Builder’s Risk Insurance: Not Just for Builders

What is builder’s risk insurance? 

Builder’s risk insurance covers properties at risk for loss and damages during new construction, remodeling or installation. Incurring losses while building would likely delay the project and hurt the budget. In other words, builder’s risk insurance protects the insured against financial losses that arise during construction. 

Builder’s risk insurance is broader than standard commercial property insurance, covering a variety of job site exposures, building materials, and fixtures that would need to be replaced or installed if they were damaged. 

Who needs builder’s risk insurance? 

Anyone with a financial stake in a property under construction needs builder’s risk insurance.

Insurance company The Hartford recommends these parties acquire a builder’s risk policy:

• Property owner
• General contractor
• Subcontractor
• Lender
• Architect

What does builder’s risk insurance cover? 

Standard builder’s risk insurance policies cover property damage to buildings and other types of structures while they’re under construction – during installation or amid a renovation. It also covers any equipment and supplies already onsite, on their way to the construction site or at other site locations. 

Builder’s risk insurance also helps with expenses that aren’t explicitly construction-related, but occur from property damage. Here are some costs a builder’s risk policy can cover, according to The Hartford’s website: 

• Lost sales
• Rental income
• Additional interest on loans
• Real estate taxes
• Costs associated with a delay in construction startup

The costs associated with a delay include expenditures, lost business income and a delay in receiving tenants’ rent. A builder’s risk policy would typically cover the net profit or loss – before taxes – that would have been earned or incurred from rental income, and additional expenses incurred. 

The Hartford points out that every construction project is distinct, so builder’s risk policies will be tailored toward your project. Many insurers will customize a builder’s risk policy with coverage extensions to fit your project’s needs. The Hartford notes the following as common extensions:

• Scaffolding
• Construction forms
• Temporary structures
• Debris removal and disposal in the event of a loss
• Pollutant cleanup

Additional builder’s risk policy coverage options

Builder’s risk insurance policies can vary beyond standard coverage with common extensions. Some insurers include these add-ons: 

• Legal and accounting fees
• Interest on money borrowed
• Extra construction costs
• Realty taxes and other assessments on the construction site
• Architect, engineering and consultant fees
• Insurance premiums
• Title fees
• Additional refinancing charges
• Extra bond interest
• Added debt service payment
• Additional construction loan fees 

Be sure to compare policies from various insurers and speak with an insurance agent to obtain the coverage that best suits your needs. 

What does builder’s insurance exclude? 

It’s essential to be aware of what builder’s insurance doesn’t cover. These policies generally don’t cover areas known to be vulnerable to earthquakes, floods or wind. However, you may be able to add extensions to your policy to help insure projects that face perils related to these zones. 

Exclusions vary by policy, but these are some primary builder’s risk insurance coverage exclusions: 

• Defective workmanship and materials
• Inherent vice, wear and tear
• Settling, cracking, shrinking or expanding 
• Flood and earth movement 
• Pollution
• Acts of terrorism and war
• Employee theft
• Rust and corrosion
• Mechanical breakdowns
• Damage due to faulty design
• Planning
• Engineers

What are complete, limited and broad exclusions?

Generally, builder’s risk insurance exclusions fall into these three categories: 

1. Complete: The loss is entirely excluded from coverage.
2. Limited: The loss is excluded from coverage, but certain specified causes of loss resulting from the initial damage or loss are covered.
3. Broad: The loss is excluded, but losses resulting from the initial loss are covered.

For example, a builder’s insurance policy wouldn’t cover a fire, but building losses from a fire triggered by an earthquake can fall into the limited or broad categories. Be sure to check your policy specifics and the extent of its exclusions.

What are faulty workmanship exclusions?

Real estate attorneys say faulty workmanship exclusions are perhaps the most controversial – and most relied upon – builder’s risk policy exclusion, especially since a construction project has a high probability of error. This aspect of builder’s risk exclusions is notable because, according to a national survey from the Associated General Contractors of America, 80% of contractors report difficulty finding qualified craft workers to hire. Because it’s so difficult to find qualified craft workers, expect this risk trend to continue. 

Generally, builder’s risk policies exclude costs incurred by repairing a subcontractor’s faulty work, according to The Hartford. However, the insurer notes that “policies with an ensuing loss provision may cover the resulting damage to other property caused by the faulty work.” 

Legal experts say that under an ensuing loss provision, damage that occurs before and due to faulty workmanship may be covered. However, you need collateral or subsequent damage to trigger coverage with some builder’s risk insurance policies. Others require that a separate peril cause the damage. 

Faulty workmanship exclusions are known to be controversial, so make sure you’re aware of your policy’s specifics. 

What should you look for in a builder’s risk insurance policy?

Whether you’re working with a new insurer or dealing with a company with which you already have a business owners insurance policy, general liability coverage, or professional liability coverage, you’ll need to work with your representative to ensure there are no coverage gaps.

Like standard insurance policies, a builder’s risk insurance policy consists of the insuring agreement, exclusions, extensions, conditions and endorsements. 

Based on the above exclusions, it’s imperative that you look for these inclusions or endorsements: 

• Water-related damage 
• All stakeholders as insureds
• Defective work or materials 
• Earthquake and flood (if possible) 

You should also take these administrative areas into consideration: 

1. Coverage start date. Most insurance contracts start on the date the policy is signed, but The Hartford states that “certain policy provisions may restrict when coverage begins for your project.” This is important, especially since you won’t want to start the project without coverage.
2. Coverage end date. Builder’s risk coverage usually ends after the project’s completion. However, other end-date conditions can include cancellation, or when the building becomes occupied or resumes its intended use. Be sure to note the specifics detailed in your policy. 

The Hartford recommends considering all your exposures in various construction phases before purchasing coverage. For instance, consider your risk exposure at the construction site, in transit and at a temporary storage site. 

The insurer notes that you may have the option to get broad protection for property of all kinds at all locations, or narrow your coverage to specific property and risks. 

How are premiums determined?  

Contact an insurance agent or broker to receive a builder’s insurance policy quote that takes all your needs into account. Builder’s risk policy costs vary by project, including the coverage amounts, limits and policy endorsements. Here are some other factors insurers consider when they list their fees:  

• Construction materials
• Type of project
• Size of project

According to The Hartford, a good rule of thumb is to choose coverage limits equal to anticipated construction costs. If your construction project has a high cost, it may result in higher premiums. 

When considering this type of insurance, you need to read and understand the entire builder’s risk policy: all included coverage, conditions and exclusions. Compare this to your risk management plan, and speak with an insurance representative to address areas of concern.