You likely already have commercial property insurance (if you don’t, get covered!), and that might be sufficient for smaller renovation projects, like remodelling a small office space or installing a new communications system.
For more significant renovations, however, such as entirely redesigning and renovating a restaurant, ensuring builder’s risk insurance or installation coverage protects your project is vital. Let’s go over why:
What Is Builder’s Risk Insurance or Installation Coverage, and What Does It Cover?
It is a type of property insurance policy designed to cover construction and renovation projects from different kinds of property damage. It’s also referred to as course of construction insurance.
For example, a builder’s risk policy may cover damage or loss to an unfinished structure or job site because of fire, water damage, a natural disaster, theft and vandalism. This type of policy is only valid while the construction or renovation project is underway. Once the project is completed, the builder’s risk policy usually expires, but it can provide extended coverage after a build or renovation work is finished. It depends on the policy and the options you choose for it.
For business owners that lease a unit and intend to do extensive renovations, they would benefit from a builder’s risk policy. However, because it is a leased space, after the renovations are complete, it’s important they cover the completed renovations in the tenant’s improvement portion of their property coverage. That will ensure that if there was a total loss, the investment they put into the leased space would be covered.
For example, suppose a barber is opening a new barbershop. They sign a lease for a studio space in a commercial complex and spend $30,000 renovating the place. One year later, a fire in a neighbouring business burns the barbershop to the ground. Without tenant’s improvements coverage in their commercial property policy, they’ll be at a loss for the investment they made renovating the shop.
Why Is Builder’s Risk Insurance Critical to Have for Commercial Renovation Projects?
The purpose or value of having builder’s risk insurance for a major renovation or new construction build can’t be understated. It’s as vital an investment as your renovation project is and then some.
Among the reasons why builder’s risk insurance is critical for commercial renovations are:
Coverage for the Property During Construction or Installation
Accidents and unexpected incidents happen on construction and renovation job sites. Builder’s risk insurance can cover damages and losses to the building during the project because of fire, water damage, severe weather, theft and vandalism.
Coverage for Temporary Structures
Renovation projects often involve temporary structures (like scaffolding) and equipment that might not be covered by commercial property insurance if they’re damaged, vandalized, or stolen.
Coverage for Damaged or Stolen Building Materials
Likewise, the internal and external building materials used for your renovation need protection from damage, loss, and theft. The materials used for renovating your building aren’t covered by commercial property insurance until after they’ve been permanently installed.
Protection for Everyone Involved in the Renovation
Builder’s risk insurance helps cover all stakeholders’ financial interests in the project, including business or property owners, contractors and subcontractors, and others like financial lenders or investors who bankroll the renovation.
Meets Contractual Obligations
Some municipalities or provinces may require specific types of renovation projects to have builder’s risk insurance before they commence. Without it, you could open yourself to fines or legal action from local authorities.
Who Should Purchase a Builder’s Risk Insurance Policy?
Determining who should buy builder’s risk insurance for a renovation and what the coverage limits are is usually defined in the renovation contract a property owner signs with the general contractor or renovation expert they hire.
The short answer is any of the involved stakeholders can be responsible for purchasing builder’s risk insurance, be it the property or business owner, general contractor, or as a shared responsibility between the two.
5 Things to Do to Protect Your Finances During Commercial Renovations
Here are five things every business owner should do before embarking on a commercial renovation project:
1. Vet the Contractor You Hire
Verify the general contractors on your shortlist (there should be more than one) are licensed, insured, and bonded. Ensure they meet the legal requirements and have the credentials to undertake your commercial renovation project.
Review their past commercial projects and seek references from their former clients. Also, think about and evaluate the contractor’s communication skills during meetings. Are they listening to you and asking relevant questions about the project? Do they communicate well? If they don’t, that could be a warning sign to look elsewhere.
2. Verify the Contractor’s Insurance Coverage
Get a copy of the contractor’s certificate of insurance, and contact their insurance company to verify they are indeed insured. Also, ensure the subcontractors the general contractor hires for the project are insured.
When speaking to the contractor’s insurer, go beyond what the certificate of insurance states and ask for details on the types of coverage and how much coverage the contractor has. Know what exclusions are in the contractor’s policy.
Furthermore, insist the contractor you intend to hire includes you as an additional insured under their policy that indemnifies or compensates you for damage or loss during renovations and once the project is completed.
3. Establish a Communication Plan
Establish a communication plan with the contractor and include dates to receive regular updates on the project’s progress. Be sure to define who the point of contact is and establish the frequency and method of communication to prevent misunderstandings and keep the project on track.
4. Carefully Review the Renovation Contract
Carefully review the contract terms before signing. It’s advisable to consult a lawyer to review the contract for you before signing anything. The contract should include details such as the project’s timeline, milestones, scope of work, materials to be used, and any details on builder’s risk insurance and the contractor’s and subcontractors’ insurance policies.
5. Define Payment Terms and Timelines
Understand the payment terms outlined in the contractor’s proposal and determine a transparent payment structure to avoid disagreements and misunderstandings. Discuss the payment schedule, any upfront costs, and how changes to the scope of work will be addressed.
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