Builders Risk Insurance: Who Needs It and What It Covers

Builders Risk Insurance provides protection for buildings and/or structures during the time of the construction, renovation, or fabrication process, as well as to materials becoming a part of the project, foundations, site work, and temporary structures such as scaffolding. The builder's risk insurance is typically purchased by either the project owner or general contractor and will provide coverage to all parties working on the construction project. A standard commercial property policy is a poor fit for construction, which is why this specialized inland marine policy exists.

What is builders risk insurance?

Course of Construction Insurance, or Builders Risk Insurance, provides Inland Marine protection for each stage of a project from construction commencement to acceptance. The purpose of this document is to track the American Association of Insurance Services (AAIS) Builders' Risk Coverage, Scheduled Jobsite Form, Comprehensive Form (IM 7050 07 20). As an "open perils" policy, the limit is normally set at the final completed value of the construction project.

Who needs builders risk insurance, and who pays?

Anyone with money at risk in a construction project needs it: owners building new, adding on, or renovating. This type of insurance is usually purchased by the project owner or the general contractor for the project. The construction contract outlines who will be responsible for what and normally names all parties covered under the policy including the owner, contractor, subcontractors of every tier, construction managers and any lending institutions. Having all parties covered under one policy makes filing a claim much easier than having to deal with multiple different policies from each of the different party's insurance companies.

There is a legal reason for that: an insurer cannot subrogate against its own insured. The AIA A201 General Conditions build on this, having the owner and contractor waive rights against each other and their subcontractors for damage covered by the project's property insurance.^[1]

What does builders risk insurance cover, and what is excluded?

The policy covers the permanent aspects of the build as well as materials that go into the permanent structure (buildings, foundations, grading, fixtures), along with temporary work such as scaffolding and forms, often sublimited. Its reach outstrips a standard property policy:

Direct physical loss is covered unless excluded. Most commonly the policy excludes earth movement, flood, ordinance or law, defects and errors in design or workmanship, and delay in completion. Earthquakes and floods are usually required by the contract, and require endorsements to be added back into coverage, and at an increased deductible. The most confusing of all exclusions are those dealing with "defective" work. In general, a contractor's defective work itself will be excluded from coverage. However, damages caused by the defective work will often still have coverage under the policy.

When does coverage begin and end?

Coverage runs while structures are in the course of construction, and the end date is where projects get burned. Builders Risk coverage ends at the first of these: the insurance policy expires or is canceled, the structure is accepted, your insurable interest in the structure ceases to exist, you have abandoned construction on the building, or more than 90 days have passed since completion.

Write insurance coverage that lasts the full construction time and includes some buffer for delays. Do not renew this annually. Insurers might refuse to extend or they might extend only at a much higher rate. IRMI summarizes: "Imagine asking for a policy extension during hurricane season or after the insurance company just paid out a sizable loss!"^[2]

How much does builders risk insurance cost?

The builder's risk premium for a completed value policy is equal to the estimated completed value multiplied by a rate quoted per $100 of value, which already represents the increasing exposure due to time. Typically, the costs associated with builders risk insurance are in the range of 1 to 4 percent of the total completed project value, or $1.00 to $4.00 per $100 according to Insureon, a small business insurance marketplace.^[3] This can be determined based on your construction classification and/or location. For example, if you have a $2,000,000 completed value at a $1.00 rate then the term premium would be $20,000.

By raising your base deductible you lower your premium. Always keep the carrier notified of any changes made during the duration of the contract, i.e., if there are any change orders. This will help ensure that the limits stay in line with those required, as any losses suffered will be based on replacement cost of the damaged items (including overhead and profit).

Does builders risk cover delays and lost income?

Not automatically. The base policy has no coverage for time delays except for very limited Expediting Expenses coverage. Delay in completion coverage, added by endorsement, provides coverage to the owner for the lost rents on a leased project when a project is delayed, or lost net income like business income coverage, and Soft Costs, which includes interest, taxes, and insurance premiums. Delay in completion coverage carries a waiting period shown on the Delay In Completion Schedule (IM 7080 07 20), and the Deductible is calculated in days, not dollars.

This guide is for educational purposes and summarizes standard ISO and AAIS policy language. Your policy's specific terms, conditions, and endorsements control. Talk to a licensed broker about your actual exposures.

The Bottom Line

Builders Risk Insurance protects a building project and its materials from the time the ground-breaking begins until the time that the work has been accepted, under an "open-perils" theory of loss. This type of protection does not match with any standard property insurance policy. The contract decides who buys it and who counts as an insured. Coverage ends at the first trigger, not the expiration date. Therefore, review all of your potential "triggers" based upon your projected build schedule and set the term to outlast your worst-case delay.