What “soft costs” of a construction project are covered in a builders risk insurance claim is a frequent question posed. For policyholders, contractors, and those about to undergo a construction project, one of the most important actions to take is retaining an insurance agent who is well versed with construction builders risk policies because the amounts of coverage, especially for the soft costs, can vary widely from various forms of insurance available on the market.
Insurance broker AMWINS has a good basic discussion of this topic and warns to hire an insurance agent with a “deep understanding” regarding builders risk policies and who can assess the types of risks for particular construction project:
Construction contracts generally require the building owner or the contractor to purchase and maintain a builder’s risk policy. The policy provides coverage for loss or damage to the unfinished building’s construction materials on the work site during the course of construction, subject to certain restrictions and exclusions. The policy can also be extended to cover existing structures if the project is a renovation. Exposures are broken down into three general parts: hard costs, soft costs and business income or loss of rents.
Hard costs are the tangible assets that comprise the construction project; quite simply, the costs of material and labor associated with a project – also known as ‘sticks and bricks.’
Soft costs, also known as Delay in Opening Expenses, are usually covered and limited by special endorsements to builder’s risk property policy. Coverage is provided for additional construction loan interest, real estate taxes, marketing and re-leasing expenses, administrative expenses, and architectural/engineering fees which are incurred as a result of a covered loss – one that causes delay in completion of a project. These expenses can be further broken down into two sub-categories: construction expense and additional soft costs.
Construction expenses are fixed costs incurred during the delay in construction, and additional soft costs are costs that are more likely affected by the length of the delay. Construction expenses include but are not limited to: additional advertising, public relations, or promotional expense, architectural/engineering fees, inspection fees, loan fees and non-interest financing fees, and cost to extend permits and licenses. Additional soft costs include but are not limited to: additional loan interest, real estate taxes, expense to lease equipment and temporary office space, operational expenses (salaries, utilities, etc.), and insurance expense.
Builder’s risk policies can also be extended to provide the owner coverage for Business Interruption (BI) or Loss of Rent due to a delay in start-up. Much like BI on a standard property policy, the extension typically covers operating profit, fixed costs, expenses that continue post-loss, and expenses incurred to reduce or avoid a delay in opening.
In the event of a covered loss, the typical soft cost provisions in a policy provide coverage for the costs incurred from the date the construction would have been completed (had no loss occurred) until construction is completed, and is subject to the insured exercising due diligence and dispatch.
Calculating the delay period is complex and requires the broker to be knowledgeable about the specific and unique attributes of a project, as well as a deep understanding the coverage form.
IRMI notes the traditional soft costs of a construction project which should be covered:
Most builders risk policies include coverage for additional ‘soft costs’ incurred as result of the delay in construction. This should include all construction overhead costs, such as:
• Additional interest (both on construction and permanent financing)
• Real estate taxes
• Advertising expenses
• Architect fees
• Extended general conditions
• Bond and permit fees
• Legal and accounting
• Other administrative costs
Yet, it also warns that the agent must access each type of project to tailor a product with that project’s particular risks:
Keep in mind that a major catastrophe could have a detrimental impact to the construction project, in addition to the delay in construction. For example, a construction project expected to be complete during a robust economy may suffer additional losses if the delay results in opening after the economy has slipped into a recession. Also, the stigma associated with occupying a property where a catastrophic loss occurred may make it difficult to find tenants. Your broker can help you design a policy that meets your specific needs and risk exposures.
The selection of the agent putting together the builders risk coverage is important.
Public adjuster Tony D’Amcio of Goodman Gable & Gould is an excellent public adjuster. Tony is an old school insurance company adjuster turned public adjuster and had a reputation for fully paying claims when he worked with Travelers. For readers of this blog interested in this topic that I will be exploring in greater detail, I would suggest that you read an article, Soft Cost or Delay in Opening: Insure For The Potential Exposure, which Tony published in Adjusting Today on this topic.
Thought For The Day
The top experts in the world are ardent students. The day you stop learning, you’re definitely not an expert.