What Is Builder’s Risk Insurance?
Builder’s risk insurance, also called course of construction insurance, covers the policyholder against damage or loss to buildings during construction or renovation. Typically, coverage also extends to the materials used in construction. Anyone with a financial interest in property should purchase builder’s risk coverage.
Constructing a new residential or commercial building, or renovating an existing property, can cost thousands, even millions, of dollars. But real estate is also easily prone to damage, whether from weather, vandalism, fire, or other means. You can protect your investment by buying small business insurance, in particular builder’s risk insurance.
Not many small business owners are aware of builder’s risk insurance. There are no standard insurance forms for this coverage, and there are many ways to customize the coverage according to your business’s specific needs. In this guide, we’ll explain who needs builder’s risk insurance, typical coverage and exclusions, pricing, and where to buy it.
Who Needs Builder’s Risk Insurance?
Builder’s risk insurance is important coverage for anyone with a financial interest in a property that’s being built or renovated. This includes the building owner, architects or engineers involved with the project, and the contractor or subcontractor. Construction projects involve many intricate details. If the foundation, underground pipes, or scaffolding are damaged, they can be very costly to replace without appropriate coverage.
Local governments often require proof of builder’s risk insurance before they’ll grant you a building permit. According to Katie Tu, an insurance expert with QuoteWizard, “This coverage is often required by the city, county, or state government in order to show compliance with building codes. If you need it depends on the purchase contract between you and the contractor. Sometimes, the contractor will purchase builder’s risk insurance. If not, then you may need to provide it.” When multiple parties go in on a construction project together, usually one party purchases the builder’s risk coverage, but all are named on the policy as insureds.
It’s not just brand-new buildings that builder’s risk insurance is suitable for. This coverage is also available for renovating existing buildings and for upgrading existing structures to green, sustainable standards. Depending on the policy, you can also use the coverage to bring your building up to date with changes in building codes.
Builder’s risk insurance is actually a specialized type of commercial property insurance and inland marine insurance that’s designed to protect buildings under construction and construction materials. You can purchase builder’s risk coverage separately or add it on to an existing property insurance or inland marine policy. Builder’s risk coverage typically is temporary and expires when your construction project is complete.
What Does Builder’s Risk Insurance Cover?
In general, a builder’s risk insurance policy will have a term of three months, six months, or one year, depending on the timeline of the construction project. If necessary, you might be able to extend the terms one time for up to an additional year.
Builder’s risk policies can be very complex and aren’t written on standard forms, in the way that a general liability insurance or professional liability insurance policy might be. For that reason, it helps to look at coverage from several different angles.
Covered Persons on Builder’s Risk Insurance
A builder’s risk insurance policy is typically structured with one primary insured party and several additional insured parties. Usually, a general contractor will purchase the builder’s risk policy and act as the primary insured. The building owner and subcontractors will be listed as additional insureds. However, depending on what the construction contract says, the owner might have to purchase the policy.
Some builder’s risk policies also cover materials suppliers, whereas others do not. If your materials supplier isn’t covered, it’s a good idea to purchase business interruption coverage. In that case, if, for example, a storm delays your supplier by a week in shipping your materials, you won’t have to pay for the costs of that delay out of pocket.
Covered Property on Builder’s Risk Insurance
Builder’s risk insurance policies vary significantly in terms of what property they actually cover. All policies will cover the building that’s being constructed or renovated, but from there, coverage really depends on your specific policy. Here are areas where you should confirm coverage:
- Construction materials: Materials that you store off-site or that are damaged or lost in transit to the construction site might or might not be covered.
- Documents and data: Blueprints, specifications, and other documents that are damaged or lost aren’t covered by every builder’s risk policy.
- Temporary structures: Temporary structures such as scaffolding or signs might or might not be insured under your policy.
- Soft costs: The “soft costs” of delayed construction, such as architect fees, penalties owed to the local government, and additional real estate taxes, are covered only by some builder’s risk insurance policies.
If coverage in any of these areas isn’t available by default, you can sometimes add on coverage for an additional cost.
Covered Costs on Builder’s Risk Insurance
Most builder’s risk insurance policies will cover physical damage or loss from a range of causes, including fire, storm, wind, vandalism, theft, fungus/contamination, and collision with vehicles or aircraft. You’ll also typically be reimbursed for protective measures that you have to take as a result of the damage, such as debris removal and pollutant cleanup.
The amount of money you’ll be reimbursed for claims also matters. Some insurance companies pay only for the actual cash value of damaged or lost property, and others pay for the property’s full replacement value, accounting for depreciation. The latter is better for the policyholder, but also results in more expensive premiums.
What’s Excluded by Builder’s Risk Insurance?
These are some of the common exclusions in a builder’s risk insurance policy:
- Employee theft: To cover employee theft, make sure you purchase a commercial crime policy.
- Work vehicle: Coverage of your work vehicle requires commercial auto insurance.
- Damage from earthquakes and flooding: Unlike most weather-related damage, earthquake and flood damage aren’t covered by builder’s risk insurance policies. These require separate insurance.
- Manufacturing defects or flaws in workmanship or design
- Intentional damage
- Water damage
- Ordinary wear and tear
As we mentioned earlier, there are no standard forms for builder’s risk policies. As a result, policy language on exclusions can vary dramatically. For instance, some policies won’t cover certain types of construction tools and equipment. Other policies will exclude certain soft costs. It’s important for you to check in with your insurer and ensure that you have the coverage you need.
How Much Does Builder’s Risk Insurance Cost?
The cost of builder’s risk insurance typically accounts for 1% to 4% of a business’s total construction budget. For example, if your construction budget is $100,000, and you have a three-month builder’s risk policy, you might end up paying somewhere between $300 to $1,300 per month in premiums.
The following factors can affect the cost of your builder’s risk insurance policy:
- Cost of the project
- Location of the project
- Timeline of the project
- Square footage of the construction site
- Expertise and experience of the contractors and subcontractors who will be handling the project
- Amount of coverage
- Quality of materials used in the construction
- Logistics of the project, such as where construction materials are stored
According to Leslie Kasperowicz, managing editor and home insurance expert at ExpertInsuranceReviews.com, “The cost of a builder’s risk policy is impacted by several factors, including the location of the construction, the length of time the project is expected to take (a duration of more than a year may incur additional costs), the type of construction, and whether it’s new construction or remodeling of an existing structure. Risks that are specific to the location of the build, such as proximity to water or placement in a remote area, can also have a big impact on what you pay for coverage.”
Before getting a quote for builder’s risk insurance, you should carefully evaluate your construction budget. This is the total value of the completed building (excluding land value) plus materials costs and labor costs. Depending on what your policy covers and any add-on coverages that you buy, you should also estimate the soft costs of construction delays. This can help you determine appropriate coverage limits.
Where to Buy Builder’s Risk Insurance
Builder’s risk insurance is highly specialized, so it’s best to buy coverage through insurance companies that have experience with this product. It might be helpful to shop for a policy through a broker who is familiar with the construction industry. We recommend only going through insurance companies that are A-rated or higher by AM Best, a global credit rating firm that ranks insurance companies based on their financial stability. All of the insurance companies listed below have an AM Best A-rating or higher.
Here are the top insurance companies to buy builder’s risk insurance:
We recommend The Hartford for the broadest builder’s risk insurance coverage. They have been insuring small businesses for over 30 years, and we regard them as one of the best business insurance companies. For builder’s risk insurance, The Hartford includes coverage for many things that are optional with other carriers.
Along with the property under construction or renovation, The Hartford’s builder’s risk insurance policy covers all of the following:
- Materials and equipment that are stored off-site or in-transit, provided they’ll be used in the project.
- Up to $100,000 of coverage for blueprints, schematics, and other valuable documents that are associated with the project.
- Contract penalties of up to $50,000 are covered if you owe fines or legal fees as a result of delays in the construction project.
- Expedited costs are covered up to $25,000 if you experience a loss, and need to expedite new supplies or quickly hire additional labor.
- Third-party property that is stored at the construction site is covered.
In order to get started with The Hartford, you’ll need to contact a local insurance agent. An online quote isn’t available for builder’s risk insurance.
Insureon is a business insurance marketplace that can help you find affordable, comprehensive builder’s risk coverage. With a single application on Insureon, you can compare quotes from multiple insurance companies, saving you the time of shopping around.
This could be a better option than The Hartford for a business owner or contractor who wants more a la carte, customized coverage rather than having all options in one package. When you apply for a quote on Insureon, they will also suggest other types of coverage, such as commercial auto insurance or worker’s compensation insurance, that you might want alongside the builder’s risk policy. Get a free quote to get started.
Ordinarily, people associate State Farm with car insurance and homeowners insurance, but they also provide builder’s risk insurance. Their product is targeted primarily to homeowners and house flippers who are undertaking extensive renovations. If you already have homeowners insurance through them, State Farm even offers a discount to add on builder’s risk coverage.
For an additional charge, you can also purchase general liability insurance, equipment breakdown insurance, ordinance and law coverage, and identity theft coverage from State Farm. Ordinance and law coverage is helpful if physical damage or loss to property puts you out of compliance with city codes. Identity theft coverage is helpful if proprietary construction documents get into the wrong hands. Find a local State Farm agent to get a quote.
Whereas State Farm and The Hartford are better options for small businesses, larger developers may opt for Chubb for their builder’s risk insurance. They do more work with large construction firms and can adapt coverage for more complicated coverage needs. For instance, Chubb offers coverage for international construction firms that have U.S. clients. They also have a loss control and engineering department that can help you maximize your construction budget, avoid risks, and stick to your timeline. Finally, they offer specialized builder’s risk coverage for firms that work in the oil and gas, heavy chemicals, or energy industries. Find a Chubb agent to start building your coverage.
Our last recommendation for buying builder’s risk insurance is Travelers. This insurance carrier offers an enhanced builder’s risk insurance product that goes beyond basic coverage. While some builder’s risk insurance policies only reimburse policyholders for the actual cash value of damaged property, Travelers offers replacement coverage. Both permanent fixtures and temporary fixtures, such as signs and scaffolding, are covered. You can customize soft costs coverage or take the Travelers default of $100,000 in soft costs coverage limits. And Travelers also has automatic green building coverage, so there’s no need to spend more on insurance if you’re upgrading a property to sustainable standards. Get started by finding a Travelers agent near you.
The Bottom Line
Builder’s risk insurance is essential for anyone with a financial interest in commercial or residential property. Don’t operate your construction or real estate business without learning more about this essential type of coverage. The good news is that, although builder’s risk insurance can be a complicated product, the opportunities for customization are huge, so you should end up with a product that fits your needs and budget.