Builder’s 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 alleviate these worries by protecting the insured against financial losses that can arise during construction. 

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 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 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: 

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

What business insurance coverage extensions are available?

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:

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

What does builder’s risk insurance exclude? 

It’s also critical to understand what builder’s insurance doesn’t cover. For example, 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 can include the following: 

• 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?

Faulty workmanship exclusions are perhaps the most controversial — and most relied upon — builder’s risk policy exclusion because construction projects have a high probability of error. This aspect of builder’s risk exclusions is notable because, according to data from the Associated General Contractors of America, 85 percent of contractors report having open positions for qualified craft workers. Because finding qualified craft workers is so challenging, expect this risk trend to continue. 

Generally, builder’s risk policies exclude costs incurred by repairing a subcontractor’s faulty work. However, policies can have an ensuing loss provision that may cover damage resulting from 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 ensure 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 that already handles your business owner’s insurance policy, general liability insurance or professional liability insurance, you’ll need to work with your representative to ensure no coverage gaps exist.

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

Based on the above exclusions, it’s imperative to look for the following inclusions or endorsements: 

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

You should also consider the following administrative areas: 

1. Coverage start date: Most insurance contracts start on the date the policy is signed, but restrictions may apply. Before starting any building project, you must have coverage, so ensure you know precisely when coverage starts. 
2. Coverage end date: Builder’s risk coverage usually ends after the project’s completion. However, other end-date conditions can include cancellation, when the building becomes occupied or when it resumes its intended use. Be sure to note the specifics detailed in your policy. 

Before purchasing coverage, consider all your exposures in various construction phases. For example, consider your insurance risk exposure at the construction site, in transit and at a temporary storage site.

You may have the option to get broad protection for property of all kinds at all locations or opt to narrow your coverage to specific property and risks. 

How are premiums determined?  

When it comes to business insurance costs, including builder’s risk insurance, 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 policy costs — including coverage amounts, limits and policy endorsements — vary by project and other factors, including the following; 

• Construction materials
• Type of project
• Size of project

A good rule of thumb is to choose coverage limits equal to anticipated construction costs. If your construction project is expensive, it may result in higher premiums. 

When obtaining this type of insurance, it’s crucial to read and understand your entire builder’s risk policy, including its coverage, conditions and exclusions. Compare all policy elements to your risk management plan and speak with an insurance representative to address areas of concern.