Builders Risk Insurance: Not Just for Builders

What is builder’s risk insurance?

Builder’s risk insurance is a type of business insurance that covers properties at risk for loss and damages during new construction, remodeling or installation. Incurring losses while building can delay projects and cause massive budget overruns. Builder’s risk insurance helps mitigate those risks.

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

Who needs builder’s risk insurance?

Anyone with a financial stake in a property under construction needs builder’s risk insurance. The following parties should acquire a builder’s risk policy:

• Property owners who are building new structures or renovating existing ones.
• General contractors overseeing construction projects.
• Subcontractors with significant material or equipment investments.
• Developers managing multiple construction projects.
• Lenders financing construction projects.
• Investors with financial interests in construction developments.

Lenders and project contracts may require builder’s risk insurance before work begins. Some local building codes also mandate this coverage for certain types of construction projects, particularly for commercial developments and multi-unit residential buildings.

What does builder’s risk insurance cover?

Standard builder’s risk insurance policies cover property damage to buildings and other structures while under construction, whether during initial building or amid a renovation. These policies also cover any equipment and supplies already onsite, on their way to the construction site or at other locations.

Builder’s risk insurance also helps with expenses that aren’t explicitly construction-related but can occur from property damage. For example, a builder’s risk policy can cover the following:

• Temporary storage costs for materials that need to be moved
• Additional interest on construction loans due to project delays
• Professional fees for architects and engineers to redesign damaged work
• Permit and inspection fees that must be renewed due to delays
• Security costs to protect the job site after a loss

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.

Common policy extensions

Every construction project is distinct, so builder’s risk policies are tailored toward individual projects. Many insurers will customize a builder’s risk policy with coverage extensions to fit your project’s needs, including coverage for the following:

• Soft costs: Additional expenses resulting from construction delays.
• Debris removal: Cleanup costs after a covered loss.
• Expediting expenses: Rush delivery of materials or overtime labor.
• Professional fees: Architect and engineer costs to redesign damaged work.
• Testing and inspection: Costs to re-inspect rebuilt portions.
• Green building certification: Fees to recertify sustainable building features.
• Ordinance and law coverage: Additional costs to comply with updated building codes.

What builder’s risk insurance doesn’t cover

Exclusions vary by policy but can include the following:

• Design errors or defective workmanship
• Mechanical breakdown
• Acts of war or terrorism 
• Nuclear hazards and radioactive contamination
• Gradual deterioration or normal wear and tear
• Earthquakes
• Flood damage
• Theft of materials

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

1. Standard exclusions: Common to most property insurance policies.
2. Limited exclusions: May be covered with endorsements or higher premiums.
3. Broad exclusions: Difficult or impossible to cover.

Builder’s risk insurance costs and premiums

When it comes to business insurance costs, numerous factors play a role. Contact an insurance agent or broker to receive a builder’s insurance policy quote that considers all your needs.

Builder’s risk insurance typically costs between 1% to 5% of the total construction project value, according to Stanton Insurance. That means:

• A $500,000 residential project might cost $5,000 to $20,000 for annual coverage
• A $2 million commercial project could range from $20,000 to $80,000 annually
• Large-scale projects over $50 million may achieve more competitive rates due to economies of scale

Builder’s risk policy costs — including coverage amounts, limits and policy endorsements — vary by project and other factors, including the following:

• Construction type and materials – Fire-resistant materials typically receive better rates
• Project location and exposure to natural disasters – Coastal or seismic zones carry higher premiums
• Project duration – Longer projects face more exposure periods
• Security measures – Job sites with security systems may qualify for discounts
• Contractor experience and claims history – Established contractors often receive better rates
• Coverage limits and deductibles – Higher deductibles can reduce premiums

Decision-Making Framework for Builder’s Risk Insurance

Use this checklist to determine if you need builder’s risk coverage:

Project Value Assessment

• Is the total project value over $50,000?
• Would a total loss significantly impact your financial position?

 Stakeholder Requirements

• Does your lender require builder’s risk insurance?
• Do contracts mandate coverage for all parties?
• Are you contractually obligated to provide coverage?

Risk Exposure Evaluation

• Is the project in an area prone to natural disasters?
• Will valuable materials be stored on-site for extended periods?
• Is the construction timeline longer than six months?

Regulatory Considerations

• Do local building codes require coverage?
• Are there municipal requirements for bonding and insurance?
• Will you need ordinance and law coverage for code upgrades?

If you answered “yes” to multiple questions above, builder’s risk insurance is strongly recommended.

What to do when a loss occurs

If you experience a loss during construction, follow these critical steps:

Immediate Actions (Within 24 to 48 Hours):

1. Ensure safety: Secure the job site and protect against further damage.
2. Document the scene: Take photographs and videos before cleanup.
3. Notify your insurer: Most policies require notification within 24 to 72 hours.
4. Contact authorities: File police reports for theft or vandalism.
5. Preserve evidence: Don’t dispose of damaged materials until insurer approval.

Ongoing Claims Process:

• Cooperate with adjusters and provide requested documentation.
• Maintain detailed records of all additional expenses incurred.
• Continue protective measures to prevent further damage.
• Track project delays and associated soft costs.
• Coordinate with contractors on temporary repairs and cleanup.

Most builder’s risk policies require prompt notification of losses, typically within 24 to 72 hours. Failure to provide timely notice can jeopardize coverage.

The information in this article is for educational purposes only and does not constitute professional insurance advice. Insurance requirements, costs and coverage options vary by location, project type and individual circumstances. Always consult with licensed insurance professionals and review actual policy documents before making coverage decisions.