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What is Builder’s Risk Insurance?
Builder’s Risk Insurance is a specific type of property insurance that protects a building while it is under construction or being renovated. Besides insuring the building itself, builder’s risk can also include protection for construction materials at the site or in transit, labor costs, and temporary structures such as fencing and scaffolding. Builder’s Risk Insurance is also known as Course of Construction Insurance.
Why do contractors need Builder’s Risk Insurance?
Builder’s Risk Insurance is especially important for general contractors who are doing new building construction or renovations. Builder’s Risk Insurance plays a key role in managing the risk of a construction project and ensuring that it’s completed on time. Since a standard property insurance policy will not cover the structure, materials, equipment, and supplies for a construction project that’s in progress, Builder’s Risk Insurance meets the needs of contractors during the construction phase of a project. Unfortunately, many contractors fail to purchase Builder’s Risk Insurance before starting a project and both contractors and owners are then caught off guard when the property under construction is damaged during the course of construction.
General contractors often purchase the building materials for construction and then recoup the costs after the building project is completed, which leaves them financially exposed if something should go wrong during the course of construction. General contractors will also have invested a significant amount of money into equipment and supplies, such as power tools and ladders, which will be used for multiple construction projects.
If you are a general contractor working on the construction or remodeling of a structure, threats such as natural disasters, fires, theft, and vandalism during the course of construction could cause devastating losses to the structure and your company’s materials, equipment, and supplies. Struggling to recover financially from these types of losses and being unable to immediately replace the damaged structure and materials could lead to more costly delays that hinder the completion of the project.
Who should purchase Builder’s Risk Insurance?
For those who are financially involved in a new construction or renovation project, Builder’s Risk Insurance is an important coverage to have. Purchasing Builder’s Risk Insurance may even be required if the project is financed by a lender or to comply with local and state building codes.
Typically, general contractors or the custom builder are the ones to purchase the coverage policy as general contractors often have a better understanding of the risks associated with the building project. However, it is also not unusual for the property owner to purchase the policy. It may be more beneficial for the property owner to own the policy, as any claim being paid out would go directly to the property owner to then be distributed to the general contractor or builder.
What is the coverage term for Builder’s Risk Insurance?
The coverage term begins when construction starts and typically terminates when the project is complete and turned over to the owner. Builder’s Risk coverage can be renewed, although it is usually only for one additional term.
What physical properties does Builder’s Risk Insurance cover?
Builder’s Risk Insurance covers damage to buildings, structures, materials, equipment, and supplies while under construction. While some Builder’s Risk Insurance policies state that coverage applies to properties of every kind, it’s important to note that other policies will specify the type of “structures” included in the coverage.
These types of properties are often covered by Builder’s Risk Insurance or may be covered by paying an additional premium:
- Building or structure under construction
- Fixtures and machinery
- Building materials and supplies onsite
- Temporary structures
- Property in transit
- Property stored offsite
- Office trailers
- Underground pipes
What perils does Builder’s Risk Insurance cover?
Most Builder’s Risk policies offer “all risk” coverage for physical damage to any of the covered properties. Other policies provide coverage for specific named perils, ranging from severe weather events to break-ins. The most commonly covered perils include:
Disasters including Fire/Explosion, Windstorm, Hail, and Lightning
- Example: Your general contracting business is building a single-family home. The foundation has been poured, and construction is 40% complete when a severe windstorm passes through the area and destroys the partially-built house. Your Builder’s Risk Insurance would compensate you for the cost of the materials used so far and the labor costs you’ve expended in completing 40% of the house.
Theft and Vandalism
- Example: Your general contracting business is building a parking structure in a high-crime area downtown. Three months into the construction of the parking lot, thieves make their way into the half-built structure and steal all of the construction equipment from the site. Your Builder’s Risk Insurance reimburses you thousands of dollars for the cost of the equipment.
- Example: Your general contracting business is building a hospital when a small personal plane with an engine malfunction crashes into the structure and causes extensive damage. Your Builder’s Risk Insurance compensates your contracting company for the cost of labor and materials to reconstruct the damaged area.
What doesn’t Builder’s Risk Insurance cover?
One of the key exclusions for Builder’s Risk Insurance is any damages that result from faulty design, workmanship, or materials. Defective design, workmanship, and materials play a role in many high-dollar construction losses. While there might be some coverage depending on the language of the policy, Builder’s Risk Insurance generally specifies an exclusion for these causes of loss.
For example, if your contracting firm is constructing a new house, and it burns down from a wildfire, your business would be covered. On the other hand, if a steel beam collapses because your worker failed to install a bolt in the correct place, your business generally would not be covered by a Builder’s Risk Insurance policy.
Builder’s risk insurance also commonly excludes the following:
- Wear and tear
- Mechanical breakdown
- Dishonest acts of the insured
- Terrorism and acts of war
- Settling, cracking, and expansion
- Release of pollutants
- Law or ordinance that increases the cost of construction
- Loss covered under guarantee, warranty, or obligation of manufacturer or supplier
What are the common coverage extensions for Builder’s Risk Insurance?
Contractors will often purchase coverage extensions to protect against losses due to some of the above exclusions as well as other scenarios. Common extensions for Builder’s Risk Insurance cover:
Delay in Completion
- Income losses due to a delay in completion of the project because of damage to covered properties. For example, if the construction of a new building is projected to generate the company an additional 25% in revenue, then a one-year delay in the opening of the new building would result in losing 25% of expected income.
“Soft costs” including:
- Additional construction loan interest
- Real estate taxes
- Marketing and re-leasing expenses
- Administrative expenses
- Architectural/engineering fees
- Inspection fees
- Cost to extend permits and licenses
Other common extensions:
- Faulty design, workmanship, and materials
- Cost of removing debris from damage to covered properties
- Water damage that’s not from a flood or storm
- Increased cost of construction due to newly enforced ordinances or laws
- Fire department service charge
- Valuable papers and records
How much does Builder’s Risk Insurance cost?
The cost of Builder’s Risk Insurance depends greatly on the coverage types, exclusions, and overall cost of the construction project. Typically, Builder’s Risk Insurance premiums fall between one and four percent of total construction costs.
What are the limits of Builder’s Risk Insurance?
Builder’s Risk Insurance typically covers the full contract price of the completed project. If you are the general contractor and the project owner will be paying your company a total of $1 million to complete the structure, you should purchase Builder’s Risk Insurance with a policy limit of $1 million in case there’s a total loss. Some Builder’s Risk Insurance policies also have sublimits for specific causes of loss that are higher risk or tend to generate higher-dollar claims. These include property in transit, temporary structures, debris removal, and earthquakes.
From damaging windstorms to theft and vandalism, there are numerous risks that general contractors must take into consideration as they are working on a construction or remodeling project. With new revenues often dependent on the construction of the new structure, how can contractors ensure that their construction projects are successfully completed within their project timeframe?
Builder’s Risk Insurance will cover a variety of scenarios that could cause costly damage to the building or structure under construction as well as the materials, equipment, and supplies contractors use. Depending on the individual policy and common extensions purchased, many Builder’s Risk policies will also cover other costs, such as the expenses associated with delays in completion. Although many contractors will fail to purchase Builder’s Risk Insurance, it is a critical coverage to carry for any construction project.