Who Gets Builders Risk Insurance on a Project?

Builders risk insurance provides specialized financial protection for properties undergoing construction or renovation. Construction projects inherently involve various risks, from natural disasters to on-site accidents, which can lead to significant financial losses. This insurance safeguards the investment in a building project by mitigating the financial impact of unforeseen events that could damage the structure or materials before completion.

Understanding Builders Risk Insurance

Builders risk insurance, also known as course of construction or inland marine coverage, is a property insurance policy specifically tailored for buildings and structures during their construction or renovation phase. This policy covers the physical structure itself, along with materials and equipment intended for permanent installation on the job site. It extends to property in transit to the site and materials stored off-site for the project.

Coverage includes perils such as fire, windstorm, theft, vandalism, lightning, and explosions. Some policies may also cover debris removal costs and “soft costs” such as additional interest on financing or real estate taxes incurred due to project delays from covered damage. Builders risk insurance primarily covers damage to the project itself, not liability for injuries or issues from faulty workmanship.

Builders risk policies contain specific exclusions. Common exclusions include damage from earthquakes and floods, although additional coverage can often be purchased through endorsements. Policies generally exclude losses due to faulty design, materials, or workmanship, ordinary wear and tear, and employee theft. Mechanical breakdown of equipment not resulting from a covered peril is also excluded.

Builders risk insurance is temporary. Coverage usually begins when the project starts and continues throughout the construction period. The policy typically expires upon project completion, occupancy of the building, acceptance by the purchaser, or a specified period after substantial completion. Extensions are often possible if the project takes longer than anticipated.

Key Parties Who Need Coverage

Several parties in a construction project have an insurable interest, meaning they stand to suffer a financial loss if the project is damaged. The presence of multiple parties with a financial stake often necessitates careful coordination to ensure all interests are adequately protected under the policy.

Property owners, whether individuals, developers, or businesses, typically have the most significant financial investment in a construction project. They risk losing capital, including the cost of land, materials, and labor, if the property is damaged. For homeowners, standard homeowners insurance policies usually do not provide sufficient coverage for an unoccupied structure under construction, making builders risk essential.

General contractors have a substantial financial interest in the successful completion of the work, including materials, equipment, and labor costs. They are frequently contractually obligated to ensure the project is insured and often bear the direct financial consequences of damage or delays.

Subcontractors have an insurable interest in their specific work and materials. While their work is often covered under the general contractor’s primary builders risk policy, listing them as additional insureds on the main policy ensures their interests are protected.

Lenders and financial institutions providing construction loans have a substantial financial stake in the project’s successful completion and its eventual value. As a result, lenders almost universally require builders risk insurance as a condition for financing construction. They typically require being listed as a loss payee or mortgagee on the policy, ensuring they receive insurance proceeds in the event of a covered loss to protect their investment.

Determining Responsibility for Coverage

The party responsible for procuring and managing the builders risk policy is primarily determined by the specific terms outlined in the construction contract. Depending on the project’s nature and the preferences of the parties involved, either the owner or the general contractor may be designated to secure the policy.

For smaller construction projects, the general contractor often secures the builders risk policy, listing the owner and other relevant parties as additional insureds. For larger or more complex undertakings, the project owner might prefer to manage the insurance directly, ensuring comprehensive coverage that aligns with their overall financial exposure and risk management strategy. This approach centralizes control over the policy.

When a property owner acts as their own general contractor, known as an owner-builder, they bear sole responsibility for obtaining builders risk insurance. Securing this coverage is essential to protect their investment and is often a requirement for any construction loans they may obtain.

For very large construction projects, owners or general contractors may opt for consolidated insurance programs, often referred to as “wrap-up” insurance. An Owner-Controlled Insurance Program (OCIP) is sponsored and managed by the project owner, covering all enrolled parties, including the general contractor and subcontractors, under a single master policy. This approach can streamline coverage, eliminate redundancies, and potentially lead to cost savings by purchasing insurance in bulk.

A Contractor-Controlled Insurance Program (CCIP) is managed by the general contractor, providing consolidated coverage for all project participants. Both OCIPs and CCIPs offer benefits such as consistent coverage limits and improved claims processing. Regardless of who procures the policy, the cost of builders risk insurance is ultimately factored into the overall project budget.