Builders risk insurance is a specialized type of property insurance that covers buildings under construction. Unlike standard homeowners or commercial property policies, builders risk policies are designed to protect structures that are not yet complete and therefore face unique risks during the construction process. One of the most common sources of confusion in residential construction is determining who should purchase the builders risk policy and how coverage should be structured to protect both the homeowner and the builder. The answer depends on the contract structure, the financing arrangement, and the specific insurance requirements of each party. Understanding construction bonds and surety requirements for building projects provides context for evaluating the full range of financial protections available during construction.
What Builders Risk Insurance Covers
Builders risk insurance covers physical damage to a building during construction. The policy typically covers materials, supplies, equipment, and the structure itself against perils such as fire, lightning, wind, hail, theft, vandalism, and certain types of water damage. Coverage begins when materials are delivered to the site and continues until the building is completed and occupied. Most builders risk policies cover losses on a replacement cost basis, meaning the insurer pays the cost to repair or replace damaged property at current prices rather than the depreciated value. This is important because construction costs typically increase over time, and a policy that pays only actual cash value may not provide sufficient funds to complete the project after a loss.
Builders risk policies typically have coverage limits that equal the completed value of the building, including both materials and labor. The premium is based on this total insured value, the construction type, the location, and the length of the construction period. Premiums typically range from 1 to 4 percent of the total insured value. For a $300,000 home, this means a builders risk premium of $3,000 to $12,000. Policies can be written for a specific term, usually 12 months, with extensions available if construction takes longer than anticipated.
There are important exclusions in standard builders risk policies that homeowners should understand. Earthquake and flood coverage are typically excluded and must be purchased separately. Theft of materials from the job site may have sublimits or require additional security measures. Soft costs such as additional living expenses if the project is delayed by a covered loss may also require separate coverage. Many policies exclude damage caused by design errors, faulty workmanship, or material defects, though they cover resulting damage from these causes. Understanding these exclusions is essential for determining whether additional coverage is needed.
Who Should Purchase the Policy: Homeowner vs. Builder
The question of who should purchase builders risk insurance depends primarily on the construction contract structure and the financial arrangement. In a traditional design-bid-build contract where the homeowner pays the builder as work progresses, the homeowner has a direct financial interest in the property under construction and should be the named insured on the builders risk policy. The homeowner owns the land and pays for the materials and labor as they are incorporated into the building. If the building is damaged, it is the homeowner who suffers the financial loss, and it is the homeowner who should control the insurance proceeds for repairing the damage.
In a design-build contract where the builder provides both design and construction services under a single contract, the builder may purchase the builders risk policy and include the cost in the contract price. However, the homeowner should still require that they be named as an additional insured or co-insured on the policy. This ensures that the homeowner has direct rights under the policy and will be notified if the policy is canceled or modified. Without being named on the policy, the homeowner has no contractual relationship with the insurance company and may have difficulty recovering losses if the builder fails to file a claim or disputes the amount of the loss.
The most protective arrangement for homeowners is to be named as the primary insured on the builders risk policy, with the builder named as an additional insured. This gives the homeowner control over the policy, including the right to file claims, receive premium refunds if the project is completed early, and make decisions about coverage limits and deductibles. The builder retains coverage for their liability exposure while the homeowner controls the property insurance. This arrangement also avoids the potential conflict of interest that arises when the builder controls insurance proceeds that may need to cover losses caused by the builder’s own negligence.
| Policy Arrangement | Homeowner Control | Builder Protection | Claim Process | Recommended For |
|---|---|---|---|---|
| Homeowner as primary insured | Full | Additional insured status | Homeowner controls claim | Owner-financed projects |
| Builder as primary insured | Limited | Full control | Builder controls claim | Design-build, turnkey projects |
| Joint co-insured | Shared | Shared | Both must agree | Bank-financed projects |
| No builders risk policy | None | None | No coverage available | Not recommended under any circumstances |
Key Policy Provisions and Common Pitfalls
Several critical provisions in builders risk policies can significantly affect claim outcomes. The coinsurance clause requires that the policy limit be at least 80 to 90 percent of the completed value of the building. If the limit is set lower than this threshold, the insurer can reduce claim payments proportionally, leaving the insured to pay a share of any loss out of pocket. For example, if the completed value is $400,000 but the policy limit is only $250,000, the coinsurance clause could reduce a $100,000 claim payment to $62,500. Ensuring that the policy limit reflects the full completed value of the building is essential for avoiding coinsurance penalties.
The policy term must be long enough to cover the entire construction period, including any delays. Standard builders risk policies are written for 12 months, but most residential construction projects take longer than this, particularly when permitting delays, weather delays, and change orders extend the schedule. Policy extensions are available but must be requested before the original term expires. Homeowners should monitor the policy expiration date and request extensions as needed to maintain continuous coverage. A coverage gap during the construction period could leave the building uninsured at a critical time.
Course of construction coverage automatically applies to new materials and completed work as the project progresses, but the policy must be endorsed to cover certain items. Contractor equipment and tools are typically excluded from builders risk policies and must be covered under the contractor’s own equipment insurance. Materials stored off-site, such as windows, cabinets, or roofing materials that are delivered before they are needed, may not be covered unless specifically scheduled on the policy. Foundations and site work may have limited coverage under standard policies and may need separate coverage for underground work. Reviewing the policy with an experienced construction insurance agent before work begins ensures that all project components are adequately covered. Understanding construction equipment protection and maintenance strategies helps homeowners and contractors evaluate the full scope of insurance needs for building projects.
Claims Process and Best Practices for Homeowners
Understanding the claims process before a loss occurs is essential for homeowners who control their own builders risk policy. In the event of damage to the building under construction, the homeowner should immediately notify the insurance company and document the damage with photographs and detailed notes. The insurance company will assign an adjuster to inspect the damage and estimate the repair cost. The builder should be involved in the claims process to provide input on the repair scope and cost, as the builder will be responsible for performing the repair work.
Disputes between the homeowner, builder, and insurance company over the scope or cost of repairs are common in builders risk claims. To minimize the potential for disputes, the policy should include an appraisal clause that provides a mechanism for resolving disagreements about the value of the loss. The appraisal process involves each party selecting an appraiser, who then selects a neutral umpire. If the two appraisers cannot agree on the loss value, the umpire makes the final determination. This process is typically faster and less expensive than litigation and can resolve most valuation disputes without court involvement.
Best practices for managing builders risk insurance include maintaining a complete set of construction documents, including contracts, plans, specifications, and change orders, in a location accessible even if the building is damaged. Keep a log of all materials delivered to the site, including receipts and photographs, to support claims for stolen or damaged materials. Review the policy with a qualified insurance professional at least twice during construction, once at the beginning and once when the project is approximately 50 percent complete, to ensure coverage limits remain adequate and no coverage gaps have developed. With proper planning and policy structure, builders risk insurance provides essential protection for the significant investment represented by a home under construction.