A loss to a new construction project can leave policyholders in a particularly vulnerable position. For business owners, it means delayed openings and a potential loss of profits. If you’re a homeowner, any damage to your new house can mean a delay moving in and unexpected temporary living costs.

Including soft costs in your builder’s risk insurance policy can provide protection. Read on for more about soft cost coverage and how to protect your investment.

What Is Builder’s Risk Coverage?

Builder’s risk (sometimes called course-of-construction insurance) is a type of property insurance that protects construction projects from loss or damages.

There are three main kinds of coverage available in builder’s risk policies:

  • Coverage of hard costs
  • Coverage of soft costs
  • Loss of income or business rents coverage

Hard costs are also known as “bricks-and-sticks” costs: They are the materials and labor associated with the project. Loss of income is relevant to business owners who may lose profits if, for example, the opening of a new storefront is delayed by an event during construction. Our focus today is on soft costs, which are described below.

What Are Soft Costs in a Construction Project?

Soft costs are also known as “delay-in-opening expenses”; if a project is delayed, soft cost coverage can include protection against costs from additional loan interest, real estate taxes, re-leasing expenses, extending permits, and so on, that are incurred due to a covered event that causes delay in completing a project.

For example, let’s say that a local fried chicken shop is expanding. Their new storefront is in process, but before it can be completed, a hurricane strikes and causes significant damage, pushing back opening day by at least four months. Standard builder’s risk insurance covers the materials needed to recover the physical building; however, it would not cover the loss of income that the owners experienced, nor would it cover the cost of marketing to announce the new opening date, interest on construction loans, additional permit or reinspection fees, etc.

With soft-cost coverage, the shop’s owners would be able to claim for loss of income, as well as included expenses like those listed above, from the date the construction would have been completed had there not been a hurricane, to the actual time of completion of construction.

Is Soft Cost Coverage Included in Builder’s Risk Insurance?

While some soft cost coverage is included in many builder’s risk policies, the exact coverage varies by policy, and most policyholders would benefit from an additional soft cost endorsement. Any soft cost coverage in a builder’s risk policy is likely to cover construction overhead costs. For example, soft cost coverage might include:

  • Real estate taxes
  • Advertising expenses
  • Additional interest (both on construction and permanent financing)
  • Insurance
  • Architect fees
  • Extended general conditions
  • Bond and permit fees
  • Legal and accounting costs
  • Other administrative costs

What Is Most Likely To Be Covered by a Typical Builder’s Risk Policy?

A typical builder’s risk policy is most likely to cover direct physical damage to the structure itself, materials or equipment stored on-site, or debris removal in case of covered events. Builder’s risk does not typically cover liability, worker injury, or delays not caused by covered perils, nor does it cover soft costs (as described above).

Further Resources on Insurance Coverage Law

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