Building a house is one of the largest financial investments most people will ever make. During the months of construction, the partially completed structure and the materials on site are vulnerable to a wide range of perils—fire, wind, theft, vandalism, and weather damage. Builders risk insurance is the specialized policy designed to protect this investment during the construction period. Yet confusion persists about who should purchase the policy, what it covers, how much it costs, and how claims are handled. This comprehensive guide explains everything homeowners and contractors need to know about builders risk insurance, helping you make informed decisions that protect your project from financial loss.
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What Is Builders Risk Insurance?
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Builders risk insurance, also known as course of construction insurance, is a specialized property insurance policy that covers buildings under construction. Unlike a standard homeowner’s insurance policy, which covers completed structures, builders risk insurance addresses the unique exposures of a construction site: materials stored on the ground or in temporary structures, partially completed work that is vulnerable to weather, the lack of permanent security systems, and the presence of multiple trades and contractors working simultaneously. The policy typically covers physical loss or damage to the building, materials, and equipment intended to become part of the building, with coverage continuing until the project is completed and the owner takes occupancy.
The standard builders risk policy is written on an “all-risk” basis, meaning it covers all causes of loss except those specifically excluded. Covered perils typically include fire, lightning, windstorm, hail, explosion, riot, vandalism, theft, damage from vehicles or aircraft, and collapse. Some policies also cover damage caused by weight of snow, ice, or sleet; water damage from sprinkler systems or plumbing; and damage during testing of equipment. Exclusions typically include earthquake, flood, wear and tear, inherent defects, faulty workmanship, design errors, and losses caused by government action or nuclear hazards. It is important to read the policy carefully and understand both the covered perils and the exclusions, as these vary significantly between insurance carriers and policy forms.
Builders risk insurance differs from general liability insurance, which covers bodily injury and property damage to third parties. While a general liability policy protects the contractor if a visitor is injured on the job site, builders risk insurance protects the building itself and the materials that will become part of it. Both types of coverage are essential for a well-protected construction project, and they serve complementary but distinct purposes. Homeowners should confirm that both policies are in place before construction begins, regardless of who is responsible for purchasing each type of coverage.
Who Should Purchase Builders Risk Insurance?
The question of who should purchase builders risk insurance—the owner or the contractor—is one of the most common sources of confusion in residential construction. The answer depends on the contractual arrangement between the parties, the requirements of the lender (if any), and local practices. In many residential projects, the owner purchases the builders risk policy because the owner has the insurable interest in the property. The building and materials belong to the owner, and any loss diminishes the value of the owner’s investment. However, it is also common for contractors to purchase builders risk insurance, particularly on commercial projects or when the contractor is providing design-build services with a single point of responsibility.
Standard industry contracts, such as those published by the American Institute of Architects (AIA), typically require the owner to purchase and maintain builders risk insurance. AIA Document A201, the General Conditions of the Contract for Construction, states that the owner “shall purchase and maintain . . . property insurance written on a Builder’s Risk ‘all-risk’ or equivalent policy.” The policy must include the interests of the owner, contractor, and subcontractors as named insureds. This approach ensures that all parties working on the project are covered under a single policy, simplifying claims handling and avoiding disputes between multiple insurance carriers.
When both parties are named on the policy, it is essential to understand how claims proceeds will be distributed in the event of a loss. The policy should specify the order of payment: typically, claims are paid first to the contractor to cover the cost of rebuilding or repairing the damaged work, with any remaining proceeds going to the owner. This arrangement protects the contractor’s interest in being paid for reconstruction work while ensuring that the owner’s investment is fully restored. A waiver of subrogation clause, which limits the ability of the insurance company to sue the contractor for causing the loss, is also standard in well-written builders risk policies and helps maintain a cooperative relationship between owner and contractor after a loss.
Coverage Details and Policy Limits
The amount of coverage required for a builders risk policy is typically equal to the completed value of the structure, including all materials, labor, and overhead. This amount should be established at the beginning of the project and adjusted as construction progresses and the value of the work in place increases. Some policies are written with a fixed limit based on the total contract value, while others use a reporting form that allows the insured to report values periodically as the project advances. The policy limit should be sufficient to cover the total cost of rebuilding the structure in the event of a total loss during construction, including any increases in material or labor costs that may occur during the rebuild period.
In addition to the building limit, builders risk policies typically provide coverage for several related items. Soft cost coverage reimburses the owner for additional expenses incurred as a result of a construction delay caused by a covered loss—such as extended loan interest, additional architectural or engineering fees, and extra carrying costs. Coverage for materials in transit protects materials that are damaged while being shipped to the job site. Coverage for scaffolding, temporary structures, and construction forms protects the temporary works necessary for construction. Coverage for debris removal pays for clearing damaged materials from the site after a loss. Each of these coverages should be reviewed carefully with an insurance agent to ensure that the policy provides adequate protection for the specific project.
Deductibles for builders risk policies vary widely, from as low as $1,000 to as high as $25,000 or more, depending on the policy and the risk profile of the project. Higher deductibles reduce the premium cost but increase the out-of-pocket expense in the event of a claim. Homeowners and contractors should choose a deductible that balances premium savings against the financial risk they are willing to assume. For small claims that fall below the deductible, the responsible party must bear the cost directly—which may lead to disputes about who is at fault and who should pay for minor damage.
How Builders Risk Insurance Interacts with Other Policies
Builders risk insurance does not exist in isolation; it interacts with other insurance policies that may apply to the construction project. The contractor’s general liability policy covers third-party bodily injury and property damage but typically excludes damage to the contractor’s own work—a gap that builders risk insurance fills. The contractor’s workers compensation policy covers injuries to employees, but builders risk insurance may cover injuries to volunteers, owner-occupants, or others who are not covered by workers compensation. Understanding these interactions is essential for identifying gaps in coverage and avoiding unpleasant surprises at claim time.
When the owner purchases builders risk insurance, the contractor should still maintain their own general liability, workers compensation, and umbrella liability policies. The contractor’s policies protect the contractor’s assets and cover liabilities that fall outside the scope of the builders risk policy—such as damage to neighboring property, injuries to the public, or pollution events caused by construction activities. The owner should request certificates of insurance from the contractor before construction begins, verifying that the contractor carries adequate limits on their liability and workers compensation policies.
For homeowners who are financing their construction project with a construction loan, the lender will almost certainly require builders risk insurance as a condition of the loan. The lender will be listed as a “loss payee” on the policy, meaning that claim payments will be made jointly to the owner and the lender. This requirement protects the lender’s collateral interest in the property during construction. Homeowners should coordinate with their lender’s insurance requirements to ensure that the policy meets the minimum coverage amounts and specific conditions mandated by the loan agreement.
Cost Factors for Builders Risk Insurance
The cost of builders risk insurance varies based on several factors. The most significant factor is the total insured value of the project—the higher the construction cost, the higher the premium. As a general guideline, builders risk insurance premiums range from 1 to 4 percent of the total construction cost, though rates can be higher for high-risk projects or lower for well-protected, low-risk sites. For a $400,000 home, the builders risk premium might range from $4,000 to $16,000, depending on the risk factors involved.
Other factors that influence premium rates include the construction type (wood frame is higher risk than masonry or concrete), the location of the project (areas prone to wildfires, hurricanes, or crime carry higher rates), the duration of the construction period (longer projects cost more to insure), the presence of security measures (fenced sites, security cameras, and alarm systems can reduce rates), and the claims history of the contractor or owner. Some insurance carriers offer discounted rates for projects where the contractor has completed extensive safety training or holds professional certifications. Shopping among multiple carriers and working with an agent who specializes in construction insurance can help secure the best rate.
It is worth noting that builders risk insurance is typically purchased for a specific term that matches the expected construction schedule. If the project takes longer than anticipated, the policy can be extended, though additional premium will be due. Some policies include a minimum premium that covers a specified period—typically 6 to 12 months—with additional charges for extensions beyond that period. Homeowners should plan for possible delays and budget for potential policy extensions when estimating insurance costs.
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Filing a Claim Under Builders Risk Insurance
In the event of damage to the project during construction, the claim process under a builders risk policy follows a standard sequence. The first step is to mitigate further damage—covering exposed areas with tarps, securing the site, and taking reasonable steps to prevent additional loss. The policyholder should then notify the insurance carrier or agent as soon as possible, providing a preliminary description of the loss and its cause. The insurance company will assign an adjuster to inspect the damage, estimate the cost of repair or replacement, and determine whether the loss is covered under the policy terms.
Documentation is critical to a successful claim. Before any cleanup or repairs begin, take extensive photographs and videos of the damage from multiple angles. Keep receipts for any emergency repairs or mitigation measures. Maintain a log of all communications with the insurance company, contractor, and any other parties involved in the claim. The adjuster will need access to the site, copies of the policy, the construction contract, and any permits or plans related to the project. A well-organized claim file speeds the adjustment process and reduces the likelihood of disputes over the scope or value of the loss.
Disputes over builders risk claims typically arise over three issues: whether the loss is covered by the policy, the value of the loss, and how the claim proceeds should be distributed among the named insureds. If a dispute cannot be resolved through negotiation with the insurance company, most policies include an appraisal clause that allows either party to demand an independent appraisal of the loss. If the dispute involves the contractor’s responsibility for causing the loss, the waiver of subrogation clause in the policy protects the contractor from being sued by the insurance company—but it does not prevent the owner from pursuing a claim against the contractor for losses that exceed the policy limits or for losses that fall outside the policy coverage.
Conclusion
Builders risk insurance is an essential component of any construction project, providing financial protection against the many perils that can damage or destroy a building during construction. While there is no single answer to the question of who should purchase the policy—it depends on the contractual arrangement, lender requirements, and local practices—the most important thing is that adequate coverage is in place before construction begins. Whether the policy is purchased by the owner or the contractor, all parties with an insurable interest should be listed as named insureds, and the policy should include a waiver of subrogation clause to prevent disputes between owner and contractor after a loss. By understanding the coverage, costs, and claims process associated with builders risk insurance, homeowners and contractors can proceed with confidence, knowing that their investment is protected.