Who Pays for Builders Risk Insurance?

Builders risk insurance protects construction projects from unforeseen damage or delays. Understanding who pays for this specialized insurance is important, as cost allocation impacts project budgets and risk management.

Understanding Builders Risk Insurance

Builders risk insurance, also known as course of construction insurance, is a property insurance policy for buildings and structures under construction or significant renovation. It covers physical loss or damage to the building, materials, supplies, and equipment. Policies typically cover perils like fire, theft, vandalism, wind, hail, and other weather-related events.

Coverage often extends to temporary on-site structures, materials stored off-site, or in transit. Many policies also offer “soft cost” coverage for indirect expenses from covered delays, such as loan interest or architectural fees. This protection is necessary because standard property insurance does not cover structures under active construction.

Key Parties Responsible for Payment

Several entities with a financial interest in the construction project typically determine who pays for builders risk insurance. The property owner, general contractor, and project lender are the main parties who might bear this cost.

Property owners often have the largest financial investment, making them a primary candidate for securing builders risk insurance. Paying for the policy directly protects their capital and ensures project continuity if damage occurs. This allows owners to tailor coverage to their specific needs.

General contractors also have a stake, responsible for work, materials, and equipment on-site. Depending on contracts, a general contractor might buy the policy to protect their interests or as a project requirement. If the contractor pays, these costs may be reimbursed by the owner as part of overall construction expenses.

Lenders financing construction projects almost always require builders risk insurance as a loan condition. They protect their investment, as the unfinished structure is collateral. Lenders typically require being named as a loss payee or mortgagee on the policy, ensuring they receive funds in a covered loss.

Factors Influencing Payment Responsibility

Several factors influence which party pays for builders risk insurance, beyond just financial interest. These elements determine the specific allocation of responsibility within a construction project.

Contractual agreements are the primary determinant. The construction contract specifies which party, owner or general contractor, must procure and pay for the policy. Standard forms, like AIA A201-2017, often stipulate owner responsibility for property insurance, including builders risk. However, contracts allow negotiation for the contractor to assume this responsibility.

The project’s type and size also influence who pays. For large commercial developments, the owner often takes responsibility due to higher value and complexity. For smaller residential renovations or custom homes, responsibility might fall between the homeowner and general contractor, depending on who initiated the project or has more control. Project complexity, materials, and site characteristics also impact cost, influencing who bears the premium.

Lender requirements significantly influence payment, especially for financed projects. Financial institutions mandate builders risk insurance before disbursing construction funds. Lenders typically require coverage limits equal to the greater of the loan amount or total estimated construction costs, excluding land value. While the policy protects the lender, the borrower, usually the property owner, is responsible for purchasing and maintaining coverage.

Local regulations or common industry practices within specific regions can also influence who pays. While no universal legal mandate exists, certain localities or project types may have customary practices. Regional customs might favor the owner or contractor assuming this cost, sometimes overriding general tendencies.

Typical Payment Scenarios

Builders risk insurance costs are allocated in several common scenarios, reflecting financial interest, contractual agreements, and project specifics.

In owner-builder projects, where the property owner manages construction and acts as their own general contractor, the owner almost always pays for builders risk insurance. This protects their entire investment, from materials to the completed structure.

For projects led by a general contractor, payment responsibility varies. Often, the general contractor procures the policy, especially if responsible for the entire build and having significant on-site materials and equipment. This is common in fixed-price contracts where insurance cost is factored in. Alternatively, the contract might stipulate the owner pays, particularly in cost-plus contracts or if the owner wants direct policy control.

Projects with lender financing almost always require builders risk insurance. The lender mandates coverage to protect their financial exposure in the construction loan. The property owner, as borrower, is usually responsible for purchasing the policy to satisfy lender requirements. The lender is named as an additional insured or loss payee, protecting their interest in a covered loss.

Project scale also dictates payment structures. For large commercial developments, the owner or developer usually assumes the cost due to the substantial investment. For smaller residential builds or renovations, the cost (typically 1% to 5% of the total construction budget) might be paid by either the homeowner or general contractor, depending on their agreement and financial stakes.