Builders Risk for Renovations and Existing Structures

The first approach keeps the owner's permanent property policy in force on the existing building, with the insurer's knowledge and any renovation endorsement it requires, and adds a builders risk policy on the new work only. This often suits occupied buildings where tenants stay in place and the work is a modest share of the total value.

The second writes one builders risk policy that schedules the existing structure as a separate value alongside the renovation. This is more common on gut rehabilitations and adaptive-reuse projects, where the building is vacant, the owner's property insurer may not want the risk during construction and the lender wants one policy covering everything it is financing.

The third applies to contractors doing tenant improvements in someone else's building. The landlord insures the building, the tenant may insure its improvements and betterments and the contractor carries an installation floater or a small builders risk policy for its materials and work until acceptance. The lease and the construction contract should say which party carries each piece.

• Owner's property policy on the existing building plus builders risk on new work
• One builders risk policy scheduling both existing and new values
• Landlord's policy, tenant's betterments coverage and contractor's installation floater

Commercial property policies are written for a building in normal use. Many contain a vacancy or unoccupancy condition that reduces or suspends coverage for certain perils after a building has been vacant for a stated period, and some address renovation directly. Buildings under renovation are sometimes treated differently from vacant ones. The definitions vary, and a gut rehab with no tenants can look a lot like a vacant building to an adjuster.

The owner should notify its property insurer of the project scope, schedule and occupancy before work begins, and ask for written confirmation of how the policy applies. Ask whether a protective safeguards endorsement requires the sprinkler or alarm system to stay in service, because many renovations require impairing exactly those systems. If the property insurer will not continue on acceptable terms, that is often the signal to move to a builders risk form that schedules the existing structure.

Renovation underwriting focuses on the fire protection that already exists and how the work will interrupt it. Federal construction safety rules require existing automatic sprinkler systems to be kept in service as long as reasonable during demolition or alterations, allow control valves to be operated only by authorized persons, call for modifications to be expedited so protection returns quickly and require control valves to be checked at the close of each workday. Where standpipes exist in a structure being altered, they must be maintained ready for fire protection use. A written impairment procedure that follows those rules is often the first document a renovation underwriter asks for.

Hot work and selective demolition are the next questions. Cutting, welding and torch work near existing roofing, wood blocking or concealed spaces are frequent causes of renovation fires, and federal rules call for moving or protecting combustibles and posting a fire watch when normal precautions are not enough. Before demolition, an engineering survey by a competent person must assess the framing, floors and walls for the possibility of unplanned collapse, and that survey can also inform the insurer about structural risk to the existing building.

Ask whether the builders risk or property form makes any of these procedures a condition of coverage, and make sure every trade working on the building knows the rule.

Converting an office building to apartments, a warehouse to creative office or a church to a restaurant changes the occupancy classification, and the building usually has to meet current code for the new use. After a loss, the rebuild may face the same requirement for parts of the building that were grandfathered before. Ordinance or law coverage can pay the reasonable cost of meeting current code during repair, including demolition of undamaged portions that the building official requires to come down. The AIA exhibit lists it as an optional owner coverage, which means it is easy to leave out.

Adaptive reuse also uncovers conditions no one priced. Asbestos in pipe insulation, lead paint, underground storage tanks and contaminated slabs are common in older industrial and commercial buildings. Federal demolition rules require determining whether hazardous substances were used in pipes, tanks or equipment and purging them before demolition. Those discoveries are pollution exposures rather than builders risk losses, and most builders risk forms exclude contamination cleanup.

Underwriters want to know what share of the finished value is new and what share is existing. For the new work, the base is the construction contract plus change orders and owner-furnished items. For the existing structure, the base is replacement cost, which can be far higher than the purchase price of an older building in a strong land market. Using the acquisition price or the assessed value is a common way to understate it.

On adaptive reuse, the line between the two can blur. Existing columns, slabs and exterior walls that stay in place are existing property; new floors, mechanical systems and interiors are new work. Ask the insurer how it wants values split and how a loss that damages both will be adjusted, particularly if two different policies apply.

When the owner's property insurer pays for fire damage to an existing building, it may try to recover from the contractor whose work caused the fire. Construction contracts often include a mutual waiver of subrogation for property losses to prevent that, but the waiver only helps if the owner's property policy permits it and the contract extends it to the existing structure, not just the work. Check both.

The contractor should also confirm whether its own liability policy responds to damage to the existing building, since some forms exclude damage to property the contractor is working on. That is a liability question rather than a builders risk one, and it is one reason renovation projects need the property and liability programs read side by side.