What Is Builder's Risk Insurance and How Does It Work?
Builder's risk insurance covers homes and buildings while they're under construction.
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Builder's risk policies also usually include coverage for materials, like lumber and drywall. The policy pays out if a worksite is damaged by fire, lightning, vandalism, theft or other potential losses. That way, you have the money to finish your building project, and you aren't out anything if there are issues along the way.
What is builder's risk insurance?
Builder's risk insurance covers homes and buildings under construction, plus the building materials.
Builder's risk insurance, sometimes called "course of construction" insurance, is a type of business insurance.
A regular home insurance policy or business policy doesn't cover structures that aren't fully built yet. Plus, buildings under construction have unique risks, like the potential for building materials or tools to be stolen. Builder's risk insurance is specifically designed to cover homes and buildings while they're being built, and it accounts for the unique risks that construction poses.
Who needs builder's risk insurance?
Usually, the people who buy builder's risk insurance are contractors, builders or engineers. Homeowners don't usually have to buy the policy themselves, but it's possible. If you're building or remodeling a home, talk to your builder and an insurance agent to find out who should buy a builder's risk policy.
What does builder's risk insurance cover?
Builder's risk insurance usually covers the structure that's being built as well as building materials.
It can also cover things like extra interest on loans, extra real estate taxes, lost sales and loss of rental income.
For example, if an apartment building burns down while it's being built, the builder would have to push the project back to rebuild it. That means they lose money by not being able to rent the apartments as quickly as they thought. In that case, a builder's risk policy could pay for the fire damage and the loss of rental income.
Depending on the company you pick, you might also be able to add extra coverage, called "riders" or "endorsements," to your builder's risk policy to customize it to your needs. If you're building in an earthquake-prone area, for example, you might want to add an earthquake rider. Other riders include coverage for scaffolding, debris removal and inflation.
Builder's risk policies usually cover you for common types of damage, like theft, fire and vandalism. Explosions, lightning, hail and wind damage are also usually covered.
What isn't covered under builder's risk insurance?
Just like home insurance, builder's risk insurance doesn't cover everything. The things that aren't covered are called "exclusions." Common exclusions on builder's risk insurance include damaged caused by:
- Wear and tear
- Faulty designs
- Rust or corrosion
- Employee theft
- Mechanical breakdowns
- Terrorism or war
The only way to know for sure what your policy does not cover is to review your specific policy documents.
How much does builder's risk insurance cost?
Builder's risk insurance usually costs about 1% to 5% of the total cost of the building project.
If your finished project costs $250,000, you can expect to pay between $2,500 to $12,500 per year. Costs vary widely depending on the details of your project and the specific coverage you need. Small businesses pay about $105 per month, or $1,259 annually, for builder's risk insurance.
Things that affect builder's risk costs
The amount of coverage you need has the biggest effect on builder's risk costs. The more coverage you need, the higher your rate will be. You'll also pay more if you add extra coverage, called endorsements or riders. Other things, like where you live and the type of project you're working on, also affect costs.
If you live in an area where damage is more likely, such as where wildfires are common, your builder's risk insurance will cost more. Costs will also be higher if you live where construction materials are hard to get or more expensive. That's because, if materials are stolen or damaged, the insurance company has to pay more to replace them.
If you're doing a small or short-term project, like installing new cabinets or countertops, you'll likely pay less than if you're doing a full-blown new construction or remodeling project. That's because smaller projects need less coverage and are also generally less risky. Remodels are often the most expensive projects to insure, especially if they involve making structural changes to an existing building.
Different types of building materials come with different risks that affect costs. For example, building a home or building with wood framing usually results in higher builder's risk costs because the risk of fire damage is greater than it would be with fire-resistant materials like masonry.
How to get builder's risk insurance
Contact an agent. Builder's risk policies can be complex, so it's not something you should try to buy on your own. Working with a local agency can be helpful, because local agents have a better understanding of the types of coverage that will be most important in your area.
Get quotes. If you work with a local independent agency, you can get quotes from several companies, which lets you compare your options. Several major insurance companies sell builder's risk insurance, including Liberty Mutual, Nationwide and The Hartford.
Review your options and buy a policy. Talk to your agent about the quotes. Your agent can walk you through the coverage and exclusions, and they can also help you decide if you need to add any optional coverage to your policy. Once you've found the best option, you can make a payment to start the coverage.
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Frequently asked questions
What does a builder's risk insurance policy cover?
Builder's risk covers homes and buildings under construction from things like fires, theft, certain types of water damage and vandalism. The exact coverage will depend on your policy, so be sure to read the policy documents carefully and talk to your agent about what's covered.
Who typically buys builder risk insurance?
Whoever has the biggest financial stake in a building project is usually the one who buys builder's risk insurance. For example, if a homeowner hires contracts to build their dream home, the homeowner should probably buy a builder's risk policy because they stand to lose money if the home or materials are damaged before the home is done. Sometimes, though, it makes more sense for a contractor to buy the builder's risk insurance. If you're working on a building project, talk to your builder and insurance agent to decide whose name should be on the policy.
What is the difference between builder's risk and homeowners insurance?
Builder's risk insurance covers homes that are still under construction, while homeowners insurance covers finished homes that someone lives in. Builder's risk insurance is considered a commercial or business policy, while home insurance is considered a personal insurance policy.
Sources
For the average cost of builder's risk insurance, ValuePenguin used estimates from Stanton Insurance Agency, which is based in Waltham, Massachusetts. Costs for builder's risk insurance will vary depending on where you live, what company you pick and the specific details of your building project.
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