Builder’s Risk Insurance: What Is It, What Does It Cover And Should You Get It?

Whether you’re a commercial real estate mogul or a homeowner with a vision for expanding your family, builder’s risk insurance can protect you from financial damage due to catastrophes or accidents during a construction project.

In some cases, builder’s risk insurance may be mandatory for you because of city or county law. However, even if it’s not required, you may want to protect yourself financially while you build your forever home or begin a significant renovation. The following information will give you a better idea of what builder’s risk insurance is and how it can help you.

Builder’s risk insurance is a unique insurance policy that covers buildings during construction or renovation. Parties listed on the policy are insured against damages or losses such as a fire, storms, hail, lightning, high winds, vandalism, contamination, explosions, and collision.

Builder’s risk insurance or contractor’s all-risk insurance, as it’s also referred to, isn’t a standard policy, so the coverage can vary greatly. Some policies will extend to construction materials, documents and data, and temporary structures. Policies can also protect against injury claims from non-employees and the cost of fixing or replacing damaged equipment.

Builder’s risk insurance benefits anyone with a financial interest in a construction project or property renovation. Those who stand to lose financially during construction should be on the policy. Additionally, your municipality may require a builder’s risk policy to grant you a building permit or approval.

Typically, your general contractor will purchase the policy to ensure that it covers the project sufficiently. However, the purchase agreement between you and the contractor may state that the building owner or buyer has to purchase the policy. However, numerous parties associated with the project will benefit if you include them in the policy:

• Property owners
• Architects or engineers working on the project
• Contractors or subcontractors
• Development or investment companies
• Building owners
• Lenders
• Home builders

A builder’s risk insurance policy protects your construction project from various property damage. Many builder’s risk insurance providers cover the direct effects, like damaged construction materials, and indirect effects, like loss of revenue, caused by property-related damages during construction.

Below are some examples of risks that policies can cover:

• Damages: Vandalism, fire, lightning, hail, high winds, rental income, real estate taxes, smoke, theft, explosions, vehicle collisions, and Acts of God, such as hurricanes or earthquakes.
• Material: Construction materials damaged or lost in transit, documents and data such as blueprints or project plans, and temporary structures like scaffolding, fencing, signage, retaining walls, and trailers. The property itself is also insured.
• Comprehensive general liability: Claims from non-employees of bodily injury while on the construction site.
• Equipment: The cost of fixing or replacing construction equipment.
• Financial loss from construction delays: Rental income, real estate taxes, sales income, and more paid interest on loans.
• Projects: New residential or commercial construction, remodels, additions and installations.

Beware that builder’s risk policies don’t cover everything. An extension or additional insurance policy may be necessary to ensure adequate coverage of your building project. Below are the most common exclusions: 

• Damages caused by warfare
• Workers’ compensation claims
• Accidents (which construction liability insurance more likely covers)
• Wear and tear
• Acts of terrorism and war
• Employee theft
• Rust and corrosion
• Mechanical breakdowns
• Damage due to faulty design
• Workmanship and materials

Builder’s risk insurance typically costs 1% – 5% of the total construction project budget. So, for example, if the construction budget is $200,000, you will likely end up spending $600 – $3,300, depending on the scope of work.

If you’re planning to build your home, you could save money by implementing inexpensive ways to build a house to lower your construction budget.

The following factors can affect the cost of your builder’s risk insurance policy:

• Project cost and location
• Project timeline
• Square footage of the construction site
• Your contractors’ and subcontractors’ expertise
• Amount of coverage
• Quality of construction materials
• Project logistics, such as location for materials storage

Coverage Add-Ons

If your policy does not provide the full coverage you need, you can enhance your policy with coverage add-ons. Add-ons vary by provider, so shopping around will help you understand how you can cover different assets and liabilities. In addition, because every project and every policy is different, some companies allow you to customize your policy to fit your needs. Common add-ons and extensions include protection for:

• Flood damage
• Wind and storm
• Construction forms
• Temporary structures
• Debris removal and disposal in the event of a loss
• Pollutant cleanup
• Sewer backup

It’s ideal to speak with an experienced insurance broker about your project. An effective insurance broker will evaluate each detail of the project, from the location to the type of transit used to move materials, then give you a tailored policy based on all contributing factors.

Determine The Scope Of Your Project

If you want to save time and money with your construction project, define the size of the building and your general plan for the project. You’ll need to ask questions and do your homework to know how much it will cost to build a house. Giving your project shape and definition will help you know what you need to cover through your builder’s risk insurance policy.

Buy From An Agent, Broker Or Insurance Provider

Insurance brokers and agents are a great resource to begin your search for a builder’s risk insurance policy. Brokers and agents connect you to the right insurance policy based on your needs.

Brokers aren’t the companies that are financially backing or underwriting the policy. However, their relationships with insurance providers allow them to match you with the right policy at an affordable price. Therefore, putting an insurance broker to work can save you time and energy. Beware that brokers charge fees for their services, so be sure to understand what you’ll pay the broker before enlisting their help.

You can also purchase a policy directly from an insurance company. Working with an insurance company will let you obtain a policy tailored to your project. On the downside, the company may limit the kind of coverage you receive. Therefore, it’s a good idea to shop around similar to how people shop around for mortgage lenders and quotes.

Most insurers write builder’s risk insurance policies on an inland marine form rather than a standard property insurance form. This form allows for a broader range of coverage that the insurer can adapt specifically for your project.

Builder’s risk insurance is highly specialized. Therefore, when shopping for a policy, look first with companies that are A-rated or higher by AM Best, a global credit rating firm that ranks insurance companies based on their financial stability.

Understand The Terms Of Your Plan

Before you sign on the dotted line, review the policy and be sure to discuss any areas of concern before purchase. Remember, some policies may have exclusions. You may need to purchase a coverage add-on or otherwise address your coverage needs before construction begins.

Knowing when your coverage begins and ends is vital. Some policies won’t have specific coverage dates; the coverage may begin or end with certain approvals or permits. Therefore, before purchasing a plan, understand which milestones in the construction process can trigger a change in your policy coverage.

Whether you’re building your dream home or a room addition, you’ll want to insure the construction process from top to bottom. General contractors and homeowners alike can benefit from builder’s risk insurance for their construction projects. Partnering with an experienced insurance broker or company will give you an added sense of security and help make your vision a reality.

If you’re in the market for builder’s risk insurance, shopping around for different quotes can help you find the best option for your financial needs. You can also learn more about construction loans if you’re seeking information on building a house.