Coverage Saves Some for Residential Builders

It’s 6 a.m. The boss has just rolled up to the project site. The crew is strapping on their tool belts when someone notices the windows that were sitting ready for installation have been stolen.

And oh yeah, a couple of boxes of lighting fixtures are gone, too.

Theft and vandalism, local insurance agents said, are the two leading claim costs on local residential construction sites. That’s what builder’s risk policies are for.

A commercial insurance product, builder’s risk covers a contractor’s building materials during the construction process.

Other headaches such as fires and wind destruction also typically fall under the same coverage.

Mike Luttrell, a vice present at Walker Brothers Insurance in Springdale, said most builder’s risk policies available in the market run from 17 cents to 25 cents per $100 of construction value. That’s in the city limits, and it’s double out in the county.

Luttrell and a couple of peers agreed that about 90 percent of the residential construction sites in the market probably have some form of the coverage in place.

Total residential building permits for the two-county area during 2004 had a valuation of $823.6 million, according to the Northwest Arkansas Regional Planning Commission.

So if 90 percent ($741.2 million worth) of that figure was covered by builder’s risk policies, then the local market for that segment of coverage is between $12.6 million and $18.5 million.

The building permit tally was even up 19.4 percent from $689.5 million in 2003, which means builder’s risk policies also likely spiked last year.

“Fortunately, we don’t have too many claims on those policies up here,” Luttrell said. “There was the big fire at a home in Clear Creek early this year, but invariably most of those claims are for materials delivered to the work site that turn up missing.”

Luttrell’s firm recently had a $2,200 claim from a customer that, after a $1,000 deductible, wound up costing the builder $1,200 for stolen light fixtures. Those costs, the agents and builders agreed, unfortunately have to be passed on to other buyers in future bids.

Assuming the same in-city range of builder’s risk cost per $100 of coverage, the premiums on an $800,000 residential home construction would run about $1,600 annually. If the project took 15 months, then three additional months would be prorated.

Even at less than a percent of construction cost, the coverage is for up to a total loss.

Gary Jech, president of Farris Insurance Agency Inc. in Springdale, said it’s also possible to take out builder’s risk policies on a monthly basis.

For builders cranking out homes in five months or less, the monthly reporting basis could potentially save them 10 to 15 percent.

“It’s more of a matter of convenience and how the customer wants to do it,” Jech said.

Jech said it’s also important for contractors to know that a builder’s risk policy covers their construction property and contents of the house but not any liability exposure. A general liability underwriter must be used for that.

Luttrell said that builders might get a better rate by consolidating their coverages through the same provider.

Roland Julian, president of Rogers Insurance Agency Inc., said another tip is that not all builder’s risk policies are the same. Some cover theft and others don’t, so contractors should ask questions about what they’re getting.

All three of the agents’ firms write more than 200 of the policies per year.