Builder’s risk insurance provides financial protection for building projects while they are under construction or renovation. Policies cover fire, theft, vandalism, and weather. Builder’s risk insurance costs typically range between 1% and 4% of the total construction costs, or around $1,000 to $4,000 per $100,000 of construction costs depending on the project details.
How Builder’s Risk Insurance Works
The term “builder” in builder’s risk insurance refers to the insured, who can be the contractors and subcontractors performing the work, the property owner, the lender, and others with insurable interests. Builder’s risk insurance is generally purchased by the property owner or contractor. All interested parties should be listed as named insured in the policy.
Builder’s risk insurance protects the builder’s insurable interest during the course of construction or renovation of a building or structure. Insurable interest is the costs and equity invested into a project by the builder. The coverage is purchased for a specific project for a specified term, such as three, six, or 12 months during the “course of construction,” the other commonly used name for this type of policy.
Builder’s insurance can pay for materials, fixtures, equipment, and the structure itself in the event those items are damaged or destroyed by a covered risk, such as fire, theft, vandalism, or extreme weather. Common perils excluded from a builder’s risk insurance policy are employee theft and extreme acts of nature, such as earthquakes.
Builder’s Risk Insurance Example
Consider a property owner who purchases a vacant piece of property on a lake. As there is no structure on his property, he only needs general liability insurance to cover things like a hiker tripping on a rock and getting injured.
However, the property owner takes on additional risk if he decides to build on his land. If a trespasser’s cigarette leads to a fire, the partially completed structure and materials could be lost. Builder’s risk covers the cost to rebuild and replace the materials.
For more information on what a builder’s risk policy covers, check out our section on coverage and exclusions.
Who Builder’s Risk Insurance Is Right For
Every new construction and most major renovation projects need builder’s risk insurance. Beyond the builder, other parties may have an insurable interest in the development, and that exposes them to loss. While one party buys the builder’s risk insurance policy, the policy is usually written to protect to protect these other parties.
Insurable Interest on the Policy
An insurable interest is any financial stake in the project. When it comes to construction and renovation projects, there may be several stakeholders who have an insurable interest, including the builder, the property owner, and the financing companies. Policyholders control the policy purchase and administration but may receive direction from other stakeholders.
Parties that are often named insureds in builder’s risk insurance include:
- Property and project owner
- General contractor
- Bank or lending institution
While it is usually the general contractor who purchases the builder’s risk insurance policy and transfers the costs through his administrative fees to the land owner or project developer, it is possible that the latter purchases the policy instead. Every named insured has the right to claims proceeds.
For example, a homebuilder cannot walk away from the project after a loss and use the claim check to take a trip. Named insureds, such as the mortgage company, are also listed on the claim check and will demand to be made whole either with their share of the payout or through project completion.
This is different from individuals who ask to be made additional insured to show property owners that they have coverage for liabilities on a property. Additional insureds do not have a shared interest in the financial risk of the project—just an interest in being released of liabilities on the project.
Builder’s Risk Insurance Providers
Protecting your assets and interests while working on your project is as important as choosing the best building materials. Look to get builder’s risk insurance with national providers that understand the construction industry and have policies that match your project. Building a strip mall is much different than adding 1,000 square feet to your home.
Top Builder’s Risk Insurance Providers
Commercial development contractors for projects that may extend for more than 12 months
General contractors developing new residential construction projects
Homeowners doing extensive remodelling or building additions to homes
Contractors requiring flexibility with timelines for anticipated construction delays
Small developers seeking additional assistance with loss control services
All of the above builder’s risk insurance providers are similar in that they are national carriers with sound financial backing, so you can be confident they will protect your project through the course of construction.
Here are five top insurance providers that write builder’s risk insurance policies:
CoverWallet is an insurance provider with affordable rates on specialized insurance, including builder’s risk insurance. No matter the specifics of your project and construction type, CoverWallet makes sure you’re properly covered. CoverWallet quotes major insurance carriers to find the right coverage through one quick online application.
CoverWallet is the perfect choice for general contractors working on commercial development projects that may extend for more than 12 months. Because these projects need to consider higher values, more subcontractors, and extended risk periods, CoverWallet is able to find the best carrier that writes that risk.
Hiscox is a large, A-rated insurance provider that tailors policies to specific industries. For example, Hiscox specializes in most businesses associated with the construction industry, including builders, heavy construction contractors, and specialty trade contractors, such as masons, carpenters, and electricians.
Hiscox is the right choice for small business owners working on new residential developments. Hiscox is a leader for microbusinesses such as a general contractor utilizing a group of subcontractors to complete a project.
Large insurance companies like State Farm can offer sound capital funding protection, which is an important quality for a builder’s risk insurance provider. An added benefit is their ability to customize features of your policy with their wide range of coverage endorsements. State Farm also has an A.M. Best rating of A++, which assures a strong financial position.
State Farm is the right choice for homeowners doing extensive remodeling or additions. Its builder’s risk policy is tailored to existing homeowners insurance. Policyholders may even qualify for loyalty or multiline discounts if their builder’s risk insurance is part of the existing homeowner’s coverage.
Insurance321 is an online insurance marketplace that helps small businesses find builder’s risk insurance and more. The company works with top insurance providers to make sure policy coverage isn’t sacrificed for better rates. Builders can get through the Insurance321 online portal both quickly and easily.
Insurance321 is the right choice for projects that anticipate potential weather or permit delays. Because the company works with multiple carriers, it is able to place policies with the ones that are able to adjust policy terms.
Nationwide is a large insurance company widely regarded for its strength in personal lines, such as home and auto insurance. As an extension of its homeowner’s policy strength, Nationwide has comprehensive builder’s risk insurance policies as well as other lines of small business coverage, including general liability and workers’ compensation insurance.
Nationwide is the right choice for a small contractor getting into real estate development who needs extra support and advice when it comes to loss control services that keep premiums down. Nationwide offers extended assistance with fire prevention, safe transportation, and overall security.
Builder’s Risk Insurance Costs
Builder’s risk insurance costs vary widely based on the type of project, location, construction costs, and construction type, including materials and construction shape. Premiums often range between 1% and 4% of the project cost, with a $500,000 project potentially costing between $5,000 and $20,000 in an annual premium.
The five primary factors affecting builders insurance cost include:
- New construction project: New construction projects need coverage for excavation, site preparation, foundations, underground plumbing, and temporary structures. Imagine the site excavation leading to a tractor toppling into the temporary structure.
- Renovations and remodeling projects: Protecting an existing structure during a major renovation increases the costs of builder’s risk. The most notable recent claim on a remodel happened in France when the Notre Dame Cathedral was consumed in fire during a remodel.
- Project location: Rates in states vary widely, as do locations within the state where construction is happening. Geographic locations may increase the chances of perils such as hail, windstorm, or even crime.
- Construction materials: Using high-quality materials for cabinetry, windows, or other features may require more coverage for the project and can increase premiums.
- Project duration: The faster a project takes to complete, the lower your premium is because the window for accidents to occur is reduced. Longer projects tend to have more downtime, leaving the location unattended and exposed to more losses.
You can work with your insurance company to help offset builder’s risk insurance costs through your deductible. Increasing your deductible lowers premiums, but keep in mind that the money for the deductible needs to be accessible at the time of a claim to ensure the project isn’t halted. Don’t elect a deductible higher than you can manage.
“Remember that there are two costs of insurance: the cost of the premium and the cost at the time of claim. With inadequate coverage, the loss could come from your pocket, causing major setbacks in your profit. Do not shop by price when it comes to builder’s risk insurance; shop for coverage. Get the coverage that is going to protect the project.”
– John Scalley, Scalley Insurance Agency
Builder’s Risk Insurance Coverage & Exclusions
Builder’s risk insurance is designed to cover typical risks builders face during the course of construction projects. Even a partially built structure has value, not to mention the value of materials, tools, and equipment stored at the job site. Policyholders should take note of the perils covered in the policy as well as those risks that are excluded from coverage.
What Builder’s Risk Insurance Covers
Most builder’s insurance policies are written on an all-risks basis, meaning coverage extends to any exposures associated with the building project unless explicitly listed as excluded in the policy. Covered property often includes materials, supplies, and fixtures. Builders can add endorsements to include machinery and equipment as well as unattached structures, such as office trailers, fences, landscaping, and scaffolding.
Risks commonly covered by builder’s risk insurance include:
- Wind, hail, and rain
- Collision (by vehicle or aircraft)
Additionally, the structure is covered based on the work to the degree it is completed. This could include rebuilding the framing with one side of drywall installed that is knocked over during a windstorm.
What Builder’s Risk Insurance Does Not Cover
Common exclusions listed in builder’s risk insurance policies are acts of war, intentional damage, and normal wear and tear. Most policies also exclude some extreme acts of nature, such as earthquakes and floods. If you want specific risks to be covered, you can add them to your policy as additionally covered perils.
Here are risks and perils typically excluded from builder’s risk insurance:
- Acts of war
- Intentional damage
- Employee theft
- Normal wear and tear
- Water damage
- Third-party liability
Because most builder’s risk insurance policies are written on an all-risks basis, you should focus on the short list of exclusions when purchasing coverage. Builder’s risk insurance policies also vary widely among commercial insurance companies. For example, one provider may automatically cover tools left on the site while others require an endorsement to cover them. As a result, consider the actual coverage when it comes to the cost of the policy.
Builder’s Risk Common Endorsements
An endorsement modifies the basic insurance policy to add, remove, or alter coverage in the contract. Because builder’s risk insurance is very specific in both time frame and risk mitigation, endorsements might be required by additional insureds to fully protect their investment in a new structure.
Common builder’s risk insurance endorsements you can purchase include coverage for:
- Materials and property in transit
- Scaffolding at the job site
- Heavy equipment and machinery
- Fire department response
- Property in temporary storage facilities
- Valuable papers, such as site plans and blueprints
- Backup of sewer and drain
- Tools used and stored at the site
When shopping for builder’s risk insurance, don’t assume that every policy includes these items. Builder’s risk insurance costs are carefully calculated with inclusions pertinent to specific projects. Talk to the insurance provider to get a clear understanding of what is and what is not covered.
Other Types of Insurance Builders May Need
Builder’s risk insurance is usually purchased by a property owner or a contractor who is insured by the policy. Builders who are contractors may need several other types of insurance, which fall under the general category of commercial insurance, or more specifically, contractor’s insurance.
Here are the primary types of insurance that commercial builders may need:
- Commercial General Liability: Covers third-party bodily injury, property damage, and related legal costs. For example, if a third party trips and falls over a piece of equipment on your job site, general liability covers the medical costs and legal defense, if needed.
- Commercial Auto Insurance: Pays claims of bodily injury, property damage, medical payments, and more for passengers in other vehicles if your commercial vehicle is in an at-fault auto accident.
- Professional Liability Insurance: Covers injuries, property damage, and related legal costs caused by your work. Also protects against claims arising from an error in building or failure to fulfill a building contract.
- Workers’ Compensation: Covers your employees’ medical bills and lost wages for work-related injuries or illnesses.
- Commercial Umbrella Insurance: Increases liability coverage on many business liability policies, including general liability, commercial auto, and workers’ compensation.
- Extended Liability: Extends coverage limits on one underlying liability policy, whereas umbrella can extend multiple policies.
- Surety Bond: Guarantees you will complete your building project according to the contract and in accordance with local laws.
Tips for Buying Builder’s Risk Insurance
Buying builders risk insurance involves many moving parts of a new development project. Take the time to gather the right information before you reach out for quotes.
Here are three tips when buying builder’s risk insurance:
1. Collect Other Parties’ Business Details for COI
The insurance company needs the legal name, address of record, and any existing general liability insurance in place for any party that has an insurable interest in the project and will be a named insured. Having this information at the time of the application expedites the process and makes getting certificates of insurance (COIs) fast and simple.
2. Collect the Right Documents for Quoting
Premiums for builder’s risk insurance are based on a percentage of the construction costs. This means a licensed contractor’s bid, along with city permit approvals, is required to get the policy. An insurance company will not provide a cost estimate based on building costs in the area when it comes to new construction. It needs the actual costs that will be spent on the project.
3. Confirm the Policy Provides All-risk Policy Coverage
Every insurance company underwrites policies differently. While most builder’s risk policies are written as all-risk coverage, be sure to confirm it. Keep in mind that “all-risk” doesn’t mean any and every loss. There are still exclusions to all-risk policies, such as flood and earthquake.
“Always try to get an all-risk form and pay attention to how the policy covers (or excludes) flood and earthquake damage. If the building will be generating rental or lease income, pay specific attention to how the policy covers lost rents and business interruption losses.” Matthew Struck, Treadstone Risk Management, LLC
Builder’s Risk Insurance Frequently Asked Questions (FAQs)
There is a lot of confusion when it comes to builder’s risk insurance. The following are some of the most common questions about commercial builder’s risk insurance.
Who needs builder’s risk?
General contractors, property owners, and financing parties for real estate developments or major projects need builder’s risk insurance. Normally, general contractors purchase the policy and include other stakeholders as named insureds. While this is the most common scenario, it is also possible to have other stakeholders, such as a homeowner, purchase the policy instead.
Is property insurance the same as builder’s risk insurance?
Builder’s risk is a specialized type of property insurance that covers risks during construction, while property insurance is a traditional type of policy that covers an existing structure. Some homeowners insurance policies cover major renovations or additions with certain riders but may have limited coverage extended to the general contractor.
Do I need builder’s risk for a home extension?
For homeowners expanding the footprint of their home, check with your existing homeowners insurance policy to see what coverage is extended during construction. Insurance companies often can add a rider to existing homeowner’s policies, but will likely need a general contractor’s scope of work, budget, and city permits. Homeowner’s policies may be limited in coverage.
What is an installation floater?
An installation floater is sometimes required of subcontractors whose installation may create significant risks to the entire structure. Examples where installation floaters are often required include HVAC or furnace installation. An installation floater is purchased by the subcontractor with costs transferred to general contractors, if applicable.
Whether your project is a ground-up construction, a renovation, or a remodel, you need builder’s risk insurance. Residential construction isn’t covered by homeowners insurance and is not sufficient coverage for all-risk exposures associated with contracting and construction. Similarly, contractors will need property coverage in addition to general liability for building projects.