Whether you’re developing new commercial properties or renovating existing properties, access to builder’s risk insurance is essential to protecting your projects during construction. Yet, like most segments of the insurance industry, the builder’s risk market is experiencing great volatility. By understanding the state of the market, you’ll know what to expect if you need a builder’s risk policy over the next year.
Market Conditions Are Creating Headwinds
In the US and globally, the builder’s risk market has begun to harden much like the insurance industry overall. Commercial projects are under greater scrutiny by underwriters, who have a lower appetite for writing these policies and are less inclined to be flexible on coverages and terms.
The factors fueling this shift are similar to the issues plaguing the economy in general. The escalating cost of construction labor and materials, coupled with tight supply for both, is driving up project costs and lengthening timelines. That scenario increases a project’s risk, making insurers less likely to provide a policy or more likely to increase premiums while limiting coverage. Though many of these challenges were fueled by the pandemic, it will take years for the construction market to stabilize and for the pendulum to swing back.
Adding to the inflationary pressures, skilled labor shortage, and supply chain problem is the fact that natural disasters like hurricanes and wildfires are happening more frequently. Not only is insurance tougher to obtain in markets that sustained significant damage recently, like Florida, California, and other western states; these incidents create a ripple effect, making insurers more selective in writing builder’s risk policies nationwide. The higher their claims volume, the more reluctant they are to write new policies in any market.
What to Expect if You Need Builder’s Risk Coverage
Given that every commercial construction project is unique—running the gamut from renovations to existing properties up to large-scale vacant land developments—there are no set rules for how the current market might impact your project. But there are several likely scenarios to prepare for if you’re planning new commercial work.
- Larger projects (exceeding $10 million) and complex projects will be tougher to insure. Many insurers are choosing not to participate in this segment of the market, resulting in fewer coverage choices and higher premiums.
- Projects in high-risk markets will have fewer options and face greater scrutiny. Commercial projects in coastal areas prone to hurricanes and tropical storms, in western states susceptible to wildfires, in markets with a high risk of earthquakes, and in flood zones are all becoming more challenging to insure. Builder’s risk insurance is especially tough to obtain throughout Florida, where there is a high risk of natural disasters and a disproportional percentage of insurance lawsuits. Even when coverage is available in these markets, the terms may be unfavorable and the pricing higher.
- Frame construction projects will be harder to insure. Many companies are unwilling to insure frame construction because it’s much more susceptible to fire than masonry or steel. When coverage is available, the underwriting process is more rigorous and the premiums higher. Often the project owner or builder must meet more stringent requirements, such as producing a written safety manual for reducing fire risk or proving the property is within a certain distance to a water supply.
- Renovation projects will be challenging to insure. It’s generally tougher to find builder’s risk coverage for a structural renovation vs a cosmetic renovation, due to the complexity and scope. But any renovation project can prove problematic when it comes to obtaining builder’s risk coverage. Sometimes the existing property insurer is unwilling to write the builder’s risk policy—or even stay on during the construction period—necessitating two separate policies. That can cause delays, require more legwork, and create complexity if a claim arises.
- Construction investment could make matters worse. Thanks to the Infrastructure Investment and Jobs Act, the construction market is expected to see a large influx of funding over the next several years. While that’s good news for the industry, the ripple effects could negatively impact the insurance market. For instance, the gap between labor supply and demand will bring less experienced contractors into the commercial space. The less knowledgeable these resources are about builder’s risk coverage, the more likely those projects could experience delays.
Considerations to Keep in Mind
With premiums on the rise and capacity limited, it can be challenging to obtain builder’s risk insurance with favorable terms and conditions. When your project is already facing escalating costs and longer timelines, you don’t want to struggle to find the right coverage.
By paying attention to the following considerations for obtaining builder’s risk insurance, you can streamline the process and ensure your project is sufficiently covered:
- Lead time. It’s taking longer now to get a builder’s risk policy than it has historically, so it’s prudent to start early. At B.F. Saul Insurance, we recommend allowing at least 6-8 weeks for the underwriting process. Since it can be a strenuous experience for the entity purchasing the coverage, allowing plenty of time reduces the burden.
- Pricing. With premiums on the rise, it’s critical to start thinking about builder’s risk coverage earlier in the process so you can be sure to budget for it properly.
- Policy submission. A builder’s risk policy requires an extensive submission with much more detail than standard property insurance. Most insurers request a scope/statement of work, statement of values, civil and architectural plans, project schedule with milestones, project budget, contractual requirements, logistical plans (e.g., how materials will be transported and where they will be stored), background on the lead contractor and subcontractors, whether the building will be occupied during construction, and a pro forma detailing soft costs such as the revenue impact of a project delay. Even details like the project inception and ending dates and who should be listed on the policy are not always straightforward. It is essential that the submission is clear and complete, but it can be an overwhelming and time-consuming task.
How B. F. Saul Insurance Can Help
Given the current state of the builder’s risk insurance market and the considerations that are critical to ensuring your project is protected, it is more important than ever to have an experienced advisor by your side. That is why many commercial project owners and builders partner with B. F. Saul Insurance.
The commercial insurance experts at B. F. Saul recognize that each commercial project is unique. From a museum undertaking a major renovation to a developer embarking on a habitational property project from the ground up, our team has worked with countless property owners and builders to ensure their projects are adequately covered.
Our commercial insurance team brings its deep expertise to every project, leveraging decades of experience nationwide, including the most challenging markets. We dig deep to understand your risks, find the best options, and negotiate terms and conditions for you. Best of all, we help make the process as seamless and efficient as possible.
If you have a commercial construction project on the horizon, contact B. F. Saul Insurance early to ensure you obtain the right coverage on the right timeline.
Kallie Drewyer is an Account Manager on the Commercial Lines team at B. F. Saul Insurance, specializing in assessing the risk management needs of prospects and clients and helping market new and renewal accounts. She is responsible for servicing a designated book of business/clients as it relates to marketing, claims, and administration. Kallie interned with Saul Centers for three summers before joining the B. F. Saul Insurance team in July of 2019.