Builders Risk Insurance: The Ultimate Guide
If you’re starting on a major construction or renovation project, you have a lot to think about: Designing your project and making the plans. Purchasing materials. Verifying your contractors. But one thing you definitely don’t want to forget about is builders risk insurance.
What is a builders risk insurance policy?
A builders risk insurance policy is a type of insurance that provides coverage for buildings and structures during the course of construction or renovation.
Unlike traditional commercial property insurance, the builders risk policy covers more than just an existing structure. It covers a project from the first shovel in the ground to the completion of the building.
During a construction project, your business will be exposed to certain risks that are unique to buildings under construction. These include the potential for theft and your building being more vulnerable to wind damage. A builders risk policy helps protect you from these exposures.
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What does builders risk insurance cover?
Builders risk insurance is designed to be flexible so it accommodates your unique construction risks. While each insurance company will have unique coverages with their own policy wording, builders risk insurance coverages generally include the following.
Buildings Or Structures Under Construction
A building under construction is more vulnerable to weather-related events, vandalism, and even accidents. During construction, certain parts of the building that would not usually be exposed to damage are at risk, and will be until the project is completed.
Materials And Supplies
Exposure risk is largely unique to construction sites. This is because you’ve purchased materials that are not yet a permanent part of the building. They are often left in temporary structures, in a trailer, in storage somewhere, or even out in the open – all of which can leave them exposed to theft and the elements.
Property In Transit
Auto accidents are a normal risk that general contractors take on every day. But they can be very costly if they occur while you’re transporting building material or equipment to or from the job site, because that equipment might be far more expensive than the vehicle carrying it.
Debris Removal
When people think of building construction risks, they primarily think of the property value of the newly constructed portions or the existing structures. Many don't consider the cleanup costs involved if the building were damaged from a fire or windstorm. The debris removal from a catastrophic event that damages your project can cost you anywhere from $10,000 to over $100,000.
Soft Costs
There are a lot of "soft costs" associated with a building project that’s delayed due to construction damage. Additional interest on financing, real estate taxes, architectural fees, and permit fees all add up over time and push your project over budget.
Business Income And/Or Rental Value
Your project has a timeline and is part of a business plan designed to help recoup the cost of construction. What if your construction project is damaged and massively delayed as a result? The opening of your store, warehouse, or rental property won’t happen as scheduled. Even a year’s delay can lead to a serious loss in income.
Does a builders risk policy cover liability?
No, your builders risk policy won’t cover liability. Builders risk is meant to cover your investment in buildings, building materials, and other property-based assets.
In addition to builders risk, we suggest that you purchase a liability policy (or see if your current general liability insurance policy will cover the liability from the new construction project). If you’re a general contractor, your insurance policy should automatically cover the new project unless you have a designated premises limitation.
What projects require builders risk insurance?
Most construction projects require a builders risk policy. Any time there’s a financial stake in a structure, there’s a risk of losing money – and that’s where this type of insurance comes in.
New Construction And Additions
When you’re building a new structure, like an office building, hotel, apartments, or warehouse, there are risks involved. Materials can be stolen from the construction site. Wind can blow down an unfinished structure. A fire can start. You’ve also likely invested a lot of money into labor and materials, and if your structure isn’t completed, you could lose it all.
An addition you’re putting on an existing building is also usually considered a new structure in terms of insurance, so a builders risk policy is almost always recommended for additions, too.
Major Remodeling Projects
Major remodeling projects also have a lot of money involved and aren’t always covered by your current insurance. Whether you’re converting a building into apartments, rehabbing an old building to bring it up to code, or overhauling your offices into an open layout, you’ll want builders risk insurance to cover your investment.
Projects With Lender Financing
If you get a construction loan from a bank or the bank is involved in your project, they’ll want to cover their investment just as you would. There’s a strong chance they’ll require you to purchase a builders risk policy to cover their interest in the project.
Who buys builders risk insurance?
There are two parties that purchase builders risk insurance: The project owner and the general contractor. The party responsible for purchasing the policy is typically determined in the building construction contract.
Project Owners
The project owner has the most interest in the project and often has the most to lose if the structure is damaged or destroyed. If a catastrophe happened, their investment could be completely wiped out. This significant interest means they should always make sure they have a builders risk insurance policy.
General Contractors
The general contractor also has a significant interest in the project, and they’re often responsible for purchasing most of the insurance the project needs, including the builders risk policy. Contractors might also want to purchase installation floater insurance, sometimes called “installation builders risk insurance,” which covers their tools, materials, and equipment specifically.
The Four Sections Of A Builders Risk Policy
Because each construction project is completely unique, almost everything in a builders risk policy is customizable. You can even negotiate custom builders risk insurance coverages if you’re willing to pay the additional premium, which is why it’s important to know what you can, should, and should not ask for.
Here we’ll review the four sections of your policy or quote and identify how a policy might respond to a given situation.
- Property Covered
- Property Not Covered
- Perils Covered
- Perils Not Covered
Remember that while these are the most common coverages you will find on a builders risk policy, there’s a caveat: Your policy might not be the same.
"Property Covered" Under Builders Risk
The big coverage listed in the section above is the coverage of “Buildings or Structures.” If you keep reading, you’ll see how the policy defines it:
Continuing down the list of covered property:
Think about the project you’re working on and a potential claim you might have. Try to place what you want to cover in the definitions above. It’s important to note that if you can’t fit what you need covered into the definitions, that doesn’t mean it isn’t covered. It may just need to be addressed in another section that adds additional coverages.
"Property Not Covered" Under Builders Risk
A builders risk policy isn’t designed to cover everything, and it should be clear about what will be left out. Many builders risk policies list excluded property in this section, and you’re given back a small sublimit later on in the policy. A good example of this is “Trees, Shrubs, or Plants.” Although excluded, most policies will give back $2,500 or so in coverage if requested.
Here are the common exclusions:
"Perils Covered" Under Builders Risk
A peril is an event that could cause damage to your project such as a tornado, hailstorm, fire, vandalism, and so on.
Most builders risk policies read like this:
As you can see, this coverage is pretty broad. This is the typical coverage found on most property policies. On a standard property policy, it’s called “Special Causes of Loss,” but many call it an “All-Risk” policy.
This policy covers all direct physical loss or damage to the covered property unless excluded.
Most builders risk policies will have this wording (with some exceptions like coastal construction) and we recommend never taking anything different unless you are forced to.
“All-Risk” coverage will give you the broadest terms and protection available.
"Perils Not Covered" Under Builders Risk
While the “Perils Covered” section might include any direct physical damage or loss, this is the section that limits the scope of what the policy covers.
Here’s what’s not covered:
Additionally, if you look at the "Additional Coverage Limitations," you’ll see under what conditions the policy will not provide coverage:
What Does a Builders Risk Insurance Policy Cost?
Like all insurance, your builders risk policy will be customized to your situation and the pricing is based on risk, so the cost can vary – and the more risk, the higher your premium will be. Construction type, project value, project duration, location, and coverage limits can all influence the cost of builders risk insurance. For example, a renovation project that doesn’t involve structural changes will have less risk than building a ten-story office building from the ground up. Overall, you can expect to pay slightly more than you would for a typical property policy.
5 Tips for Buying Builders Risk Insurance
With all the exposures to risk that construction projects face, it is important to know what a builders risk policy is and how you can leverage it to protect your new investment. Here are our top tips.
1. Read the coverage extensions
While you can customize the limit on almost any builders risk insurance coverage, there are quite a few supplementary coverages thrown in that most people don’t know about. These include:
- Equipment Breakdown
- Property in Transit
- Trees, Shrubs, Lawns, Sod, and Plants
- Fungi, Wet or Dry Rot, or Microbes
2. Look into adding “testing coverage”
In almost every builders risk policy, damage arising from "testing" is an excluded cause of loss. Depending on the scope of your project, this could be a very bad exclusion to have on the policy.
Let’s say you had all-new plumbing installed during the completion of your building. Before the plumbing company left, they ran some water through the pipes to test out their work. Those tests resulted in water damage to the unfinished building, which would not be covered under a normal builders risk policy.
Things like this happen quite often. This is why we suggest purchasing the "Testing Endorsement" (often the IM 7962 01 12 form), which adds "Direct Physical Loss Resulting From Testing" to the covered causes of loss.
Here’s an example of this endorsement:
3. Beware of the 100% coinsurance clause
In a previous insight – "Agreed Amount Endorsement - What Is It?"– we went over the mechanics of how the coinsurance penalty works and how massive this penalty can get if you misreport the value of your construction project to the insurance company.
With the 100% coinsurance clause (which most builders risk policies have), there is no room to underrepresent your building evaluation; if you do, the amount you are underinsured turns into the portion of the claim that becomes unpaid.
Our suggestion is to be conservative and always build in a little room in the event of a large loss. The minor premium difference could save you quite a bit come claim time.
4. Understand when your coverage ends
One of the most confusing aspects of a builders risk insurance program is determining when to transfer coverage to a traditional property insurance policy. If you don’t do it at the right time, you could be paying for coverage and think you’re covered, but in reality you don’t have the coverage you need.
You can find this information in the “Additional Coverage Limitations” policy section we referenced earlier. To summarize, your builders risk policy ends when any one of the following conditions are met:
- If the property is occupied or put to its intended use
- If the policy cancels or expires
- A covered building or structure is accepted by the purchaser
- Insurable interest in the covered property ceases
- Construction is abandoned with no intent to complete it
- A covered building or structure has been completed for more than 90 days
5. Builders risk is not standardized, so read the policy
Ultimately, you need to understand what’s covered in your builders risk policy. Unlike many forms of insurance, builders risk isn't very standardized; each insurance company handles it in a different way.
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What To Ask Your Broker Before Purchasing Builders Risk
While it’s tempting to buy insurance online with just a few clicks, it’s always smart to talk to a broker, especially because builders risk insurance is so specialized. Here’s what to ask.
Is testing covered?
If you’re installing any machinery, equipment, electric, or plumbing, ask your broker whether the testing endorsement is included on your builders risk insurance policy. This will cover your testing, start-up, commissioning, examination, or trial risks associated with the newly constructed building.
Are floods and earthquakes covered?
Earthquakes and floods are two perils that are not covered automatically on any standard builders risk form. However, earthquake and flood insurance can often be added as an additional coverage if you ask.
It’s important to know if your construction project is susceptible to either risk and whether your insurance policy covers them. We suggest running your building location through a catastrophe model to determine if your project is at risk, and if so, how high that risk might be. Let us know if you need help with running this report!
Are all interested parties listed as insureds?
All parties with an insurable interest in the property should be covered under the builders risk policy. Most commonly this is the project owner, the general contractor, and the bank. That being said, it could also include subcontractors and material suppliers.
If the project is a remodel, is the existing structure covered?
Frequently, builders risk is set up to cover the cost of the project. This is fine if the project is a brand-new build, but if you’re renovating an existing structure, make sure the builders risk insurance covers the existing structures as well as the newly renovated portions of the project. The claim will not go well if the insurance company is obligated to replace the renovation but not the building the renovation is happening to.
Is equipment breakdown coverage included?
Many insurance companies are starting to include equipment breakdown in their builders risk policies. This will cover the mechanical or electrical failure of your permanently installed equipment or machinery.
While it may not be a requirement for you, it’s a claim we often see filed on construction projects. If you have expensive equipment or machinery in your building, this coverage is a great benefit.
How are liability risks covered?
If you’re the project owner, have the conversation with your broker to determine how the premises liability will be covered during the course of the project.
You can either look at including this risk in your existing general liability insurance policy or, if your general liability carrier doesn’t want to cover the project, you can take out a specific premises liability insurance policy. Either way, make sure to have this discussion and make a plan before the project starts.
The Bottom Line
Builders risk insurance protects your investment during the course of a construction project. Although this policy is very broad, there are some important things you need to know before purchasing. Additionally, there are some endorsements that we always suggest adding to fill in coverage gaps. If you’re about to start a construction project and have questions about your options, we can help. Get a quote today to get started.
About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.