Proof of Builder's Risk Insurance (BRI) or Course of Construction Insurance must be obtained from the borrower, or directly from the insurance agent and is required when a loan is originated to fund the construction of a new structure or when an existing structure is being renovated.

BRI, at replacement cost, is required to cover the full Guaranteed Maximum Price contract value for the construction being performed when it is new construction or renovation. The Bank’s Loans in Process (LIP) account must be equal to or greater than the contract value therefore the amount of the coverage per the policy will always be equal to or greater than the required LIP amount.  

Details of the coverages are listed in the Association for Cooperative Operations Research & Development (ACORD) 27 or 28 (Schedule A) which is a document issued by an insurance company or broker to provide proof of property insurance coverage. The ACORD must include:

• The property address
• Amount of coverage
• Contractors name
• Capital City Bank (CCB) listed as mortgagee
• Policy date
• Expiration date

The borrower must be listed as the insured on the BRI policy. If the owner and builder are separate parties, oftentimes you will find the contractor will be listed as an additional insured. Associates must review the contract to determine who is responsible for obtaining the Builder’s Risk Insurance policy and confirm that the coverages meet all Bank requirements in addition to the requirements per the contract.

Construction Loan Administration (CLA) is responsible for the oversight of all Builder's Risk policies on all residential and commercial construction loans.

Builder's Risk Insurance (BRI) standard policies provide proof the Bank’s collateral is covered in case of loss by:

• Fire
• Lightning
• Hail
• Smoke
• Explosions
• Theft
• Vandalism
• Acts of God (For example: Hurricanes)

In addition to the standard policy insuring the structure, the builder's risk policy insures the materials, supplies on site, in transit, or at other locations. Depending on the coverage requested by the borrower and required by the Bank, builder’s risk policies provide the option to purchase additional coverage or endorsements to the policy that will insure equipment and tools (inland marine policy), soft costs, or expenses not directly related to construction, scaffolding, temporary structures, debris removal, construction forms, lost sales, rental income, interest on loans, and real estate taxes if property damage were to cause a delay in construction. Construction Loan Administration (CLA) reviews both the insurance ACORD and the detailed builder's risk coverage form to confirm that adequate insurance coverage has been obtained and the effective date of the policy precedes the date of the commencement and funding for any improvements.

BRI does not provide protection for any potential legal liabilities resulting from accidents, injuries or damage caused by the contractor or anyone else involved in the project nor does the coverage protect the borrower or the Bank from faulty work or negligence performed by a contractor or subcontractor. As such, lenders must ensure that the Bank is originating loans to quality, reputable builders with proven records and that the Bank is obtaining proof that the builder has adequate liability and workers’ compensation insurance coverage.

All builders, whether the builder is the borrower on the loan or the contractor on the project, are required to be underwritten by CLA and added to the Bank's accepted builders list. 

Other exclusions under a standard BRI policy typically include:

• Law or Ordinance Compliance
• Earth Movement
• Government seizure or action
• Nuclear hazard
• Volcanic action
• Utility services
• Flooding, sewer or drain overflow and mudslides
• Fungus, bacteria, wet or dry rot
• War or military action

Associates must be mindful that Builder’s Risk is temporary insurance coverage and will expire upon one of the following conditions being met:

• Policy expires or is cancelled
• Building becomes occupied
• Building is completed and a Certificate of Occupancy (CO) is issued
• Building has been sold and CCB debt is retired
• Project is idle for 60 days (review policy coverages)

Note: The loan officer and CLA are required to monitor stale inventory to avoid project delays, builder’s risk cancellations, and potential loan defaults. Residential construction loans funded to 95% will be considered stale if the CO has not been issued within 60 days of the last draw. Moreover, commercial construction loans will be considered stale if the CO is not issued within 60 days of the last draw.

It is the responsibility of both the lender and CLA to ensure that, if one of the above conditions has been met, the Bank obtain from the borrower documented proof of a vacant dwelling insurance policy, hazard insurance policy, or proof of the renewal of the builder’s risk policy. Failure for the borrower to provide to the Bank proof of adequate insurance coverage with Capital City Bank listed as a mortgagee and loss payee, can result in a potential loss for the Bank. 

If the Bank determines that the property is not insured, the loan is deemed to be in default and can result in the Bank calling the loan and requiring the borrower to pay the outstanding principal and any outstanding interest or fees that are due at the time of the default being declared.

When originating a loan that is secured by real property, the policy must include the standard mortgagee clause naming the Bank as the mortgagee. There are valuable rights afforded to the mortgagee that are not available to a loss payee, including:

• The right to advance notice of any cancellation or non-renewal
• The right to pay the premium and prevent a lapse in coverage
• Not having coverage impaired by acts of the mortgagor (For example: Fraud, arson, concealment of facts or misrepresentation, or failure to comply with conditions imposed by the insurance company.)

The Banks mortgagee clause for Builder's Risk Insurance, which must be listed in the Certificate Holder section of the ACORD, is provided below:

Capital City Bank
PO Box 900
Tallahassee, FL 32302
Attention: Construction Loan Administration
e-mail: _constructionadministration@ccbg.com

Accord 25 - Schedule A Example

Below is an example of an ACORD 25 documenting proof of Liability Insurance, Worker's Comp Insurance and Builder's Risk Insurance Schedule A.

 

 

ACORD 28 - Schedule B Example

Example of Commercial Property Insurance ACORD 28 Schedule B:

 

 

Upon receipt of the Builder's Risk Insurance (BRI) ACORD provided above, associates must review the amount of the deductible included on the policy. When lending money secured by 1-4 family residential construction or commercial projects on loan amounts of $750,000 or less, the deductible on the insurance policy should not exceed the lesser of $5,000 or 2% of the insured value of the improvements. On loan amounts equal to or greater than $750,000, the maximum deductible is established at the lesser of 2% of the insured value not to exceed $10,000. Higher deductibles can result in the bank not having sufficient insurance proceeds to complete the project work in the event a loan goes in default and a claim is filed under the BRI policy. Associates requesting exceptions to the BRI deductible requirement must contact the Construction Loan Administrator or a Credit Manager to obtain the approval. 

Another line item that is important when reviewing a BRI policy or binder is the policy period. It is critical for Bank associates to confirm that no construction has commenced on the project prior to the effective date of the BRI policy. If work has been commenced prior to the effective date, that work is deemed to be uninsured under the policy coverage.

When accepting BRI from a borrower, staff is required to verify that the insurance policy is underwritten by a reputable company whose name is familiar within the industry. The insurer must be licensed and authorized by law to conduct business within the jurisdictions where the mortgaged property is located. If staff accepts a binder or policy written by a company we are unfamiliar, the associate is encouraged to check the company’s financial rating in the AM Best's Insurance Guide or Demotech. 

• For an insurer rated by AM Best Company (AM Best), a minimum Financial Strength Rating of B+ as reported online at http://www.ambest.com
   
• For an insurer rated by Demotech, Inc., a minimum Financial Rating of A as reported online at http://www.demotech.com

This is especially important when originating larger loans as well as when originating all real estate secured loans. 

Note: When originating loans on renovation projects, if the business has an existing commercial hazard policy covering the building, the owner must purchase a separate builder’s risk policy to cover the same building during the renovation process.