Understanding Builder’s Risk Insurance

Can you insure a building that’s under construction? Builder’s risk insurance or course of construction insurance is a category under property insurance designed to protect a building during construction or renovation. It not only covers the building but also the construction materials on-site or on transit, labor costs, and temporary structures such as scaffolding and fencing. The coverage continues until the project is complete and signed off. 

Every construction project is unique, therefore there’s no standardized policy for builder’s risk insurance. As a result, many contractors misunderstand this insurance and deem it overly complex. However, when a builder’s risk policy is properly structured it’s a great risk management tool. 

What Risks Does a Builder’s Risk Insurance Policy Cover?

It’s important to note that builder’s risk policies differ, but they generally cover damages resulting from:

• Hail
• Theft
• Lightning
• Vandalism
• Fire or explosion
• Vehicle or aircraft collision

Additional weather-related threats such as floods, wind, and earthquakes may be covered through higher deductibles or by endorsement or coverage extension.  This is critical for construction projects that are exposed to catastrophic weather conditions. However, there are some standard exceptions to builder’s risk policies including;

• Faulty or poor planning, design, workmanship or materials
• Internal or employee theft
• Contractual penalties
• Mechanical breakdowns
• War and terrorism

What are The Requirements for Builder’s Risk Insurance?

Project owners, contractors, and lenders can all take out builders risk insurance. For you to take on this policy you must have insurable risk and interest on the property. To fulfill the insurable risk requirement the building must be under construction or renovation. To have insurable interest you must either own the property or have a financial connection to it. 

Who Should Purchase Builder’s Risk Insurance?

Builder’s risk insurance is critical if you’re financially involved in a construction or renovation project. Some lenders may require that you get this insurance or it may be a requirement of your local and state building codes. 

For most projects, it’s the general contractor or custom builder that purchases the policy since they have a better understanding of the risks associated with the project. However, it’s not unusual for the property owner to obtain the policy.

How Much Does Builder’s Risk Insurance Cost?

Just like all insurance policies, this depends on the scope of the coverage being purchased and if the policyholder opts for high deductible options or endorsements. These policies typically range from 1-4% of the total cost of construction. The construction budget is the best way of determining the right coverage limit which should precisely reflect the total finished value of the construction excluding the value of the land.

From theft to windstorms and fire, there are numerous risks associated with construction and renovation projects. Builder’s risk insurance covers a variety of scenarios that may cause extensive and costly damage to the building, equipment, materials, and other supplies. Depending on the specific policy and common extensions purchased, the builder’s risk insurance sometimes covers other costs such as expenses that may arise from delays in completion. It’s an essential coverage for any construction project.