As building material prices continue to rise, home builders and remodelers are reevaluating some of their normal business operations to increase inefficiencies and protect their bottom lines. One area that may not immediately come to mind is the impact of rising prices on a project's insurance coverage.
During a home construction or renovation project, builders and remodelers carry policies that provide coverage for risks to the project or property. The ever-changing nature of the property covered creates unique valuation issues in the event of a loss.
Coinsurance clauses, which are found in many insurance policies, require the insured to maintain coverage to a specified value of the property, usually between 80% and 100%. It also stipulates that if the insured fails to do so, it must bear a proportionate part of the loss. The term “coinsurance” is also applied to situations where the insured is contractually obliged to insure part of the risk with a second insurer. If the insured fails to carry a sufficient limit to satisfy this provision, a penalty is applied.
Coinsurance provisions also are commonly found in builder's risk completed-value policies. Because a builder's risk policy applies to a property that is undergoing construction and therefore its value increases over time, reporting cost overruns that increase the completed value is important to ensure that you do not inadvertently become subject to a coinsurance penalty.
According to Treacy Duerfeldt, CEO of Nationwide Contractors Alliance, and a member of NAHB’s Construction Liability, Risk Management, and Building Materials Committee, this is particularly pertinent now, “because as a result of the rising cost of building materials, it would not be uncommon for the initial estimate of the completed value to be understated, potentially triggering the penalty clause.”
When the actual cost of the project exceeds the initial estimate, it may be necessary to increase the limit or a coinsurance penalty may result.
To ensure that you have the right amount of coverage and to avoid a coinsurance penalty, consult with your insurance advisor or agent.