What Is Builders Risk Insurance?

The auto dealership’s new facility was nearing the end of construction when a welder’s stray spark fell into a dry pile of mulch. As laborers headed home, nobody noticed the mulch quietly beginning to smolder. An hour later, large tongues of flame were crawling up the side of the building, and the first fire engine arriving on the scene immediately radioed in for a second alarm. When the sun rose the next day, large sections of the beautiful new building looked like skeletons. The general contractor realized they were looking at hundreds of thousands of dollars in damage. Fortunately, the work their crews had already completed was protected with a builders risk insurance policy.

What is a builders risk policy?

People who haven’t worked with this type of policy may wonder: how does builders risk insurance work? Sometimes referred to as “course of construction” or “inland marine” insurance, builders risk insurance coverage provides financial protection for structures while they are being constructed and before traditional commercial property insurance policies are in place. Commercial builders insurance policies are tailored to the risk management needs of the buyer and the realities of the project.

What does builders risk insurance cover?

The purpose of builders risk policies is to provide insurance for builders for any damage or other losses during the construction process. Builders risk coverage typically combines standard types of construction coverage with optional endorsements reflecting the nature of the covered commercial or residential projects.

While specific coverages vary by policy and insurance carrier, most builders risk policies cover some combination of financial protection for damage caused by fire, vandalism, certain weather conditions, theft, sewage backups, and even materials that suffer damage enroute to the jobsite. Contractors may also choose to purchase additional builder insurance endorsements for other perils such as flooding, depending on the nature of the project and the site where it’s being built.

This type of builder risk policy is available not only for new commercial and residential construction projects, but also for remodeling work or new expansions to existing structures. In addition, contractors may also be able to buy limited policies for one segment of a larger project, such as a flooring contractor purchasing builders risk coverage solely for their portion of the project.

What does builders risk insurance not cover?

As with any type of builders insurance policy, it’s important to know what damages will not be covered, or “excluded” in insurance terminology. Specific areas that are typically not included in home builder insurance and other types of builders risk policies include the following:

Natural disasters

While builders risk insurance coverage doesn’t usually cover the damage caused by natural disasters like tornadoes, hailstorms, and earthquakes, insurance brokers often recommend adding what’s known as a severe weather endorsement to policies. The small increase to the policy cost may prove to be a smart investment, especially as changes in climate patterns are leading to greater frequency and more severity of weather events in many parts of the world.

Tool damage

Construction tools and equipment can be expensive and may be damaged or stolen during the course of a building project. Because the typical builder risk policy doesn’t cover that kind of damage or theft, contractors can purchase a separate tools and equipment insurance policy to fund the cost of replacing or repairing anything that’s damaged, lost, or stolen from the site.

Damage due to bad design and low-quality materials

If the damage to a structure under construction is caused by poor-quality or defective materials, mistakes in the design, or negligence on the part of construction workers, it won’t be covered by most builders risk insurance. Instead, contractors and subcontractors should protect themselves by carrying separate builder liability insurance.

Employee injuries

Contractors are required to obtain workers’ compensation insurance coverage to cover the cost of medical care and lost work wages for workers who suffer injuries or illness resulting from work they’ve performed. A builders risk policy will not cover such injuries or illnesses. Workers’ compensation coverage premiums are based on the nature of the work being performed and the contractor’s safety record, so the more attention contractors place on creating a safe workplace, the less they’ll pay for this important coverage.

Who should obtain builders risk?

While it may seem obvious that builders risk coverage is important insurance for home builders and other contractors, these policies are important for anyone who has a financial stake in a building’s completion. Damage to the construction project or delays in being able to occupy the building can protect the insured from negative financial consequences, such as a retailer that loses potential revenue every day the project isn’t completed.

That includes builders insurance for homeowners who are having a new home constructed for them or have contracted for major home remodeling or other improvements, as well as owners of residential and commercial properties, governmental entities with projects (such as school districts or municipalities), commercial businesses, and subcontractors. Other participants in the process who may benefit from obtaining a builders risk policy include:

General contractors

For many GCs, a large building project may represent a significant share of the company’s expected revenue, and major problems like the fire described at the start of this post could result in major losses or even bankruptcy. Builders risk policies provide a financial safety net to compensate the general contractor for losses and extra costs.

Electricians

Electricians and other skilled subcontractors can also protect themselves from financial losses with a builders risk policy. Such policies tailored for electricians may also cover the theft of materials from the site, an increasingly common problem with copper wire and other materials that may be sold to legitimate recyclers or criminal fences.

Architects

When major damage occurs during a construction project, there are often arguments about who is truly to blame (and therefore becomes liable) for the cost of damage. Disputes such as these can even wind up in court, and a judge might force the architect to pay part or all of the damages. A builders risk policy crafted specifically for architects will provide financial protection.

Engineers

Similarly, civil and other types of engineers involved in construction planning or activities may find themselves facing financial losses resulting from damage, even if they believe they don’t deserve the blame. Here again, a builders risk policy will provide peace of mind by protecting their financial interests.

Is builders risk insurance required?

This type of insurance is commonly required by lenders or investors as part of a project’s construction financing arrangements. It’s also common when tax dollars or other public funds are used for construction projects, so taxpayers don’t suffer any financial harm.

Depending upon the contractual arrangements or the nature of the project, it may also be prudent to obtain general and/or professional liability insurance or other types of contractor policies. One key area to consider is liability insurance that covers situations in which someone other than a worker is injured on the site, or when the construction process results in damage to other people’s property.

In some cases, contractors may need to purchase separate policies covering transport of materials to the site, which are often referred to as inland marine policies. A broker can evaluate the project and make recommendations as to the right type of builder insurance policy.

How much does builders risk insurance cost?

How much is builders risk insurance? The cost of builders risk insurance varies, based upon a variety of factors, including the project’s total cost, the type of property and the nature of the work being performed (new construction, addition, remodeling, etc.), the location of the project, and the specific coverages being requested. Your insurance broker can obtain a quote for your construction insurance cost.

Who pays for builders risk insurance?

As explained earlier, anyone with a financial risk associated with a construction project may benefit from builders risk insurance. In some cases, the responsibility for obtaining coverage may be spelled out in the contract. In other cases, all those affected -- from the architects, to general contractors, to subcontractors, and owners -- can negotiate to determine who will carry the builders risk insurance cost.

Trust your broker’s expertise

Generally, the best way to explore the coverage that’s needed and identify the right policies is to work with an insurance broker who has experience with this type of builders insurance policy. Experienced brokers have a solid understanding of the nature of risks associated with construction projects and can make sure your interests are protected.

Learn More

Hylant’s dedicated construction team works with contractors, construction companies, CMs, and project owners to address all aspects of their insurance, including the use of builder risk insurance to provide protection during the construction process. Contact Hylant today to discuss all your construction insurance needs.

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.