Builders’ Risk Insurance 101

Statistic data shows that 34% of private construction projects face financial risks, while 29% of public projects have the same fate. Meanwhile, engineering issues plague 51% of public and 28% of private projects, while contractual risks are eminent in 28% of private and 31% of public projects.
All these risks result in monetary losses for builders, engineers, general contractors, and building owners. In some cases, the losses may be so big that you’d end up with zero profits on the project.
That’s where builders’ risk insurance comes to the rescue. Here’s a detailed guide to teach you everything you need to know before going insurance shopping.

What Is Builders’ Risk Insurance?

Builders’ risk insurance is insurance coverage for construction materials and property during a renovation or construction project. It covers damage and destruction of construction job site property and equipment in case of unexpected events, such as fire and vandalism.

Many construction and mortgage agreements require builders to have this insurance, making it a necessity. These insurance policies are also called course of construction insurance and have varying offerings based on the insurer.

Who Needs Builders’ Risk Insurance?

Builders’ risk insurance is necessary for any party with a financial stake in a construction or renovation project. The following professionals can benefit from this insurance coverage:

Architects
Builders
Building owners
General contractors
Lenders
Development companies
Engineers
Subcontractors

If multiple parties are working together on a construction job site, the builders’ risk policy will be bought by the general contractor. Although they are the primary insured, other parties are also covered as additional insureds.

Sometimes, the building owner has to purchase a builders’ risk insurance policy. Whoever buys the policy will depend on the terms and conditions of the project contract.

What Are the Benefits of Builders’ Risk Insurance?

The major benefit of a builders’ risk insurance plan is that it protects your in-progress construction project. It also covers temporary structures, such as scaffolding and fences.

Construction sites use expensive equipment and material, damage to which can be quite costly for the project owners. A builders’ risk insurance plan can safeguard these materials in unexpected situations.

The insurance policy will also help meet client requirements, increasing your chances of winning bids. More importantly, builders’ risk insurance may be important for you to comply with state building codes.

Builders’ Risk Insurance Coverage: What Does It Cover?

Builders’ risk insurance provides coverage for several problems, including but not limited to:

Theft
Vandalism
Hurricanes
Natural disasters
Hail
Lightning
Fire
Explosions

There’s no standard list of items a builders’ risk insurance plan covers. You’ll have to speak to your insurer for more details. But a general plan will cover:

Important construction documents like electronic records and blueprints
Under construction structures like fencing, scaffolding, storage buildings, etc.
Equipment
Supplies and materials
Construction signs
Plants and trees
Labor

Many builders’ risk insurance policies also cover ‘soft’ costs, which result from delays in construction projects. These costs may include rental income, real estate taxes, lost sales income, and additional interest incurred on construction project loans.

Before you buy a builders’ risk insurance plan, make sure you’ve understood what your insurer covers. The policy does not cover everything, not even all natural disasters.

For instance, many policies do not provide coverage for floods and earthquakes. Instead, you’ll have to get an additional flood insurance coverage plan.

Some other exclusions include:

Wear and tear
Rust
Corrosion
Employee theft
Damage resulting from faulty or poor design
War
Acts of terrorism
Mechanical breakdowns

How Much Does Builders’ Risk Insurance Cost?

The typical cost of builders’ risk insurance is $95 per month. However, the price could be higher or lower based on your structure’s complete value.

Factors Affecting the Cost of Builders’ Risk Insurance

Some factors that affect the cost of builders’ risk insurance are:

Materials: The more materials you have on-site, the higher your premium will be. Likewise, the cost of materials will also determine the monthly payout.
Coverage Options: You can choose between named perils and all-risk. If you select the former, you’ll pay less because your insurance will only cover the issues you’ve selected. Meanwhile, the latter costs more because the insurer would have to pay for all sorts of damages.
Deductible: A higher deductible means you’ll have to pay a lower premium

When Does the Builders’ Risk Insurance End?

The builders’ risk insurance is a temporary policy. So, it doesn’t have a long-term period. Instead, it ends based on the period specified in your policy.

The policy may end when:

Construction ends
You cancel the policy
Building starts serving its intended use
Building is occupied

How to Select the Right Builders’ Risk Insurance Plan?

Before you start shopping for a builders’ risk insurance policy, determine who needs to purchase the policy. For example, if you’re an engineer or a subcontractor, you may not have to buy a plan. Your building owner or contractor may purchase a policy and list you as additional insured.

But if the contract obligates you to get builders’ risk insurance, here’s what to do.

Decide the Amount of Coverage You Need

What are your risks? Does your area get significant rain or hail? Is there much vandalism or theft? Evaluate all the risks and determine how much coverage you need.

Estimate the Coverage Duration

All well-managed construction projects have a pre-specified timeline. Use it to determine how long you need the coverage.
For example, you may still need coverage after construction has ended because you want it to extend till the building is occupied. Communicate this with your insurer to avoid issues later on.

Understand the Policy Offerings

Not all builders’ risk insurance policies are the same. Read the policy’s terms and conditions carefully. Also, check the exclusions to avoid costly surprises.

Conclusion

Builders’ risk insurance policy is a must-have for builders, building owners, and contractors. Even if you believe your construction site is risk-free – which it most likely isn’t – many state laws and client contracts will legally bind you to get this insurance.
So, do thorough research and compare several plans before you choose coverage for your project.

POSTED ON: Policy Insights

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