Picture this: You’re nearing completion on a new mixed-use building when a fire damages most of the upper floors. The physical rebuild is costly, but the extended timeline also means extra loan interest, permits and taxes. This is where soft costs come in, and where the right insurance coverage can make all the difference.
With decades of experience advising commercial construction clients, Luke Mills, Director, Commercial Sales at Acera Insurance Vancouver Island, shares his trusted insights to help you build your next project’s insurance coverage with confidence.
What is builder’s risk insurance?
Builder’s risk insurance, also known as course of construction insurance, is designed to protect against the financial consequences of direct physical loss or damage to your project site, as well as construction material waiting to be installed onsite, in transit or offsite.
Example: A condo building experiences flooding during the building process. Drywall and flooring on three floors are damaged and needs to be replaced. Builder’s risk insurance covers the replacement costs of these materials.
However, one area that is often overlooked that can have a significant impact on your budget are the soft costs.
“Depending on the construction contract type, the builder’s risk insurance is procured by the project owner/developer or the contractor. If it’s the contractor, it’s critical that they be made aware of the soft cost exposure.” — Luke Mills
What are considered soft costs in construction?
Soft costs refer to the non-physical expenses that can arise when a construction project is delayed due to a covered loss. These may include:
- Property taxes
- Construction loan interest and commitment fees
- Insurance premiums
- Presale and marketing costs
- Permits and design fees
- Inflation
Say you’re building a mixed-use commercial/residential project with planned construction set to be complete in two years. A fire in the building leads to project delays of over a year, which triggers an insurance claim.
Outside of the hard materials costs to rebuild the property, you must now pay for another year of property taxes, your loan interest, new building permits, consultant disbursements and the cost of your builder’s risk insurance, which will need to be extended to incorporate the delay caused by the claim.
Since people tend to overlook these soft costs with their builder’s risk insurance, proactively calculating them helps protect your bottom line.
Determining your builder’s risk insurance soft cost coverage
When insuring your soft costs, you want to avoid relying on a simplistic formula like “my soft costs are 25% of the project value.” This can lead to trouble and inadequate coverage in the event a claim.
Insurance adjusters and forensic accountants value transparency. Your insurer will want to see project-specific financials and documented rationale behind every insured amount in the event of a claim. All the claimed soft costs need to be substantiated.
Common claim triggers include:
Water damage
(especially in high-rise and multi-storey buildings)
Fire losses
(particularly wood framed buildings)
Excavation and shoring failures
Unforeseen site complications
(such as vandalism or collapse)
The benefit of working with an Acera Insurance advisor who specializes in the construction sector is that we help provide guidance in determining your soft costs. I sit down with my clients and go through their project-specific financials and insurance worksheets to ensure everything is properly accounted for in the event of a claim.
“When determining your soft costs, you need to be able to show your work. What did you intend to cover and why? That’s what your insurer will look for.” — Luke Mills
Case study: Fire damage and a well-prepared client
I had a client who was building a wood-frame, six story condo with two levels of underground parking in British Columbia. Unfortunately, when the project was getting to the dry wall phase, a devastating fire resulted in a total loss.
All the wood framing and part of the underground parking needed to be redone. The adjuster assigned to the project could easily determine the hard costs, but the soft costs were more nebulous.
When building the policy with the client, we had carefully documented all the soft costs, which resulted in a faster claim resolution with the help of a third-party forensic accountant.
“The soft costs are always the trickiest part of adjusting any claim. But in this case, we had everything documented, and the payout came fast.” — Luke Mills
Build your policy with the right partners
When building your insurance coverage for a new project, early collaboration between property owners, contractors and insurance brokers is important. You need to work together to:
Align coverage with all project and lender contracts
Define who holds which policies
Identify and close gaps in coverage
You also need to be sure that the project insurance aligns with construction contracts and lending agreements.
“I work with my clients and go through their soft cost budget line by line to isolate those costs that could reoccur in the event of a claim.” – Luke Mills
Key takeaways for builder’s risk insurance
Protect your investment before the first nail is driven by remembering to:
- Plan for delays
- Document soft costs from the start
- Clarify who should take out the insurance
- Work with an insurance advisor of who understands construction, from blueprint to build
At Acera Insurance, our mission is to deliver certainty. We work alongside you to protect your investment before the first shovel hits the ground.
Luke Mills got his start in the insurance industry in 1994. He has been with Acera Insurance for the past 23 years, where he currently serves as a director, partner and risk advisor. Luke leads Acera’s Vancouver Island construction insurance practice and is committed to helping our clients discover, manage and overcome risks in their business. Inspired by our nationwide team, Luke firmly believes we must earn our clients’ trust every day by delivering a consistently outstanding customer experience.
Builder’s risk frequently asked questions
Water damage, theft and vandalism are the most common while fire damage to wood frame projects is generally the most severe.
By employing best in class risk management practices and employee education.
Weather, labour or productivity issues, supply chain disruptions, design changes, permitting, approvals and inspections, health and safety incidents and insurance claims.
Work with your broker to perform a line-by-line review of insurance soft costs and complete a soft cost valuation worksheet.
Related reading:
- How accurate property valuations protect your business
- Limit Construction Professional Liability Exposure | Acera Insurance
Information and services provided by Acera Insurance, Acera Benefits and any other tradename and/or subsidiary or affiliate of Acera Insurance Services Ltd. (“Acera”), should not be considered legal, tax, or financial advice. While we strive to provide accurate and up-to-date information, we recommend consulting a qualified financial planner, lawyer, accountant, tax advisor or other professional for advice specific to your situation. Tax, employment, pension, disability and investment laws and regulations vary by jurisdiction and are subject to change. Acera is not responsible for any decisions made based on the information provided.
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