Builder's risk insurance, also known as “course of construction insurance”, is a specialized kind of property insurance that protects construction projects from risk that could cause damage or delay. This insurance is essential for contractors, property owners, and developers because it provides financial protection during the construction or renovation of buildings.
Unlike standard property insurance, which covers a completed structure, builders' risk insurance is designed specifically to cover a structure while it’s being built or renovated. The policy typically begins when construction starts and ends when the project is finished and approved for occupancy.
Why Does Your Project Need Builder's Risk Insurance?
Construction projects are complex, involving many moving pieces, logistics of material arrival, trade contractor scheduling, equipment delivery and rental, and labor supply. Large projects often face unpredictable challenges. Builder's risk insurance helps safeguard against some of these challenges by covering a wide range of potential perils, including:
Fire:
Construction sites are particularly vulnerable to fire due to flammable materials, temporary electrical setups, and other hazards. Builder's risk insurance provides coverage for fire-related damage, ensuring that the project can continue without devastating financial losses.
Weather Events:
Natural disasters such as storms, hurricanes, and floods can significantly harm a construction site. Builder's risk insurance helps cover the cost of repairs or rebuilding after such events, though flood and earthquake may require separate endorsements.
Theft and Vandalism:
Construction sites are often targets for theft and vandalism, especially when expensive materials, appliances, and equipment are involved. Builder's risk insurance covers the loss of stolen items and repairs needed due to vandalism.
Accidental Damage:
Accidents happen on construction sites, whether it’s a structural collapse, water damage, or equipment failure. Builder's risk insurance is not created equal; these types of losses may or may not be covered. Review policy exclusions to understand what is and is not covered.
Soft Costs:
Many builder's risk policies can be extended to cover soft costs, such as legal fees, local and state permitting fees, additional interest owed on a loan, architectural or engineering expenses, and other additional costs that arise due to a delay in project completion caused by a covered event.
What Businesses Need Builder's Risk Insurance?
Builder's risk insurance is important for anyone involved in the construction process, including:
Property Owners:
Whether you’re building an office building, retail shops, or any other commercial occupancy building, builder's risk insurance protects your investment from unexpected events during construction.
Developers and General Contractors:
Developers and GCs are responsible for ensuring that a project is completed on time and within budget. Builder's risk insurance helps stakeholders manage the financial impact of unforeseen events that could otherwise derail a project.
Lenders and Financial Institutions:
Lenders often require builder's risk insurance as a condition for providing financing for a construction project. This ensures that their investment is protected if something goes wrong during the building process.
What Does Builder's Risk Insurance Cover?
Builder's risk insurance typically covers physical loss or damage to the property under construction. The coverage can be quite comprehensive, but it usually includes:
The Structure:
The primary coverage is for the building or structure being constructed. This includes the materials that are part of the project, whether they are on-site, in transit, or temporarily stored at other locations—policies typically include sub-limits for these categories.
Materials and Supplies:
Builder's risk insurance covers materials and supplies to be installed as part of the building’s construction, whether on the job site, in storage, or in transit. This is crucial, as many construction projects involve the transportation of materials from different locations.
Temporary Structures:
Coverage often extends to temporary structures such as scaffolding, fences, and forms, which are essential to the construction process but are not part of the finished building.
Equipment Breakdown:
A few carriers may offer equipment breakdown coverage that applies to the breakdown of essential construction equipment, such as cranes or generators. This can help mitigate delays and additional costs.
Debris Removal:
If a covered event results in debris that needs to be cleared before construction can continue, builder's risk insurance may cover the cost of debris removal up to the sublimit on the policy.
Soft Costs:
As mentioned earlier, builder's risk insurance can sometimes include coverage for soft costs like legal fees, interest on loans, and additional architectural or engineering expenses incurred due to a delay caused by a covered event.
What Isn’t Covered by Builder's Risk Insurance?
While builder's risk insurance provides extensive coverage, it’s important to understand its limitations. The specific property damage exclusions will vary depending on the policy, but common exclusions include:
Normal Wear and Tear:
Builder's risk insurance does not protect against damage resulting from normal wear and tear or gradual deterioration of materials.
Defective Workmanship:
If the damage is caused by faulty construction or design, it won’t be covered under a builder's risk policy. The company that caused the construction defect or design error should have insurance to cover these situations. However, some policies may offer optional coverage for resulting damage, meaning if a defect leads to additional damage, that damage may be covered.
Employee Theft:
While builder's risk insurance covers theft, it excludes theft by employees or contractors. Separate crime coverage may be needed for this exposure.
Contractual Penalties:
Builders' risk insurance does not cover contractually owed penalties or liquidated damages resulting from the failure to meet contractual obligations, such as deadlines.
Damage to Rented Equipment Due to Negligence:
Damage to rented construction equipment caused by negligence or improper use is not covered.
How to Pick the Right Builder's Risk Insurance Policy?
Choosing the right builder’s risk insurance policy requires careful consideration of the project’s specific needs. Here are some tips to help you select the best policy:
Understand the Scope of Your Project:
The size, type, and location of your construction project will influence the type of coverage you need. A residential project will have different risks compared to a commercial or industrial one.
Assess the Value of the Project:
Make sure the policy limits are sufficient to cover the project's total replacement cost value, including materials, labor, and any additional costs.
Review Exclusions and Endorsements:
Pay close attention to what’s excluded from the policy. Consider purchasing endorsements to cover additional risks that are specific to your project or location.
Work with an Experienced Insurance Agent:
An experienced insurance agent at InsuranceAdvisor.com can help you navigate the complexities of builder's risk insurance, ensuring you get the right coverage for your needs.
Consider the Policy Duration:
Builder's risk insurance policies are typically written for open policy periods, such as 6, 12, or any number of months. Construction projects can last for a couple of months or a couple of years depending on the finished product. Ensure that the policy covers the entire construction period, including any potential delays.
Builder's risk insurance is an important tool for protecting construction projects from unforeseen risks. By understanding the coverage it provides, and knowing how to select the right options, you can ensure that your investment is well-protected, allowing your project to proceed smoothly and successfully.
Frequently Asked Questions (FAQ) about Builder's Risk Insurance
1. When should I purchase builder's risk insurance?
It’s best to purchase builder's risk insurance before the dirt is turned. The policy should be in place as soon as you start moving materials and equipment to the site. This ensures that you’re covered from day one, protecting your investment from the outset.
2. Can I extend my builder's risk insurance policy if my project is delayed?
Yes, many insurers offer the option to extend a builder's risk insurance policy if the project is delayed. However, it’s important to notify your insurance agent well before the policy expires to allow time to request an extension. Insurance companies are not required to offer extensions, it’s up to their discretion. Be prepared to explain what happened and why the extension is needed.
3. Is builder's risk insurance mandatory?
While not legally required, builders' risk insurance is often a contractual requirement. Lenders, property owners, and developers usually require it to protect their financial interests. Even if it’s not required, it’s a wise investment to protect all stakeholders in a project.
4. Does builder's risk insurance cover subcontractors?
Builders' risk insurance covers physical property owned by the named insured owner, developer or general contractor. As such, a builder’s risk policy generally does not cover materials or equipment owned by subcontractors working on the project. Some policies may include a small amount of $5,000 for tools and equipment of subs but it’s not the primary intent of this policy. Subcontractors need their own insurance for their material, tools, and equipment.
5. What happens if the project is completed early?
Suppose your project ended ahead of schedule. In that case, you can usually cancel the builders' risk insurance policy and receive a refund for the unused premium. However, depending on the policy, the premium may be fully earned, and no refund given. Do notify your insurance agent once the project is completed and occupied, as the coverage will no longer apply.