Even if you are a professional in the construction business, you may find the many kinds of construction insurance confusing. From general liability to errors and omissions coverage, there are many types of policies that can help protect you financially during the course of construction.
In this article, we'll take a look at one common type of construction-related insurance: builder's risk coverage, which is sometimes called course of construction insurance. We’ll review when you might need this type of policy and what it can do for you.
What Is Builder's Risk Insurance?
Builder’s risk insurance protects construction projects from property damage caused by fire, theft, vandalism, natural disasters and other threats while the project is being built. A builder's risk policy is taken out when a new construction project begins and terminates when the building or buildings are completed and occupied.
Builder’s risk policies tend to be highly customized to the specific needs of the policyholder. Every insurer offers their own options for basic coverage, extensions and add-ons. Chat with your broker to make sure you have all the coverage you need.
Who Purchases Builder's Risk Insurance?
Builder's risk policies are appropriate for anyone with a financial stake in a construction project, including the:
- General contractor
- Property owner
- Financial institution that loans money for the project
Determining who will purchase and pay for the policy is usually part of the negotiating process before the contract is signed.
In a large construction project, these individuals will coordinate so that one person or entity purchases the policy and includes the others as named insureds. That way the policy covers all the individuals or organizations who need it. For projects with a wide scope, builder’s risk is probably not the only type of coverage that will be in place. There will also be a general liability policy, as well as a commercial auto insurance policy. Workers’ compensation will also need to be purchased.
On smaller projects, such as a home renovation or kitchen remodel, the general contractor will probably be the one to determine if a builder's risk policy is required and will purchase it with the homeowners as the named insureds.
What Does Builder's Risk Insurance Protect Against?
The exact perils and exposures that a builder's risk insurance policy covers will vary from policy to policy and from company to company. In general, you will be covered for some or all of the following:
- Theft or vandalism
- Fire or lightning strikes
- Hail or snow damage
- Water damage
- Hurricane or wind damage
- Earthquakes (may require an extension or endorsement)
- Landslides, mudslides, or avalanches
- Floods (requires an extension or even a separate policy)
- Other "acts of God" (natural disasters)
- Ordinance or law coverage (requires an extension)
What Exactly is Covered on a Construction Site?
Physical Structures, Equipment and Labor
A builder’s risk policy covers anything related to the actual physical construction of a building, along with the equipment and labor required to build it. These are called the hard costs or “brick-and-mortar costs” of a construction project. They are tangible and easy to quantify—and they’re quite extensive.
For example, builder's risk would cover these temporary structures on a construction site:
- Storage sheds
- Construction signs
- A temporary office
- Piles of stone
- Brick or wood
- Plumbing or electrical systems (and the materials/tools used to create them)
- Other construction materials
Some policies include covered property only on the premises of the project; others cover materials stored at remote sites and in transit to the workplace. In the event of a loss due to a traffic accident involving a truck full of plywood headed for the building site, for example, the builder's risk policy would probably kick in and pay for damages.
Loss of Revenue and other Soft Costs
A builder's risk policy may also cover soft costs or expenses indirectly related to the construction project. They may include the loss of rental or sales revenue if a project is delayed, interest on loans taken out to fund the project, and taxes that are being paid on the project and land it's on.
Debris Removal and Green Construction
Some policies cover debris removal or the clean-up of polluting substances. Other policies might require an endorsement for this additional coverage. Some also cover green construction, which is increasingly popular. With that option, the insurance would cover additional costs required to make a building energy-efficient and environmentally safe, which can include everything from improved air filtering equipment to the recycling of unused building materials.
A lot of the wording of the policy depends on the type of project. For example, a bedroom addition on a house would not, in all likelihood, need coverage for extensive scaffolding, while a multi-story apartment building would. Each policy, therefore, needs to be crafted to meet the unique needs of a particular building project.
What Doesn’t Builder’s Risk Insurance Cover?
Builder's risk policies generally don’t include:
- Liability coverage, i.e. coverage for claims brought against you by a third party for property damage or injuries
- Regular wear and tear
- Rust and corrosion
- Employee theft
- Damage to work vehicles
- Defects in materials due to manufacturer error
- Damage caused by faulty workmanship or mechanical breakdowns of the machinery used on the build
- Acts of war or terrorism
A type of policy called business crime insurance can protect against employee theft. Meanwhile, a commercial auto insurance policy is needed to protect vehicles on the job site.
Talk to an insurance agent to customize your policy in the underwriting phase for your particular project. A good agent, for example, would know if there was any threat from flooding and could add additional flood insurance, since that is not covered by basic builder’s risk policies.
How Much Does Builder's Risk Insurance Cost?
The cost of a builder's risk policy varies based on a number of factors. These include the length of the project, the total cost of the project, the type of construction, and even the location where the project is being built.
A good rule of thumb for estimating the cost of builder's risk insurance would be roughly one to five percent of the total value of the project, depending on the insurance company. Keep in mind that these policies are only meant to function for a limited time—six months, for example, or a year or more for larger policy terms. Once finished, coverage ends and regular commercial property or homeowner policies take over.
Builder's risk insurance has a deductible, as well as a top limit that the insurance covers—which can be as high as $1 billion or more for large construction projects. The premiums may run into the thousands of dollars for such projects, depending on the policyholder's willingness to accept some risk or not. Since a builder’s risk policy is only needed for a limited time, the cost will usually be divided by the number of months that the policy is in force, so that the policy owner will pay a monthly premium.
What is the Difference Between Builder’s Risk Insurance and Homeowners Insurance?
One of the big differences between builder’s risk policies and homeowners insurance is the length of time they are in operation. Builder’s risk insurance is triggered by the start of a construction process, and it stays in operation throughout the building process. Homeowners insurance, meanwhile, begins once a person purchases a home or has one built, and lasts as long as they live there.
Another difference is liability coverage. A basic HO-3 homeowners policy—the most common kind—covers the dwelling itself, other structures on the property, personal property inside the home, and liability, in the event that someone is hurt or someone else’s property is damaged while at the home. Liability pays for legal assistance and medical care if needed.
Builder’s risk insurance, meanwhile, covers the building while it’s being built, as well as the associated materials. But it does not include liability coverage, nor would it cover personal property that happened to be on the building site while construction was going on.
What About the Difference Between Builder’s Risk and Inland Marine Insurance?
Another type of policy that has some overlap with builder’s risk insurance is inland marine coverage. From the name, you might assume this was insurance that covered you for water transportation—but that’s not quite the case. Also called tools and equipment coverage, Inland marine insurance covers—no surprise here—tools and equipment, as do some builder’s risk policies. It may also cover the materials used on a construction job.
Unlike a builder’s risk policy, however, inland marine protects tools and equipment transported to and from multiple worksites.
Builder’s risk, however, just covers the tools and equipment for a single project, and potentially only when on the premises (depending on the type of policy you choose).
So, if you take your tools and materials with you to go to a job, you would want inland marine insurance.
As such, inland marine insurance is better suited for subcontractors, who may bring tools, supplies, and building materials with them on a daily or weekly basis to a site they are working at.
We could say that the difference in the two types of coverage is related to quantity: builder’s risk is something you purchase for a single construction project, while inland marine insurance is related to the multiple day-to-day jobs that you, as a small business subcontractor, might be carrying out.
What's a Scenario When I'd Use Builder’s Risk Insurance?
Let’s say you’re a contractor working on a project to build a duplex apartment building. You’re halfway through the build, and you’ve just been working with the electricians who are installing all the wiring needed.
Unfortunately, an electrician’s assistant improperly wires one connection, which leads to sparks catching on some nearby drywall. Because it’s the weekend, no one is on hand to notice, and the entire framed-in building quickly goes up in flames. This results in extensive property damage and the kind of nightmare situation that can sometimes be found in the construction industry.
But when the contractor takes a look at the destruction, he’s not worried it will bankrupt him. Why? He has a builder’s risk policy with coverage limits of $1 million. Like most construction companies, he would never have been able to cover the costs to re-purchase all the materials on his own, but his insurance needs are met by a robust policy that he took out when he was awarded the contract for the building.
Not only will the builder’s risk policy cover the destroyed materials, but it will also compensate the property’s owners and their lender for the lost apartment revenues that will result from the delay as well as pay for the removal of the debris left over from the fire. Overtime labor costs may also be covered, depending on the policy itself.
Once the building is finally finished, the builder’s risk policy will have done its task, and will cease to exist. The owners can replace it with a general liability policy, equipment breakdown coverage to repair building systems such as HVAC and plumbing, loss of income insurance and more in order to protect their investment. Individual tenants, meanwhile, will most likely have renter’s insurance.
This is also when regular property insurance will kick in. Is property insurance the same as builder's risk insurance? Once again, the answer is in the timing. Property insurance, which can be for homeowners, renters, or business and building owners, does much the same thing as builder’s risk insurance, but only applies to finished buildings that are inhabited by their owners or tenants.
Where Can I Get Builder’s Risk Policies?
Although you’ll rarely see builder’s risk insurance advertised, it is available from many common insurance companies. Ask your insurance broker if you are starting a project that will require builder’s risk insurance. They should be able to help you find a policy that works for your project or gather quotes from multiple suppliers for you to choose from.
Note, however, that it’s hard to do an apples-to-apples comparison with builder’s risk insurance because each company has a slightly different take on what they include with their policies. Some, for example, may include green construction coverage, others include ordinance or law protection, while still others will cover equipment breakdown. Some policies include tools—but not all do. So if you are comparing policies, make sure you’ve got the different coverage options noted.
Protect Yourself with Builder’s Risk Insurance
For contractors and others in the building trade, builder’s risk insurance is a tool in their tool kit, designed to minimize the risks involved in any construction project. It protects against damages to a construction site while the structure or structures are being built. And now that you know everything there is to know about builder’s risk insurance, all that’s left to do? Talk to your broker about finding the right policy for you!