Builders risk insurance provides financial protection for building projects while they are under construction or renovation. Coverage includes fire, theft, vandalism and extreme weather. The cost of builders risk insurance typically averages between one and four percent of the total construction costs and varies based on several factors, including type of project, location, and construction type.
How Builders Risk Insurance Works
The term “builder” in builders risk insurance refers to the insured, who can be the contractors and subcontractors performing the work, the owner of the property, the lender, and others with insurable interests. The builders risk insurance policy is generally purchased by the property owner or contractor. All covered parties in the policy should be listed as named insureds.
Builders risk insurance protects the builder’s insurable interest during the course of construction or renovation of a building or structure. Since builders insurance is temporary coverage for a specific project for a specified term, such as three, six, or twelve months, it is not part of a business owners policy (BOP).
Coverage for builders insurance can include 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 builders risk insurance policy are employee theft and extreme acts of nature, such as an earthquake.
Builders Risk Insurance Cost
The cost of builders risk insurance will vary widely based upon several factors, including the type of project, the location, and the construction type. However, premiums often range between one and four percent of the project cost, with the high end of this range applying to projects with greater risk exposures. For example, if you need to cover a $100,000 project, the builders risk insurance premiums paid by the policyholder may be between $1,000 and $4,000 per year.
Here are details on the three primary factors affecting builders insurance cost:
1. How Type of Construction Affects Builders Risk Cost
The primary types of construction projects covered by builders risk insurance include new construction and renovation. New construction project types can provide coverage for excavation, site preparation, foundations, underground plumbing and temporary structures.
Renovations and remodeling projects tend to cost more in premium than new construction because there is an existing structure and additional risks to cover for the remodel project. For example, during a major renovation, the existing structure could collapse and replacing an existing structure is potentially more costly than building a new one.
2. How Project Location Affects Builders Insurance Cost
Ways that location impacts builders risk rates include the flood zone location of the property and geographic locations prone to natural disasters, such as hurricanes, wildfires, tornadoes and more. For example, if a property is not in a flood zone, flood insurance may not be necessary, whereas a property in a flood zone could add more than $1,000 to your builders risk premium.
3. How Type of Construction Materials Affects Builders Insurance Rates
The higher quality the construction, the lower the risk and relative insurance premiums on the project. For example, a construction with a steel frame can withstand damaging perils like wind and fire compared to a wood structure. Although most residential projects are wood construction, they are also typically the most expensive to cover.
Additional factors that can impact the cost of builders risk insurance include duration of the project and your deductible amount. For example, a construction time beyond 12 months will increase your cost due to paying premiums over a longer period of time. Low deductibles can also increase your premium.
All of these factors will determine the ultimate cost of insuring your project and where it falls on the one to four percent of project cost range. For example, if you are building a $1 million home located in a flood zone, you use low quality materials, and the duration of the project is 12 months, your premium could reach the high end of the range at four percent, or $40,000. However, a $100,000 home built with high quality materials, and not in a flood zone, might be one percent, or $1,000.
Builders risk insurance policyholders may also opt to reduce coverage to save on premium, but this is not usually a good idea, according to John Scalley, Scalley Insurance Agency:
“Remember that there are two costs of insurance: the cost of the premium and the cost at 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 builders risk insurance; shop for coverage. Get the coverage that is going to protect the project.”
Builders Risk Insurance Providers
|Hiscox||Contractors wanting tailored coverage from a large insurance provider|
|Nationwide||Individuals or contractors who prefer a large insurer with access to a local agent|
|State Farm||Business owners who want to work with a large provider that has a combination of local presence, commercial products, and personal insurance products|
|The Hartford||The Hartford is best at specializing in small business insurance|
All of the above builders 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. Protecting your assets and interests while working on your project is equally as important as choosing the best building materials.
Here are four top insurance providers that write builders risk insurance policies:
Hiscox is a large, A-rated insurance provider that writes tailored policies specific to the industry. For example, Hiscox specializes in most businesses associated with the construction industry, including builders, heavy construction contractors, and specialty trade contractors, such as architects, carpenters and engineers.
Hiscox can be a good fit for small business owners working in construction and contracting that need any type of construction insurance, including builders risk coverage.
Nationwide has a lot to offer small businesses with a wide range of commercial insurance coverage options as well as financial services, such as banking and employee benefits. In addition to builders risk insurance, Nationwide also offers related coverage types, such as builders ordinance and law, equipment breakdown, earthquake, flood and more.
Individuals or contractors who prefer a combination of online access and a local agent will want to consider Nationwide, which is highly rated for their customer service.
Large insurance companies like State Farm can offer sound capital funding, which is an important quality for a builders risk insurance provider. An added benefit is their ability to customize features of your policy and their wide range of coverage types. Start Farm also has an A.M. Best rating of A++, which assures a strong financial position.
State Farm is a good choice for individuals and business owners who want to work with a large, highly-rated provider that offers customizable features in their builders risk insurance policy.
The Hartford is a publicly owned, Fortune 500 company headquartered in Hartford, Connecticut. They offer multiple programs for small business owners. Their builders risk insurance policy can cover your project from the ground up, including the foundation, underground pipes, wiring, fencing, scaffolding, landscaping, and more.
The Hartford can be a smart choice of provider for small business owners looking for comprehensive protection for new construction or renovations.
How to Apply for Builders Risk Insurance
Applying for builders risk insurance is fundamentally different than the application process of most insurance types. Builders risk insurance is a unique type of insurance in that it covers specific risks that will vary for each project. Also, the individual or business entity purchasing the policy is not typically the only covered party in the policy.
Here are the primary steps to take before and during the application process:
1. Prepare Information About Your Builders Project
Before you begin searching for a provider and getting initial quotes, you’ll need to gather information about your project, which will help to ensure all of your risk exposures are adequately covered. Each provider may have slightly different requirements on their builders risk insurance applications, but the primary information you’ll need is similar.
Here are key pieces of information to have ready before you apply:
- Names and Addresses of Key Contacts: These may include Applicant, Producer, Mortgagee, Loss Control Contact, Risk Manager, and more.
- Type of Project: This will be either Ground-Up Construction or Renovation and Rehabilitation.
- Project Size: This can be an estimated dollar amount for the cost of the project and other details, such as square footage of the project.
- Location of Project: Street address or location of property being improved.
- Policy Term: This will be the duration of the project, but may extend beyond completion.
- Credit and Compliance History: Most insurance companies will want to know if you or your business have any liens, judgements, or OSHA violations in the past three to five years.
- Protection: Some applications will ask if you have fencing, lighting at night, or guards for your project. Proximity to a fire hydrant is also important information.
There may be other information you will need during the application process, but if you have these key pieces of information, you will have a good start.
2. Specify the Duration of the Project
A builders risk policy is typically written for a three-, six-, or twelve-month term and can usually be extended at least once if the building is not completed. Coverage can continue for up to 90 days after completion. Sometimes there is an occupancy clause, which means that coverage ceases when someone takes whole or partial occupancy of the project site.
3. Consider Getting an “All-Risks” Form Policy
It’s important to understand how certain perils can be excluded from a policy. The “all-risks” form offers the most coverage because it applies to losses arising from any cause except for those specifically excluded. Also note that this broad form of coverage is also referred to as “open perils” or “special perils” instead of all-risks.
According to Matthew Struck, Treadstone Risk Management, LLC:
“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/or business interruption losses.”
4. Get Builders Risk Insurance Quotes and Apply
Whether you get builders risk insurance quotes online, over the phone, or in person with an agent or broker, it’s wise to get at least three quotes to compare and contrast coverage, exclusions and pricing. The builders risk insurance quotes you receive will serve as the foundation for your final application and policy.
Builders Risk Coverage and Exclusions
Builders risk insurance is designed to cover typical risks builders face during the course of construction on building projects. The policyholder, which is typically the contractor or property owner, should take note of the perils covered in the policy as well as those risks that are excluded from coverage.
What’s Covered by Builders Risk Insurance
Most builders insurance policies are written on an “all-risks” basis, which means that coverage extends to any and all risk exposures associated with the building project unless they are explicitly excluded from coverage. Covered property often includes materials, supplies and fixtures. Coverage can be extended to include the machinery and equipment needed to complete the job as well as unattached structures, such as office trailers, fences, landscaping and scaffolding.
Risks or perils commonly covered by builders risk insurance include:
- Wind, hail and rain
- Collision (by vehicle or aircraft)
What’s Not Covered by Builders Risk Insurance
Common exclusions listed in a builders risk insurance policy are acts of war, intentional damage, and normal wear and tear. Some policies will also exclude some extreme acts of nature, such as earthquakes and floods. If you want to include specific risks to be covered, you can add them to your policy as “named perils.”
Here are risks and perils typically excluded from builders risk insurance:
- Acts of war
- Intentional damage
- Employee theft
- Normal wear and tear
- Water damage
Because most builders risk insurance policies are written on an “all-risks” basis, you should focus on the short list of exclusions when purchasing coverage. Since you know everything else is covered, you can then decide if you need to buy additional coverage for excluded risks that apply to your project.
Who Needs Builders Risk Insurance
Every new construction and most major renovation projects will need to be covered by builders risk insurance. The property owner financing the building project is commonly the named insured or primary covered party in the policy, but sometimes the contractor will buy the policy or will be added as a named insured.
Covered parties that are often named in builders risk include:
- Property/Project owner
- General contractor
- All sub-contractors
- Bank or lending institution
Although one party, usually the owner or general contractor, will purchase the policy and pay the premiums, the other covered parties involved in the course of construction should be listed as named insureds in the policy. However, each covered party does not need to be named specifically. For example, the covered parties can be listed by category, such as “All Sub-Contractors.”
Other Types of Insurance Builders May Need
Builders 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 categorization of commercial insurance, or more specifically, contractors 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 would cover the medical costs and legal defense, if needed.
- Commercial Auto Insurance: Covers bodily injury, property damage, medical payments and more for you and passengers in other vehicles if your commercial vehicle is involved in an auto accident.
- Professional Liability (Errors & Omissions): 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: If you are a contractor or subcontractor with employees, most states will require that you purchase workers compensation, which covers your employees for work-related injuries or illnesses. Benefits include medical bills, wages from lost work time, and more.
- Commercial Umbrella Insurance: This type of insurance doesn’t insure against a specific risk; it expands the limits of other coverage types. For example, if you were sued as a result of a third-party injury at your site and the cost of the lawsuit exceeded your general liability limit, commercial umbrella insurance would cover the excess legal costs up to the limit of umbrella coverage.
- Extended Liability: This insurance is similar to umbrella insurance, extending the coverage limits on general liability and other liability insurance types. The difference is that excess liability can only extend limits on one policy, whereas umbrella can extend multiple coverage types.
- Surety Bond: Contractors and commercial builders are often required to have a surety bond, which is a financial guarantee and assurance that you will complete your building project according to the contract.
For more details on the types of insurance builders may need, see our article on Types of Contractors Insurance.
Whether your project is a ground-up construction, a renovation, or a remodel, you’ll need builders risk insurance. If it’s a residential construction, keep in mind that your homeowners insurance will not be sufficient coverage for all-risk exposures associated with contracting and construction. Similarly, contractors will need more than general liability coverage for their building projects.