Appropriate renovation insurance is critical in today’s commercial real estate market. So much litigation surrounds this important topic that a book might not suffice, let alone one short article. However, we’ll look at a few creative approaches to choosing the best insurance for any type of renovation or construction project.

When Do You Need Renovation Insurance?

Smaller renovation projects may require no special insurance such as remodeling one small office space to add a few offices or installing a new heating system. Your property coverage usually will protect you in those circumstances. Any time you hire a contractor, however, be sure you obtain their current insurance information.

Here is the key to determining the need for purchasing renovation or builders risk insurance. “The person at risk should buy insurance when the potential loss would be disruptive to her ability to handle the loss out of current assets,” according to Scott LeMay, a risk management consultant in Tennessee. In other words, if you have assets to cover any potential losses that might arise, including the proper insurance in the event of a fire or other construction-related risk, your current insurance may suffice.

When you’re breaking ground to begin a new project or renovating a commercial space, for example, you’ll want a builders risk policy. This type of policy protects the project owner during the entire construction process. On bigger projects, often the general contractor buys the policy, known as a “wrap-up” or a course of construction policy.

Whether the owner or the contractor buys the policy, it provides peace of mind that the project is insured. The contractor will pass that cost on to the owner in the budgeting/bid process if they are the insurance purchaser. When the property owner buys the insurance, it is usually at the contractor’s insistence. The question of who buys the coverage is a complex one, and this IRMI article provides a strong overview.

The insurer writes the builders risk policy for a special term, usually from three months to one year depending on the length of the project.

What Can Go Wrong in Renovation Insurance?

Anything can and does go wrong on commercial builds and renovations from plumbing or foundation fiascos to fire losses. After a claim, uninsured subcontractors or insufficient insurance coverage can create havoc, such as several carriers pointing at each other to pick up coverage.

Claims can arise from the general contractor, the architect, the engineers who make vital decisions about materials and supplies and, importantly, the subcontractors on the build or renovation project.

According to the International Risk Management Institute (IRMI), a critical first step in deciding on the coverage is to evaluate the construction documents covering the build or remodel.

Construction documents should outline the renovation insurance requirements for the project. Indemnity provisions – the duties of each party to compensate the other for harm or liability arising from the project – are key to a successful build or renovation. You’ll want to ensure the indemnity provisions are legal in your state and not adverse to your interests. Also critical is which party is responsible for purchasing the insurance.

Waivers of subrogation in the contract are vitally important. You don’t want an injured employee’s workers’ compensation carrier successfully asserting a liability claim against you to recover the cost of that worker’s injuries.

Certificates of Insurance May Leave You in a Lurch

As an owner or manager, it’s important that you confirm your general contractor and sub contractor have adequate insurance. However, it’s important to note that a certificate of insurance furnished by your remodel or construction vendors may be woefully inadequate. The certificate does not ensure a policy’s insurance will cover the loss and it may be inconsistent with the actual policy it is evidencing. Instead, compare the actual policy with the contract to ensure the policy coverage meets all contractual terms and conditions. Pay attention to the insuring agreement, which describes the general responsibility of the insurer. Additionally, review exclusions for any potential coverage landmines. Broadened coverage comes with a higher price tag. If the contractor skimps on price, you can find yourself in coverage limbo.

Many times, contractors utilize subcontractors. For example, a general contractor may use a subcontractor for all the plumbing work on a renovation. Problems arise when the subcontractor’s insurance, or even the general contractor’s insurance, does not provide coverage for that subcontractor’s work.

The certificate will show the effective dates, the limits of liability and the policy number. It provides no detail on the terms of the coverage. Insist on an actual endorsement to the policy that makes you an “additional insured” under the policy. The certificate may afford coverage only to accidents arising while the contractor is on the premises performing the work. What happens when that plumber leaves and a week later, the building floods from the plumber’s faulty workmanship? You want to ensure the endorsements and any copy of the policy provides coverage for completed operations, as well.

On new construction, it’s imperative that insurance coverage is available for damage to foundations, pipes, excavation issues, scaffolding and construction forms, for example. By verifying coverage in its entirety, you run less risk of an uncovered loss which can mean the end of a construction project.

The time element associated with the project is important, as well. In the event of a loss, delayed construction can take a chunk out of profits. Soft costs such as the economic risks from project delays can be costly. Higher interest on construction loans due to delay, taxes and construction equipment rental can cause significant additional losses. A soft costs endorsement can help with these issues.

How ReShield Can Help

Construction and remodel challenges flourish in the commercial real estate market. With the uptick in urban infill construction and the repurposing of buildings toward either mixed or industrial use, the importance of obtaining the right insurance in construction projects has never been greater. Our experience in working with commercial real estate investors and managers can help you buy the right coverage at the right price when considering renovation insurance or builders risk insurance.