Managing Rising Construction Costs: Insurance

Builders and remodelers may be subjected to coinsurance penalties as a result of rising building material prices if they do not make changes to their policies. Builders and remodelers carry insurance policies that cover risks for the project, and coinsurance clauses, which are in many policies, say the builder should maintain coverage up to a specific value. The National Association of Home Builders says this is typically between 80% to 100%. If the insured fails to maintain the coverage, possibly due to changing costs and values, the insured is subject to a penalty.

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.”

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