Good risk management in construction isn’t just about what you do on the job site. It’s also what you do behind the scenes that can set your business up for success. Of course, one non-negotiable here is setting up your business with the right insurance. When you’re up to your neck in a new build, having the right insurance policy means one less thing to worry about. This is where builder’s risk insurance comes in.
Trust us - you don’t want to be caught without it. So what is builder’s risk insurance, anyway?
Key Takeaways
- Builder’s risk insurance covers buildings under construction from financial loss caused by fire, hail, wind, vandalism, or other property damage.
- When looking at builder’s risk insurance policies, don’t forget to check policy exclusions. For example, most policies don’t cover damages from faulty design.
- Because builder’s risk insurance can be difficult to understand, it’s important to work with an insurance company that specializes in the construction industry.
What is Builder’s Risk Insurance?
New construction projects face a lot of risks (some predictable, some unpredictable) as they grow from the ground up. Builder’s risk insurance, also known as course of construction insurance, protects against many of these risks. Along with the structure itself, this insurance can also cover damage to building materials that have been installed, or materials held on or off the construction site.
The purpose of this type of property insurance is to protect the project’s financial interests as you work on a job. If the property is damaged by fire, lightning, or theft, for example, you aren’t left to recoup those losses on your own.
Who Needs Builder’s Risk Insurance?
Any financial stakeholder in a construction project should have a builder’s risk insurance policy. Normally, this would include:
- General contractors
- Property owners/homeowners
- Developers
- Subcontractors (in some cases)
What Does Builder’s Risk Insurance Cover?
Builder’s risk insurance covers new construction on both residential and commercial property. Also, any construction materials, equipment, and temporary structures like scaffolding are covered, whether they’re stored on or off the job site.
Basic builder’s risk insurance includes protection from these common exposures:
- Fire or arson
- Explosions
- Theft
- Vandalism
- Water damage
- Weather damage such as wind, hail, and lightning
- Structural collapse
The nice thing about this type of insurance is that it can also cover soft costs that aren’t directly related to construction. For instance, if property damage causes construction delays, you’ll be covered for things like:
- Fees or penalties from a lender
- Additional interest on loans
- Lost income
When buying a policy, you also have the option to add additional insurance coverage for things like pollutant cleanup and debris removal in the event of a loss.
What Builder’s Risk Insurance Doesn’t Cover
Unfortunately, builder’s risk insurance doesn’t cover everything. Make sure your insurance agent explains any coverage exclusions. If you need extra coverage, you may be able to customize your policy.
Note: Builder’s risk doesn’t include liability coverage. You’ll need a separate general liability policy to protect your construction business.
Most basic builder’s risk policies don’t protect against:
- Wear and tear
- Employee theft
- Workmanship
- Mechanical breakdowns
- Damage caused by faulty design
3 Benefits of Builder’s Risk Insurance
Beyond protecting the property you’re working on against damage, your builder’s risk insurance coverage offers several other benefits as well:
Protection against financial losses - There’s nothing more devastating to a small business than a direct hit to your revenue and profitability. Having builder’s risk coverage means that one unforeseen disaster or theft won’t ruin your business.
Contractual compliance - Along with protecting your financial interests, having this kind of policy makes you a candidate for a larger pool of projects. Many owners and banks require a builder’s risk policy, especially for government work.
Peace of mind for stakeholders - Builder’s risk coverage can extend to other stakeholders on the project, including specialty contractors. Basically, if someone has a financial stake in a project, they can be listed as an “additional insured” on a policy, meaning everyone is covered in the event of a loss.
How Much Does Builder’s Risk Insurance Cost?
The cost of builders risk insurance is different for every construction business, and what you pay will depend on the level of coverage you need. Your lender will do some underwriting to determine your company’s level of risk by looking at a few different factors, including:
- Type of property being built
- Project size and complexity
- Location and weather conditions
- Type of construction materials being used
- Your business’s safety measures and risk management practices.
Generally speaking, the policy’s coverage limit should be equal to your projected revenue of construction. This way, if the project goes completely under, you’re covered up to that amount.
How Do You Get Builder’s Risk Insurance?
To get a builder’s risk policy, you’ll work with an insurance provider to assess your company’s risk and determine the level of coverage you need on the project. Because this isn’t your run-of-the-mill business insurance, we recommend working with an insurance broker that specializes in construction and contractors.
While you’re building your policy, make sure to provide accurate project information to get the best coverage for your needs. Also, don’t forget to review all of the terms and conditions with your provider. If you have any questions about what your policy does and does not cover, now’s the time to ask. You don’t want to submit a claim only to find out that it’s not covered.
Wrapping Up
Every construction project comes with its own set of unknowns. The more you plan ahead, the less financial risk you’ll face. But since you can’t plan for everything, builder’s risk insurance is there to fill in the gaps.