Understanding Builder's Risk Insurance

Builder and architect on building site
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Builder’s Risk Insurance, also known in some areas as Course of Construction, is a unique kind of property insurance. It's a form of insurance that covers a building where the building or insured area is presently being constructed. It can cover just the structure, or also the materials on-site waiting to be installed or transported to the job site and is a type of insurance that most owners will ask every contractor to carry.

The builder's risk insurance policy will pay for damages up to the coverage limit. The limit must accurately reflect the total completed value of the structure (all materials and labor costs, excluding land value). The construction budget is the best source for determining the appropriate limit of insurance. Builder’s Risk insurance policies can often be written in terms of three months, six months, or 12 months. If the project is not completed by the end of the initial policy term, it can often be extended, but usually only one time.

Understanding Builder's Risk Coverage

The builder's risk policy will provide coverage for damage done to the insured structure from a wide variety of events. Damage from the following events will be covered by most policies:

  • Fire
  • Wind (may be limited in coastal areas)
  • Theft
  • Lightning
  • Hail
  • Explosion
  • Vandalism
  • Vehicles or aircraft

You should read your builder's risk insurance policy to be familiar with its limitations and exclusions. Limited coverage is provided for collapse among other situations. Standard exclusions include:

  • Earthquake
  • Employee theft
  • Water damage
  • Weather damage to property in the open
  • War
  • Government action
  • Contract penalty
  • Voluntary parting
  • Mechanical breakdown

An important exclusion that should be read in its entirety excludes coverage for damage resulting from faulty design, planning, workmanship, or materials. These types of issues might be addressed by professional liability coverage rather than a builder's risk plan. Earthquake and flood coverage may be purchased in some areas.

How Much Does a Policy Cost?

This policy will be in the range of one to four percent of the construction cost, but it will depend on the type of coverage and exclusions that the policy will have. The importance of having a solid insurance company is that they will expedite your claims and will help you solve any potential claims during the construction process. Some companies can cover the soft costs of the project, but you will need to ask the insurance company to include it in your coverage but be aware that this might increase the cost of your builder's risk. The builder's risk insurance is part of your project's soft costs, and even though it will cost you some money, it is better to have it than not having it when is needed.

Do You Need an Extension?

Extensions of coverage may be provided for certain situations. The coverage for these may be limited. Common builder's risk insurance coverage extensions include:

  • A coverage extension to protect your property from loss while being transported to the job site.
  • Coverage is extended to apply to scaffolding, construction firms, and temporary structures, but only while they are at a location, you have reported.
  • Property that will be used or installed in the secured location and pertaining to the insured company.
  • When the fire department is called to save or protect covered property from a covered cause of loss.
  • The builder's risk insurance policy will pay your expenses to remove debris of covered property. This debris must result from a loss that is covered under this form.
  • Water damage from the back-up of sewers and drains is usually covered.
  • Property in transit
  • Scaffolding
  • Property in temporary storage
  • Fire department service charge
  • Debris removal
  • Sewer and Drain Backup
  • Valuable papers (site plans, blueprints, etc.)

Important Notes

It is really important to highlight this additional information that you should know:

  • The insurance will not cover the property of others.
  • Sub-contractors are required to have their own insurance.
  • There is no coverage for tools or equipment.
  • No coverage for professional liability.
  • It does not cover accidents at the job site.
  • Usually, coverage ends when the building is completed or occupied.
  • The premium for the annual policy is fully earned.

For specific terms, coverage, and exclusions, the original builder's risk insurance policy will determine the applicable coverage.