Builders Risk Insurance – Temporary Coverage for Construction Projects
Home improvements and new constructions can be both exciting and stressful. There’s always a risk that something might go wrong, damaging the project or causing it to be delayed. Majority of these risks can be covered by having builders risk insurance.
TL;DR
- Builders risk insurance is a temporary policy that protects construction projects from risks like property damage and theft.
- It’s necessary for independent agencies managing construction or renovation projects—helping protect their clients and the success of the project.
- A misunderstanding about this policy is that it covers liabilities—it doesn’t; for that you need general liability insurance.
- A quick win is to bundle builders risk insurance with liability insurance to make sure all bases are covered.
What Is Builders Risk Insurance in Insurance?
For a client: Builders risk insurance is a type of coverage which helps protect a construction project and its materials while the work is underway. It can replace or repair equipment/materials damaged by fires, theft, storms, or other covered hazards.
From a technical perspective: An independent agency would consider a builders risk insurance policy as a form of property insurance that indemnifies against damages to buildings while they are under construction. Coverage is usually provided for theft, vandalism, fire, wind, and hail, among other risks. They appear as temporary contracts and are generally effective until the construction is complete. Policy extensions can potentially cover delay in completion, pollutant cleanup, and even green building coverage.
Key Related Terms to Know
- Builders Risk Policy – A type of insurance policy that covers a building during the course of construction.
- Construction Insurance – General insurance that provides coverage for the risks present during construction.
- Inland Marine Insurance – Insurance that covers loss of cargo or damage to ships, terminals, or any transport where the property is transferred or held between locations.
- Actual Cash Value – The amount an item is worth today for purposes of an insurance claim, considering depreciation.
- Coverage Extensions – Additions to the base policy that offer protection for instances not covered in the basic contract.
Common Questions About Builders Risk Insurance
Who should buy builders risk insurance?
Builders risk insurance is suitable for anyone who has a financial interest in a construction project. This could include homeowners, general contractors, construction companies, and commercial developers.
What does builders risk insurance cover?
Builders risk insurance covers damage to the structure under construction from various hazards. This includes fire, wind, theft, vandalism, and many other perils. The policy also covers materials and tools on site, in transit, or stored off the construction site.
How much does builders risk insurance cost?
The cost of builders risk insurance is based on several factors, including the construction cost, project duration, type of construction (wood frame, steel, etc.), and coverage options selected. Each policy is customized to the specific project.
Does builders risk insurance cover subcontractors’ tools?
Usually, tools and equipment owned by subcontractors are not covered under a builders risk policy. Subcontractors need to have their own insurance to cover their tools and equipment.
Builders Risk Insurance vs. Homeowners Insurance
While both types of insurance cover property, they serve different purposes. Homeowners insurance is intended for residences that are already completed and are occupied. In contrast, builders risk insurance is designed for buildings under construction. It provides coverage for the unique risks presented during the construction process, which homeowners insurance does not cover.
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Builders Risk Insurance |
Homeowners Insurance
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Primary Use Case |
Construction projects |
Occupied residences |
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Coverage/Concept Type |
Temporary construction risk coverage |
Permanent residence protection |
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Typical Exceptions |
Coverage ceases when construction ends |
Coverage can be indefinite |
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Most affected by errors |
Contractors, Project owners |
Homeowners |
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Common Mistakes |
Not understanding the policy end date |
Not updating policy as home value changes |
Business Income Worksheet vs. Business Interruption Worksheet
Scenario 1: A residential construction project was devastated by fire. The builders risk policy covered the loss of the structure and the cost of debris removal.
Scenario 2: In a renovation project, crucial construction materials were stolen from the site. The builders risk policy covered the cost to replace the stolen materials.
Limitations and Common Mistakes
- Builders risk insurance does not cover liability claims or injuries that happen on the site.
- It does not cover mechanical breakdown, wear and tear, corrosion or decay.
- A common mistake is assuming builders risk insurance covers everything—it’s crucial to read the policy and understand the exclusions.
- Not understanding the builders risk policy ends when the building is complete can cause issues.
How to Explain Builders Risk Insurance to Clients
For homeowners looking to renovate: “Think of builders risk insurance as your own personal safety net while your home is under construction. It helps protect you from unexpected costs due to events such as theft or damage to your building materials.”
For small business owners undertaking a construction project: “Whether you are expanding your premises or undertaking a new building project, builders risk insurance helps protect your investment during construction. This will cover your project from unforeseen damages like vandalism or storm damage.”
For a CFO/Risk Manager initiating building projects: “Builders risk insurance effectively transfers the financial risk attached to a construction project you are overseeing to an insurance company. It provides coverage for the construction materials, the equipment for the project, and even the labor costs involved.”