What is Builders Risk Insurance & Why is it Important

What is Builder’s Risk Insurance?

Construction projects are complex and comprise risks that can delay timelines, increase costs, and put valuable assets at risk. For owners, developers, and contractors managing these risks is crucial, especially given today’s industry challenges.

Builder’s risk insurance offers specialized protection for projects while they are under construction, filling a critical gap in coverage not typically available from liability or commercial property policies. Builder’s Risk insurance provides developers and contractors an important risk management tool that can help keep projects on budget and on schedule.

In this article, we’ll explore what builder’s risk insurance covers, who needs it, and the key factors that can influence its cost. Understanding these essentials can help you manage risk and avoid costly financial setbacks.

How Builder’s Risk protects your project

Builder’s risk insurance is a specialized type of property insurance for buildings under construction or renovation. It protects construction projects from unexpected events, covering damage to the structure, as well as materials, equipment, and other project assets on-site — such as blueprints, scaffolding, fencing, and signage.

Coverage typically begins when construction starts and lasts until the project is completed or ready for occupancy. This property insurance is an essential layer of protection for those in the construction industry, protecting the significant investment tied to each project.

What does Builder’s Risk Insurance cover?

Builder’s risk insurance can vary depending on the policy and project needs, but it generally covers a wide range of risks, including:

• Weather-related damage: Natural disasters, such as windstorms, hurricanes, tornadoes, earthquakes, and floods can disrupt projects and result in costly damages. With extreme weather events becoming more frequent, this protection is especially crucial.
• Fire: Fires on a construction site can lead to extensive damage, often requiring major repairs or even a complete rebuild.
• Theft and vandalism: Construction materials and equipment are valuable assets, making job sites targets for theft and vandalism. A builder’s risk policy helps cover these losses.
• Water Damage: Interior water damage caused by faulty plumbing installation or equipment is amongst the leading causes of loss covered by Builder’s Risk insurance. 

Some policies also cover additional costs from construction delays, like interest on loans, lost sales or rental income, and real estate taxes.

What isn’t covered?

Builder’s risk insurance typically does not cover liabilities, such as employee injuries, professional mistakes, or defective materials. You may need additional policies, like general liability or professional liability insurance, for these types of risks.

For example, if a worker is injured on the construction site, builder’s risk insurance won’t cover medical expenses or legal costs. For these risks, you’ll need additional policies, such as general liability or workers’ compensation, to protect against on-site accidents involving employees.

Builder’s risk insurance also excludes certain events and types of damage, including:

• Faulty design or workmanship: Unless specifically endorsed, direct damage caused by errors in design or substandard work aren’t covered. Any damage from these scenarios needs separate protection. This highlights the importance of careful planning and quality control throughout the project.
• Wear and tear: Normal wear and tear, including gradual deterioration or maintenance issues, isn’t covered. Builder’s risk insurance is designed for unexpected, accidental losses, not routine maintenance.
• War and government action: Damage from acts of war or government actions, such as property confiscation, is typically excluded. While rare, these exclusions are common across most types of property insurance, including builder’s risk.
• Contractor equipment: The builder’s risk policy is intended to cover materials and equipment that are to be permanently installed in the building or structure. Heavy equipment used to support the construction, such as cranes, scissor lifts, and excavators, are more properly insured under the contractor’s own insurance.

Understanding what isn’t covered under builder’s risk insurance helps developers and contractors better assess their overall risk management strategy. Often, you need a combination of policies to provide comprehensive coverage for all potential liabilities and unexpected incidents.

Who needs Builders Risk Insurance?

Builder’s risk insurance is highly recommended for any party with a vested interest in a construction project. This includes:

• Developers: Developers of large-scale projects often purchase insurance policies to protect both the entire structure and their financial investment.
• Contractors or subcontractors: Contractors involved in the construction are typically included in builder’s risk policies — especially if they’ve invested in materials and labor for the project. Even if a developer has coverage, contractors should double check that their interests are also protected.
• Property owners: For renovations and remodels, property owners may choose to add builder’s risk insurance to protect against losses during construction.
• Lenders: Lenders often take a hands-on approach to ensure that their investments are properly protected from the risk of physical loss. It is standard for lenders to be included on builder’s risk policies as additional insureds and loss payees.

Any party that could face financial loss from project delays or damage should consider builder’s risk insurance. In many cases, lenders and project owners require it as part of their risk management plan.

What factors can influence the cost of Builder’s Risk Insurance?

Several factors affect the cost of a builder’s risk insurance policy. Knowing these can help developers and contractors choose the best coverage for their needs. Key details to consider include:

• Project size and value: Premiums are generally based on the total project value and associated delay exposures. Larger projects need more extensive coverage, which typically results in higher premiums.
• Project Duration: The project schedule plays a significant role in determining the builder’s risk premium. The project timeline is another factor that can influence the policy’s cost. Longer construction timelines often mean higher premiums, as extended project durations increase exposure to potential risks, like severe weather, supply chain delays, and other disruptions over time.
• Location: Construction projects in areas prone to extreme weather, such as coastal regions where hurricanes are common, usually face higher premiums due to increased risks. Similarly, projects located in high-crime areas are also subject to additional underwriting scrutiny.
• Construction materials: Using unique or green building materials can raise premiums, as these materials may be harder and more expensive to repair or replace.  Similarly, a wood frame building will cost significantly more to insure than a steel or masonry building due to fire risk.
• Coverage amount and deductibles: The level of coverage and deductible amount chosen also play a significant role in the policy’s costs. A higher coverage limit and lower deductible usually result in higher premiums.
• Technology and site protection measures: Projects incorporating advanced technologies, like water mitigation systems, site surveillance, or fire prevention tools, may lower premiums through discounts. However, they may also introduce new risks that could impact the policy cost.

In addition, policy endorsements or extensions can affect the cost of a builder’s risk policy. For example:

Certified acts of terrorism coverage – Builder’s risk insurers are mandated by federal law to offer coverage for certified acts of terrorism. Depending on the location of the project, this can add significant cost to the policy.

Delay-in-startup coverage: This extension helps offset financial losses if the completion of a project is delayed by an insured incident. These cover indirect expenses, like architect fees, extra loan interest, and legal costs, if a project is delayed due to an insured event, as well as loss of revenue due to an insured physical loss. Note that while these endorsements provide added protection, they also raise premiums, so project owners should weigh their benefits carefully. 

LEG III/Cost of making good coverage: While not widely available, projects governed by best-in-class controls may qualify for “LEG III” coverage which provides protection against direct damage caused by faulty workmanship or faulty design.

Understanding your Builder’s Risk coverage options

Builder’s risk insurance is a specialized type of property insurance that helps protect construction projects from the unexpected. To choose the right coverage for your needs, carefully evaluate the unique aspects of each project, such as its scale, location, and the materials involved. You also want to consider how these factors can affect both risks and premiums.

With the growing challenges in construction today, from supply chain delays to climate-related concerns, builder’s risk insurance has become an essential tool for protecting assets and keeping projects on track. For long-term or phased construction projects, where the scope or risk may evolve, it’s wise to review your coverage periodically with your advisor to ensure it aligns with evolving needs.

Carefully assessing your options and matching coverage to the project’s specific needs enable developers and contractors to better manage risk and help ensure a smooth path to project completion.