Understanding Your Builder’s Risk Policy

Construction projects can be affected by many exposures. For example, a storm could damage equipment, a fire could burn a structure, or criminals could vandalize the site. Since construction projects involve many risks, they require comprehensive insurance. In most cases, that includes a builder’s risk policy.

Key Takeaways

• Builder’s risk insurance, also called course of construction insurance, adjusts coverage as a project’s value increases from foundation to completion.
• Most builder’s risk policies are written on an inland marine form rather than a standard commercial property form, so terms vary significantly between carriers.
• Common exclusions include flood, earthquake, war, employee dishonesty, and faulty design, though some can be added back with endorsements.
• Builder’s risk coverage can extend to materials in transit and in offsite storage, not just property physically on the jobsite.
• Anyone with a financial stake in a project — contractors, subcontractors, property owners, and lenders — typically needs to be named on the policy.
• For large or multi-contractor projects, wrap-up insurance may offer broader, more centralized coverage than a standard builder’s risk policy.

What Is a Builder’s Risk Policy?

Builder’s risk insurance is a type of property insurance policy designed to address the changing value of construction projects.

Determining the full value of a property during construction is complicated. At the beginning of the construction project, the building may have a relatively low value because you have completed only minimal work and have not used many materials yet. Toward the end of the project, the value will be much higher.

According to the Insurance Information Institute, builder’s risk insurance is a special type of property insurance that addresses this issue. If you have a replacement cost builder’s risk insurance policy and your building is destroyed when it’s half complete, the policy will pay one-half the value of the completed building. Likewise, if the building is three-fourths complete, you’ll receive three-fourths of the value. We typically see this play out on residential builds, where an early-stage fire loss pays out at a fraction of the completed value, while a late-stage loss can approach full replacement cost. Many policies also require reporting the actual value each month for more accurate coverage.

Builder’s risk insurance is important for contractors and subcontractors as well as others with a financial interest in the project, such as property owners and design companies.

Builder’s Risk Policy Variations

Although builder’s risk coverage is a common and important type of insurance for contractors, IRMI says there is no single standard builder’s risk form. Some policies use commercial property forms, but most use inland marine insurance forms.

These variations mean it’s important to check the terms in your policy. Don’t just assume your current policy is the same as one you had in the past. This variation is also one of the reasons builder’s risk claims are often more complex than a typical contractor liability claim — see our guide to the four most common contractor insurance claims for how these coverages work together.

What Does Builder’s Risk Insurance Cover?

IRMI says builder’s risk insurance is usually written on an all-risk basis and may cover property in transit and in offsite storage as well as property located on site.

All-risk policies cover any risks not specifically excluded in the policy terms. However, exclusions are common — your builder’s risk policy will likely exclude floods, earthquakes, and acts of war or terrorism. It may also exclude losses caused by employee dishonesty, wear and tear, and faulty design or planning. You may be able to secure add-on coverage for some excluded risks, such as flooding.

Despite these common exclusions, builder’s risk insurance covers many common risks that threaten a construction site, from theft and vandalism to fire and lightning.

Criminal activity is an ever-present risk to construction sites. Criminals may steal materials and equipment, potentially causing damage to the site while they’re there. If this happens, you can file a claim on your builder’s risk policy.

What Does Builder’s Risk Insurance Cost?

Builder’s risk insurance typically costs 1% to 4% of the total construction budget. For example, a $1 million project might see premiums between $10,000 and $40,000. Project duration, location, and specific endorsements can all move that number up or down, so a quote from a broker familiar with construction risk is the best way to get an accurate figure.

Your Builder’s Risk Policy

When purchasing a builder’s risk policy, you will need to work with your insurance company and broker to make sure your policy is tailored to meet the needs of your project. Be prepared to discuss the following topics:

• What is the projected value of the completed project? Since this value determines your limits, it needs to be accurate.
• What type of reporting does the policy require? Do you need to report monthly values? Do you need to report changes in the construction project schedule, such as delays?
• What types of loss and causes of loss does the policy cover? Most builder’s risk policies operate on an all-risk basis, but you should make sure you’re aware of any exclusions in your coverage and consider whether you need additional coverage.
• Does the policy protect materials and equipment when they are away from the worksite? It may cover property in storage and in transit, but you need to verify this.
• Does it cover additional expenses? Some builder’s risk policies provide coverage for these costs due to construction delays.
• Who is insured? A construction project often involves multiple parties, including the contractors, subcontractors, and property owners. In our experience, this is where projects run into trouble most often — a subcontractor (such as an electrical contractor) assuming they’re automatically covered under the GC’s policy is one of the most frequent coverage gaps we help clients close. You need to know exactly who your policy covers.

Rounding Out Your Construction Insurance Package

A builder’s risk policy provides critical coverage for ongoing projects, but it does not cover everything that can go wrong. Other insurance coverage types to consider include workers’ compensation, commercial auto, general contractor insurance, and environmental insurance. Coordinating builder’s risk with these other coverages from the start helps avoid overlapping premiums and gaps alike. Heffernan Insurance Brokers can help you assess your risks and insurance needs to help you secure suitable coverage.

For large projects, wrap-up insurance may provide the best coverage and can be administered by Wrap Up Insurance Solutions.

A builder’s risk policy is only as good as its fit to your project. Between reporting requirements, exclusions, and who’s actually named on the policy, a generic builder’s risk form can leave real gaps on a custom or high-value build.

Get a builder’s risk quote from Heffernan’s construction insurance team →