What Does Builders Risk Insurance Cover?

Builders risk insurance is specialized property insurance for structures under construction or renovation. It protects the project’s financial investment, covering the structure, materials, and equipment against risks during building.

Core Property and Perils Covered

A builders risk policy covers the physical structure being built or renovated, including materials and equipment for permanent installation. Coverage extends to these items on-site, in transit, or in temporary storage. Some policies also cover cleanup costs, like debris removal, after a covered loss.

The policy protects against a broad range of perils, often called “all-risk” coverage, covering direct physical loss or damage unless excluded. Common perils include fire, wind, theft, vandalism, lightning, and explosion. Coverage for natural disasters like hail or tornadoes can vary, involving specific deductibles or sub-limits depending on the policy and location.

Some policies extend to “soft costs,” indirect expenses from a covered physical damage loss that delays the project. These include additional interest on construction loans, real estate taxes, or lost rental income. Certain policies include equipment breakdown coverage for permanently installed machinery, addressing mechanical or electrical failures.

Common Exclusions

Policies contain exclusions for risks controllable by the builder or needing separate coverage. Faulty design, workmanship, or materials are common exclusions; the cost to repair the defect itself is generally not covered. However, if such a defect leads to damage from an otherwise covered peril, the resulting damage (but not the faulty component) might be covered.

Other frequent exclusions include mechanical breakdown, ordinary wear and tear, and inherent vice. Acts of war, terrorism, and nuclear hazards are not covered. Earth movement (e.g., earthquakes, landslides) and flood damage are often excluded, requiring specific endorsements or separate policies. Contractual penalties, like liquidated damages for project delays, are usually not covered unless added via endorsement. Employee theft is another common exclusion, distinguishing it from third-party theft or vandalism.

Parties and Project Stages Covered

A builders risk policy protects all parties with a financial interest in the construction project. This includes the property owner, general contractor, and subcontractors. Lenders and investors also hold an insurable interest and may be named on the policy. The specific parties covered are determined by the construction contract.

Coverage begins when construction commences, like material delivery or groundbreaking. It continues through construction until the project reaches completion, occupancy, or sale, whichever occurs first. Policies often specify coverage ends when the building is occupied, put to its intended use, or a certain number of days (e.g., 60 or 90) after completion. Insurers should be notified promptly upon project completion or occupancy for proper coverage transition.

Valuation and Policy Limits

The coverage amount, or policy limit, for builders risk insurance is based on the estimated completed value of the structure. This value includes all anticipated building and design costs, such as labor and materials. Accurately estimating the total project cost, excluding the land value, ensures adequate coverage.

Most policies are written on a “completed value” basis, reflecting the project’s projected final cost. Underinsurance can lead to financial penalties, reducing payout if the declared value is less than the actual completed value. Deductibles apply to covered losses; the policyholder is responsible for a predetermined amount before coverage begins. These deductibles can vary, with some perils like named windstorms or floods having higher percentage-based deductibles.