Do You Need Builder's Risk Insurance?

Business.com / Insurance / Last Modified: May 16, 2017

One of the first rules you learn as a construction business owner is to buy insurance.

One of the first rules you learn as a construction business owner is to buy insurance. If you're a new contractor, you may be looking into the various types of insurance policies you absolutely need. Even those who know nothing of the construction industry correctly assume you need liability and workers' compensation insurance. Builder's risk insurance is a special type of insurance that is temporary but necessary. 

Often, an owner buys builder's risk insurance, just in case. Generally, though, a contractor is the one who buys it to protect the materials from various incidents, such as fire, theft, wind damage or other forces of nature. The point of a builder's risk insurance policy is to protect the two main parties here: the contractor and the owner. The policy can also include protection for subcontractors.

You may have seen this type of insurance referred to as course of construction insurance because it's a policy that's terminated as soon as construction finishes. It is only meant to protect the insured parties throughout the duration of construction because construction sites are a hive of potential accidents.

What does builder's risk insurance cover?

Every policy is different, depending on which insurance company you choose. The basic coverage is usually the same across the board, and it includes:

  • Property damage
  • Disasters*
  • Theft

If you're an owner, it's going to be difficult to find a basic policy that protects you from flawed materials or workmanship. You might be able to find an insurance company that allows you to add this protection to the policy, however.

Labor costs aren't usually factored in to a builder's risk insurance policy, neither are lost profits due to whatever disaster occurred. However, you may be able to add these on to your policy, which could be a lifesaver as a general contractor.

What isn't covered under a builder's risk policy?

You already know that you need liability and workers' compensation insurance – and for good reason. A temporary builder's risk insurance policy doesn't offer any protection when there's an accident or injury on the build site. These are separate polices, as are flood and earthquake insurance.

A policy is likely going to be strict as to what a disaster is, so check your policy carefully regarding damaging winds, fires and hurricanes. You need to buy the proper amount of insurance to protect your project, and you don't want to assume everything is covered if it isn't.

How much does it cost?

Many new contractors want to know how much the insurance costs. Those who have had to deal with just-installed windows from the third floor to the tenth being blown out and shattered because of a wind storm are likely to answer: less than it costs to buy materials twice. Basically, you cannot afford to not have it.

According to several insurance companies, the cost of builder's risk insurance costs about one to three percent of your total project. This may vary based on any add-ons, though, so you'll have to call your insurance agent for a custom quote.

Builder's risk insurance is a necessity for every new project. Although it may be an expensive policy, it can protect you, your workers, any subcontractors and the project owner. If you're still unsure about it, consider this: Only six fires on construction sites in 2014 added up to more than $176 million in damages.

* Most insurance companies offer protection against some natural disasters but not all. You'll likely be covered in the event of damage due to lightning, fires, blizzards, hail storms and possibly hurricanes. Floods are not typically covered, or could be separate insurance, and the same goes for earthquakes. Check with the insurance company for conditions and restrictions to the policy. 

Image from buttett/Shutterstock

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