What is Builder’s Risk Insurance?
You have the perfect site and a contract with the builder. You already have a move-in date circled on the calendar. Whether your new address is a business site or a custom home, it’s time for a happy dance. However, you might have overlooked one important thing: Builder’s Risk Insurance.
It’s a special and complex kind of property insurance. Not all agents are familiar with it. This insurance indemnifies against damage to a building while it’s under construction. The coverage typically protects the interest of an organization or a person as far as equipment, materials, or fixtures contractors use to build or renovate a structure in the event that there is physical loss of damage.
What exactly is Builder’s Risk Insurance
Insurers typically write policies for three-, six-, or 12-month terms, based on the anticipated length of a construction project. Most will extend an initial policy if necessary, but only once.
What’s Excluded in Your Builder’s Risk Policy?
Most policies don’t cover earthquakes, floods, or wind in beach zones unless a policy endorsement has been added. An agent can let you know if a rider for any of these is available for your construction area and help you decide whether the cost of one is a good financial move.
Other common exclusions include:
- Workplace accidents and injuries
- Faulty design, planning, materials, and workmanship
- Employee theft
- Mechanical breakdown
- Water damage
- Some types of weather damage
- Governmental action
- Contract penalties
- Property of others
- Voluntary parting
In some locales, a custom builder or a general contractor must show proof of builder’s risk insurance in order to comply with building codes and issuance of permits. However, material suppliers are not normally candidates for buying this type of insurance. If the property owner opts to purchase the policy and is the named insured, that is who will be paid in the event that a claim on the policy is successful.
After your builder’s risk insurance policy expires, it’s important to have permanent property insurance in place. This might be a home owner’s policy or a commercial policy.
Why do you need builder’s risk insurance?
One important common law principle is that courts consider new construction or land improvement the property of whoever owns the land (the title holder) just as soon as any improvement has occurred. If you own the land and any work has transpired—even initial delivery of materials without any labor expenditure—you’re responsible for any damage or destruction.
The causes can be many. Theft, vandalism, lightning, wind, and fire are the main culprits. Hail and explosions can also be big problems.
How much builder’s risk insurance should you have? The construction budget is usually a good estimate. The policy’s coverage limit should equal the completed value of the structure, including material and labor costs, but not the value of land.
Coverage ends when the earliest of these events occurs:
- Closing of the sale
- Policy’s expiration date
If you’re planning a renovation or a building addition, check your existing property insurance for coverage before you purchase builder’s risk insurance.