The Unique Risks US Homebuilders Face In A Booming Market

The first-time homebuyers’ market in the US is booming. Rising demand for entry-level homes is piling pressure on homebuilders to churn out affordable properties and develop communities. Developing raw land into a new home community is a massive undertaking and includes many risks that can result in un-budgeted costs and project delays.

Homebuilders face a wide variety of exposures, including weather-related incidents, fire, vandalism and theft. Property damage and destruction, construction material loss, and equipment and vehicle damage and destruction are also key risks. Homebuilders’ risk is different to traditional builders’ risk because of the exposure homebuilders face in the land development and clearing process prior to any infrastructure being placed.

In the process of clearing raw land and preparing it to house the infrastructure necessary for a new home community, homebuilders can be very exposed to weather-related risks like flood and water damage. It’s different to the traditional four wall builders’ risk because the footprint is so much larger, according to Deborah Grooms (pictured), senior vice president of Chubb major accounts, inland marine.

“There are ways for homebuilders to mitigate their exposures,” Grooms told Insurance Business. “For example, many homebuilders operate on a ‘just in time’ schedule when bringing materials on to a jobsite. This means they only bring enough tools and materials on to a job site to complete the tasks scheduled for that specific day, meaning they don’t have extra materials lying around to increase their exposure to theft, vandalism and other common construction risks.

“Job-site sequencing is really critical in the homebuilding industry. It’s key to making sure a project finishes on time, within margin and without loss. If a sub-division gets off its sequencing and doesn’t stick to the master plan, that could potentially lead to large losses. For example, if the windows are delayed and the builder decides to move forward and put up the dry-walls, one heavy rain and those dry-walls become damaged and may need to be pulled down, which in turn delays the job and takes the sequencing plan off-track. Homebuilders really have to stick to their sequencing work tasks or it can be very expensive.”

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Another tactic homebuilders are taking to manage and mitigate risks is to build some of the housing components themselves, including building their own roof trusses and pre-fab walls off-site and then transporting them to building sites where they are put together. This will speed up the build time and will help homebuilders better control their supply because they’re doing more of the building on their own, according to Grooms.

Recently, Chubb upped its commitment to the homebuilders’ insurance space by revamping its coverage forms in order to capture all of the potential exposures that homebuilders face. For example, where infrastructure and land development are often silent in coverage forms, Chubb lifted that up to a very intentional coverage for homebuilders to purchase.

“We also added coverage for trade-ins, buy-backs and foreclosures, which are all things people traditionally don’t think about when it comes to homebuilders’ risk,” Grooms added. “Someone might trade in their home, or a mortgage company might have foreclosures that come back into their inventory, and oftentimes builders will have to buy back a home due to these foreclosures. That’s a risk that’s really unique to this space.”