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Builder’s Risk Insurance Exclusions: Construction Risks

Builder’s risk insurance is a type of property insurance that provides coverage for buildings and structures during the construction phase. It is designed to protect the project owner, contractor, and other parties involved in the construction process from financial losses due to damage or loss of the insured property. However, like any insurance policy, builder’s risk insurance has certain exclusions that limit the coverage provided. These exclusions are meant to mitigate specific construction risks that are considered too risky or costly to insure. In this article, we will explore some common builder’s risk insurance exclusions and discuss the construction risks they aim to address.

1. Faulty Workmanship and Design

One of the most significant exclusions in builder’s risk insurance policies is coverage for faulty workmanship and design. This exclusion means that any damage or loss caused by errors or defects in the construction process or design is not covered by the policy. This exclusion is based on the assumption that the responsibility for ensuring the quality of workmanship and design lies with the contractor and design professionals.

For example, if a building collapses due to a structural defect that was a result of faulty workmanship, the builder’s risk insurance policy would not cover the cost of repairing or rebuilding the structure. The contractor would be responsible for rectifying the issue and bearing the financial burden.

This exclusion is in place because faulty workmanship and design are considered inherent risks in the construction industry. It is expected that contractors and design professionals have the necessary expertise and experience to carry out their work correctly. If they fail to do so, they should be held accountable for any resulting damage or loss.

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2. Normal Wear and Tear

Another common exclusion in builder’s risk insurance policies is coverage for normal wear and tear. Normal wear and tear refer to the gradual deterioration of a property over time due to regular use and exposure to the elements. It is a natural and expected process that occurs with any property, including buildings.

Builder’s risk insurance is intended to cover sudden and accidental damage or loss, such as fire, vandalism, or theft. It is not meant to provide coverage for the gradual deterioration of a property due to normal wear and tear. This exclusion ensures that the policy is focused on protecting against unforeseen events rather than routine maintenance and upkeep.

For example, if a building’s roof starts leaking due to normal wear and tear, the cost of repairing the roof would not be covered by the builder’s risk insurance policy. The property owner would be responsible for maintaining and repairing the property to prevent or address such issues.

3. Acts of Terrorism

Acts of terrorism are typically excluded from builder’s risk insurance policies. This exclusion is based on the assumption that acts of terrorism are unpredictable and can cause widespread damage and loss. Insuring against such risks would be extremely costly and could potentially bankrupt insurance companies.

Acts of terrorism include intentional acts of violence, destruction, or harm committed by individuals or groups for political, religious, or ideological reasons. These acts often target public places, infrastructure, and high-profile buildings, making them a significant concern for the construction industry.

While acts of terrorism are excluded from builder’s risk insurance, there are specialized insurance policies available that specifically cover terrorism-related risks. These policies are typically purchased separately and provide coverage for property damage, business interruption, and liability arising from acts of terrorism.

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4. Environmental Hazards

Builder’s risk insurance policies often exclude coverage for environmental hazards. Environmental hazards refer to substances or conditions that can cause harm to human health or the environment. Examples of environmental hazards in the construction industry include asbestos, lead-based paint, mold, and hazardous waste.

The exclusion of environmental hazards from builder’s risk insurance is based on the assumption that contractors and project owners should take appropriate measures to identify and mitigate these risks. It is their responsibility to comply with environmental regulations and ensure the safe handling and disposal of hazardous materials.

If a construction project involves environmental hazards, it is essential to obtain specialized insurance coverage to address these risks. Environmental liability insurance can provide coverage for pollution-related risks, including cleanup costs, legal expenses, and damages resulting from environmental contamination.

5. Delay in Completion

Builder’s risk insurance policies typically exclude coverage for delays in project completion. Delays in construction projects can occur due to various factors, such as weather conditions, labor disputes, material shortages, or design changes. These delays can result in increased costs, lost revenue, and contractual penalties.

While builder’s risk insurance does not cover delays in completion, there are other types of insurance policies available to address this risk. Delay in start-up (DSU) insurance, also known as advanced loss of profits (ALOP) insurance, provides coverage for financial losses resulting from project delays. It can compensate for additional expenses, lost revenue, and contractual penalties incurred due to the delay.

Conclusion

Builder’s risk insurance is an essential tool for managing construction risks. However, it is crucial to understand the exclusions in the policy to ensure adequate coverage and risk management. Faulty workmanship and design, normal wear and tear, acts of terrorism, environmental hazards, and delays in completion are some common exclusions in builder’s risk insurance policies.

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By being aware of these exclusions, contractors, project owners, and other parties involved in construction projects can take appropriate measures to address these risks. This may include obtaining specialized insurance coverage, implementing risk mitigation strategies, and ensuring compliance with relevant regulations and standards.

Ultimately, builder’s risk insurance should be seen as part of a comprehensive risk management approach in the construction industry. It is essential to assess the specific risks and exposures of each project and tailor insurance coverage accordingly. By doing so, construction professionals can protect their investments, mitigate financial losses, and ensure the successful completion of their projects.

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