One common mistake policyholders make buying Builders Risk Insurance is underestimating the amount of insurance required by the policy. Not having enough coverage could end up being a very costly oversight.
Most builders risk policies contain a coinsurance clause that requires the insured carry policy limits equal to 100% of the completed value. If the insured submits a claim and the coinsurance requirement has not been met, a coinsurance penalty applies and the insurer will not pay the total amount of the loss, even if the loss is less than the policy limits.
For example:
Your policy limit is $150,000 and the projected completed value at the time of the loss is $200,000. Since only 75% of the completed value was insured, on a $10,000 claim, only 75% of the claim will be paid, or in this case, $7500. This does not include any deductibles. If the policy has a $2500 deductible, that would be deducted after calculating the coinsurance penalty, further reducing the claim payment to $5000.
Coinsurance requirements are determined at the time of the loss, not at the time of policy inception. Often, insufficient limits are taken out due to:
- Only insuring the amount being financed
- Not factoring in cost over-runs
- Not including overhead and profit
These items should be included in calculated the completed value of the project. What doesn’t have to be factored in is the value of the land or the cost of excavations or other underground work.
Nobody likes paying more for insurance than they need to. Reviewing your policy limits is one way to ensure if you have a claim, you will receive the full claim value.
For more information regarding coverage provided by Builders Risk policies or for any of your other construction related insurance needs, please contact us.