to taking any action based upon this information.