What impact does your credit score have on what you pay for insurance? (image via Flickr)

In a nutshell, yes.  Insurance companies use a variety of factors to develop a risk profile for you when they are underwriting your insurance policy and determining your rate.  One of these factors may be your personal credit history and not because they are weighing the likelihood that you will pay for your policy.

Insurance rates are based in part on how much risk the insurance company believes they will be taking on by underwriting your policy.  In order to determine that risk level, they rely on real world statistics and actuarial tables built from those statistics.  By looking at large amounts of data, the insurance industry can make certain assumptions about you based on specific characteristics like your gender, age, marital status, etc.  This is how insurance companies determine that teenage boys are more likely to be in accidents than teenage girls and that married people are less likely to file an insurance claim than single people.

When it comes to your credit, the statistics can tell the insurance company some important things about how much of a risk you are.  The industry has demonstrated that there is a very strong relationship between credit history and risk level meaning that just looking at a person’s credit history can be used as an objective measurement of their insurance risk.  The bottom line is that people who pay their bills on time and are good stewards of their finances are more careful and conscientious with their cars and homes, which makes them a lower risk from an insurance perspective.

This means that the insurance company is using your credit history in a very different way than your bank might.  When your bank looks at your credit, they are assessing your income, assets, debts, and financial history to determine how likely it is that you actually meet the financial obligation of a loan or line of credit.  They are looking at your individual details to make a decision about your ability to pay.  The insurance company is looking at your credit as an objective way to assess how risky you are from an insurance standpoint.  They are looking at your individual details as compared to other people.  The bank cares about where you work, how long you have been there, how much you make, and how much you owe.  The insurance company only cares about how your credit history informs your risk profile based on the actuarial data.

Using information like your credit history to determine your insurance rates is one way that insurance companies guarantee that they are offering their products at fair prices.  The use of statistics and actuarial information in determining risk helps remove any subjective decision making from the process.  Insurance companies can offer better prices to a broader range of consumers by using factors like their credit history.

The score used by the insurance company however, is different than your standard credit score used by banks and other financial institutions.  In order to determine your insurance score, the credit bureaus use a formula that looks at things like the number of accounts you have, how good you have been at paying your bills, how stable your finances are, any negative factors like liens and bankruptcies, and how much you currently owe.  Unlike your regular credit score, occasional late payments have less of an impact on your insurance score than patterns of financial irresponsibility.

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Builder's Risk Insurance

Do you need Builder's Risk Insurance? Photo credit: monivhs1947 on Flickr

Builder’s risk coverage falls under the category of specialty insurance products and provides property insurance for buildings while they are still being built.  Standard property coverage would not cover damage to the building while it is under construction.    Once the building is complete, the property owner would purchase a more standard property insurance policy to cover any damage to the building.  It is kind of like a homeowner-to-be who has to get a construction loan in order to finance the cost of building a house and then get a mortgage once the house is complete.

This type of insurance also covers materials and equipment that are being used to construct the building and may be purchased to cover any loss exposure during renovations, not just for new construction.

Who Needs Builder’s Risk Insurance

During construction, the conditions are very different than they will be once the building is complete and there are more ways that losses can occur.  Building owners are generally liable for anything that happens on their site.  Builder’s risk offers the owner some protection from any loss of property.

What Does it Cover

Most Builder’s Risk coverage protects the land/building owner’s interest against losses resulting from fire, vandalism, lightning, wind, and other non-excluded weather conditions.  Similarly to homeowner’s insurance, Builder’s Risk policies do not generally protect against losses caused by earthquakes, flooding, acts of war, or intentional damage caused by the owner.   The timeframe of the policy generally aligns with the timeframe of the construction or renovation and expires once the work on the building has been completed.  Builder’s Risk coverage would not usually continue to offer protection to the owner after the building is certified for occupancy.

The standard Builder’s Risk policy offers site-specific coverage which means that any materials and equipment that are not onsite would not be covered under the policy.  If there are materials and/or equipment that is being stored in a different location for use on the project, a broader policy would be required.  This type of coverage can be obtained through a Builder’s Risk policy that contains Inland Marine provisions.

Although the type of coverage provided at a high level is common across the majority of Builder’s Risk policies, the actual policies are often very detailed and tailored to the specific needs of the building project that is being insured.  This ensures that the policy meets the specific needs of the individual project but also requires that the building owner and any other interested parties pay close attention to what is covered and not covered by the policy.

Who Buys Builder’s Risk Coverage

In most cases, the owner of the building being constructed would purchase the Builder’s Risk policy.  In some circumstances, building owners may require that the general contractor or the company completing the construction secure this kind of coverage as part of the contract to build the building or complete the renovation.

Sometimes, the existing property insurance will cover any losses during building renovations or while an addition is being built.  However, it is important for the building owner to verify that coverage with their current carrier prior to any work being done.  If the renovation or addition is covered by an existing property insurance policy, there is no need to purchase an additional Builder’s Risk policy.

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