Builder’s risk insurance: What it is, how it works and why you need it

Imagine this … you have the option to steal from two different homes. One is well-lit, locked up and occupied with a family happily inside. The other is just a darkened construction site, unsecured but still full of valuable materials free for the taking. Which are you going to target?

Yeah, it doesn’t take a criminal mastermind to solve that riddle. Thieves looking for a quick steal are just one everyday threat your job sites face. Then there’s fire, hail and wind … the list goes on.

Making matters worse, protecting both yourself and your clients isn’t always easy. However, it can be when you add builder’s risk insurance to your tool belt.

To get the low-down on what builder’s risk insurance is and everything that makes it so important, we created this guide to answer some of the most common questions about this type of insurance. Check it out below.

What is builder’s risk insurance?

Builder’s risk insurance is property insurance meant to cover new construction (ground-up) or even renovation work on an existing structure (but not the existing structure itself). Also known as construction insurance, builder’s risk insurance prevents the insured from having to pay out of pocket if damages happen during construction.

For example, vandalism could happen on active job site. Damage includes drywall repair, equipment theft and broken pipes of already-completed plumbing work. That’s where builder’s risk insurance comes in.

How builder’s risk insurance works for homeowners

Builder’s risk insurance can protect a homeowner from having to pay to fix the vandalism and reimburse the contractor for the cost of stolen supplies. Each policy can vary in complexity. If the homeowner operates a business from their home, for example, some coverage can even extend to make up for loss of income caused by construction schedule delays.

How builder’s risk insurance works for construction teams

In the above scenario, a builder’s policy can protect a construction company from having to pay for the rework of their plumbing subcontractor or equipment replacement costs out of pocket. This is an important part of a construction company’s overall risk management platform, which often also includes policies for contractors’ insurance, tool and equipment insurance and professional liability insurance.

For both parties, nuances of policies can impact how much – or how little – cost is covered by insurance.  Some policies even have additional clauses that may add exceptions to approved coverage.

For example, vandalism may be an approved category of coverage under builder’s risk insurance, but a claim may be denied if the insurance carrier can prove reasonable security measures weren’t in place. This could happen if a job site wasn’t secured or equipment was left unlocked and in the open. It’s important to understand the specifics of your insurance agreement before beginning construction.

What does builder’s risk insurance cover?

A builder’s risk policy provides coverage on any property that will become a permanent part of a structure, regardless of who owns that property prior to installation. It even provides coverage on those items that are included in the contract cost while they’re in transit to a job site or stored at a location other than the construction site.

Builder’s risk insurance coverage can include:

• Building structures and frameworks
• Materials and supplies
• Equipment and rentals
• Property in transit
• Debris removal caused by covered incidents
• Loss of income from construction delays
• Landscaping property, like trees and sod

Depending on the details of the policy, these items are protected even in situations where no human is responsible – weather-related damages, car accidents, fires and natural disasters.

What isn’t covered by builder’s risk insurance?

Standard builder’s risk policies don’t include coverage for floods, earthquakes, equipment breakdown or testing of HVAC or electrical systems. Those coverages can be added for an increase in the builder’s risk rate.

Claims related to human error, like negligent work or employee theft, aren’t covered under this insurance classification.

Items that aren’t a permanent part of the structure like contractor’s tools are still covered by the contractor’s insurance policies (and not the builder’s risk), but some scaffolding or temporary structures can be covered by builder’s risk.

Who needs builder’s risk insurance?

Anyone who has a financial stake in a construction project should consider carrying builder’s risk insurance. That’s because each person has an insurable interest in the project and could suffer a financial loss if something goes wrong during construction execution.

Homeowners

Especially in cases of home renovation, homeowners own the property being worked on – not the construction company. This differs from some situations of home construction, where transfer of ownership doesn’t officially happen until construction is completed and occupation inspections are finished. If a disaster happens, like a fire, the homeowner is the one on the hook for those expenses. Builder’s risk insurance helps protect the homeowner’s finances if that should happen.

Construction companies

A construction company can be responsible for project expenses long before revenue is recognized, depending on their preferred accounting method. Using this insurance policy helps protect the company from having to cover even more expenses if construction is delayed or disrupted from a covered event.

Subcontractors

Subcontractors can be named as insureds on a builder’s risk policy. This limits liability risk to the subcontractor and clearly identifies if and how much a subcontractor is responsible for deductible payments. 

Others

Architects, engineers and other individual contributors have a financial dependency on construction projects. Builder’s risk insurance helps ensure these individuals are still paid, even if documents like blueprints are damaged during any covered event.

Financial lenders

While not directly involved in physical construction, financial lenders can prevent loss or defaults on loans by accepting builder’s risk insurance.  

Who purchases builder’s risk insurance?

Homeowners and contractors can both purchase builder’s risk coverage. In some cases, though, the insurance carrier is the party who’s taking on primary risk of a project. In those agreements, it’s common to name the others as insured parties on the same policy.

For example, during a home renovation project, the homeowner may purchase the policy and list the contractor as an insured party. If a construction project is a new build, it may be more common for the contractor to carry the insurance. For residential construction, it’s often easier for a contractor to purchase coverage through a reporting form type policy, which involves issuing the builder a policy once to cover multiple projects within the same year.

These rules aren’t set in stone. Renovation contractors can benefit from purchasing the policy just as some construction companies prefer to have the homeowner carry it. Every policy can be written differently. Just make sure you’re entering the construction project with a full understanding of who’s responsible for what and make sure you’re covered in any scenario. 

How much does builder’s risk insurance cost?

The average builder’s risk insurance costs between 1-5% of the total cost of the construction project. The value of the project should be the construction cost, including labor and profit but excluding land.

For projects with more square footage, material cost and timelines, policy carriers can expect to pay a higher premium. Even if all of these variables are the same, the price of insurance can vary depending on what is or isn’t covered in the policy.

For less expensive policies, coverage might extend to accidents, thefts, vandalism and natural disasters.

On the high end of pricing, the insured can typically expect the policy to cover the same areas, but also extend to cover soft costs. An example of this might include if the homeowner lost rental income because of damage to the project.

In both instances, the cost of insurance might increase as construction is completed. For example, a kitchen under renovation might have a higher insured value three months into construction, as new appliances, custom cabinetry and high-end finishes have a higher loss value than the original materials.

Why is builder’s risk insurance so important for construction companies?

A builder’s risk policy is meant to cover the interests of the owner, contractors and all subcontractors that are working on a project.

It protects the company’s assets

Builder’s risk insurance eliminates the question of who’s at fault on the job site if someone’s actions cause property damage to the structure.

It supports brand reputation

Offering insurance options – especially when partnering with a reputable insurance provider – can help improve home buyer trust in your business.

It makes you stand out from the competition

Especially in smaller markets, not every construction business wants to take the added step of offering insurance alongside contracts. That’s why Buildertrend makes this easier, by offering builder’s risk insurance through Assurely.

It covers new construction work

For new construction (ground-up), builder’s risk is the most comprehensive coverage available to protect all parties who have a financial interest in the project.

It covers renovation projects

For renovation work, the existing structure is normally covered by the owner’s property policy, and often, the renovation work can also be covered as part of the standard property policy. If the property policy isn’t able to accommodate the renovation work in its policy form, a builder’s risk or installation floater can cover the renovation work until it’s accepted by the owner. Installation floaters cover movable property, including supplies and materials in transit, versus permanent structures.

Can builder’s risk insurance be a sales and marketing tool?

As a construction company, there are advantages to offering builder’s risk insurance as a sales and marketing tool. Include these benefits in your sales processes to help attract new clients.

Benefits of choosing a construction company that offers builder’s risk insurance

• Simplifies insurance management

Choosing a contractor with builder’s risk insurance coverage options means homeowners don’t need to go out and find their own insurer. Your clients have no shortage of details they need to track during construction – this reduces some of that burden for them.

• Easier claims process

Damages during the construction process can happen. When both the construction company and the homeowner are covered by the same policy, there are often fewer disputes that come up about who’s responsible for what. The claims process is also faster because both parties typically share an insurance contact, which means you don’t have to coordinate schedules or coverage terms.

• Decreases financial-related delays

Many financial lenders require builder’s risk insurance before they’ll approve loans or other financing, which can in turn slow down construction. When a homeowner is already covered under the construction business’ policy, it helps speed up the process.

• Solidifies project timelines

Because this insurance can increase the longer a project takes to finish, it can be an incentive construction companies to keep timelines and schedules as close to estimated dates as possible. This means less delays homeowners have to deal with.

• Reduces financial stress

Change orders and overruns are common in new build and remodeling projects. The costs of those changes can add up fast. Being properly protected against damages can help reduce some aspects of this financial stress.

• Cost effectiveness

It’s possible for construction companies to negotiate policy agreements with insurance providers. In many cases, this is cheaper than what a homeowner would be able to purchase on their own.

Use these benefits as talking points during your lead generation and sales processes. Having builder’s risk insurance not only helps you land more jobs but also lessens the time it takes to get to work on the home project.

When should a construction company change their builder’s risk insurance?

Typically, coverage of an insurance carrier ends when a project is complete. Many construction companies have insurance carriers they prefer to work with due to negotiated rates.

Keep an eye out for this shortlist of red flags that it’s time to change your builder’s risk insurance carrier.

1. Unaffordable premium rates
2. Dissatisfactory claims handling
3. Unresponsive customer service
4. Poor coverage, including high deductibles
5. Lack of interest from home buyers
6. New providers in the market

Does Buildertrend have options for builder’s risk insurance?

Buildertrend gives you tools to manage all of your construction finance needs. Just as bills, purchase orders, estimates and budgeting are important steps to running a successful construction company, so does the right insurance coverage.

That’s why Buildertrend offers Builder’s Risk Insurance through Assurely, which gives our customers easier access to this type of insurance. Buildertrend customers are able to receive:

1. Competitive group rates (based only on the cost of each job)
2. White-glove customer service
3. Flat-rate prices per job
4. Secure and fast binding process
5. One-time application directly within Buildertrend
6. Expertise from trusted insurance industry leaders

Reach out today to learn more!