Builder’s risk insurance is a specialized form of commercial property insurance that is designed to protect buildings under construction.
When most people think about property insurance, they think of the structure and contents of a completed building—either a home or a business.
However, homes that are in the process of being built are at risk from weather and other perils, too. That’s where builder’s risk insurance comes in.
What is builder’s risk insurance?
Builder’s risk insurance is property insurance that protects residential projects that are in the process of being built. It is sometimes called “course of construction” insurance.
A residential construction project requires a lot of investment in materials, equipment, and more. Builder’s risk insurance protects these construction needs while a project is built.
Because builder’s risk insurance is meant to be temporary coverage, valid during the period of construction, it is very important to know when the coverage begins and when it ends.
In some cases, a project will need to have reached certain completion milestones to be considered “done,” so coverage might end when a condition (such as building occupancy) is met, rather than a specific date.
How much does builder’s risk insurance cost?
The cost of builder’s risk insurance will vary based on a number of factors, such as the size and location of the project and the types of materials used.
Estimates typically range from 1% to 4% of the completed cost of construction, but in some cases can be less than 1%, or up to 5%. With so many contributing factors, premiums can be dramatically different from one project to the next.
The length of time a building project is anticipated to take to complete will also factor into your builder’s risk premium cost. That’s because projects that take longer to complete will be exposed to more risk. From weather-related damage to the potential for pricing fluctuations of building materials, the longer the project term is the greater the risk exposure.
So, the builder’s risk insurance cost on a $100,000 renovation that is anticipated to take between six to eight weeks to complete will be very different from a $2 million custom home with a 12 to 14-month project length.
Location is a major factor contributing to the cost of builder’s risk insurance. Areas prone to hurricane damage that have high homeowners insurance costs are going to have high builder’s risk insurance costs too. The same applies to other areas that experience natural disasters, such as tornadoes, hail, and wildfires. If there is a regional weather risk, it will be reflected in your premium costs for builder’s risk insurance.
Building in areas that have high crime rates will also carry higher builder’s risk insurance premiums, as the risk from vandalism and theft at a construction site is higher.
What does builder’s risk insurance cover?
Builder’s risk insurance protects against losses associated with property damage from fires, theft, explosions, vandalism, and weather-related occurrences like lightning, hail, and windstorms.
It also covers property such as construction materials, building supplies and equipment, and may include items that are damaged by a covered peril while in transit to the building site.
Depending on the coverage types you select and what is offered in your state, builder’s risk insurance may even cover costs incurred if damage from a covered peril causes a delay in construction, resulting in a financial loss to you.
For example, if a weather-related event causes damage that delays the project resulting in lost sales of a new housing project, or if you are required to pay additional interest on a construction loan because of the delay, your builder’s risk insurance may cover some or all of the loss—depending on your policy.
Coverage of these types of “soft costs” may be included in your base policy, or you might have to purchase this as an additional coverage rider.
Are there other factors to consider?
Builder’s risk insurance is coverage for the materials and construction of a building, from a list of covered perils.
There are also exclusions, and it is important to know what a policy does not cover.
Builder’s risk insurance typically excludes damage done by flooding. This is in line with most homeowners insurance policies, which also exclude flood damage. Similarly, earthquake damage is also usually excluded.
Although a builder’s risk insurance policy will cover theft, these policies generally exclude theft by employees, which is covered under a different type of business policy. Similarly, damage done to work vehicles is not covered, and is instead covered by commercial vehicle insurance.
Liability coverage for problems arising from design issues or workmanship is not covered by builder’s risk insurance. For protection from these types of claims, you will need to purchase separate coverage called professional liability coverage. Professional liability coverage is important insurance for anyone who provides services.
Who pays for builder’s risk insurance?
Builder’s risk insurance is usually secured by the entity that carries the most financial risk for a building project. Depending on the project, this could mean that the developer carries the builder’s risk insurance, or, in cases where the work being done is a substantial renovation on a private home, it could be the homeowner.
Typically, the general contractor will purchase the builder’s risk insurance policy. Other subcontractors and entities working on the project are then named as “additional insureds.” This means that subcontractors like roofers or framers who are working on the project will be covered while the work site is active.
The good news for contractors working on residential projects is that there are ways to reduce the cost of builder’s risk insurance. By addressing on-site risks, bundling policies, or selecting a higher deductible, the premium cost of builder’s risk insurance can usually be decreased.
If you want to know more about builder’s risk insurance, contact Rate Insurance. Experts can work to sort through the questions about what is covered—and what is not—and help you find the best policy for your residential building project.
Disclaimer:
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