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What Is Builders Risk Coverage? Dwelling Under Construction Insurance

A standard homeowners insurance policy covers an existing home, not the process of building that home. Unlike homeowners insurance, builders risk coverage insures the home-building process, whether that construction involves a new home, an addition or extensive renovations.

Many things can go wrong during a construction project. Builders risk coverage—also known as "course of construction" insurance—recognizes and compensates for worker injury, damaged equipment, damaged materials, fire, theft and costly delays. While the construction project's general contractor usually purchases course-of-construction insurance, the homeowner can buy this specialized coverage, too.

Even when the general contractor has builders risk coverage, the homeowner may elect to purchase additional insurance to protect their liability, or exposure to the risk of lawsuits, during the construction process. For example, the homeowner may purchase medical payments coverage or a liability endorsement to pay for a worker's medical bills after the GC's insurance has reached its maximum limit.

What Does Builders Risk Insurance Cover?

It is important to remember that general liability insurance and workers' compensation insurance do not cover the same areas of risk that builders risk insurance covers: Regardless of state or municipal laws, an ideal general contractor (GC) should carry general liability, workers' compensation and builders risk insurance. If your GC doesn't have builders risk insurance, you can make buying one a contractual condition. 

Builders risk coverage is temporary: It starts and ends when the construction project starts and ends. However, if your construction project lags behind schedule, you can renew the policy, sometimes for up to 12 months, but renewal will hike the price of your policy premium. If the scope of the project changes during the course of construction, you can increase your coverage limits using a "change order" endorsement.

Covered Perils

  • Fire
  • Wind
  • Explosion
  • Lightning strike
  • Hail
  • Non-worker theft
  • Vandalism
  • Vehicles crashing into the structure
  • Aircraft crashing into the structure

Property Insured

Builders risk insurance only covers the property that is under construction. For example, if you are building an addition to your house, building risk insurance will only cover the job site, not your existing house.

Job-site injuries are not covered by builders risk insurance.

A typical builders risk policy will cover the following items:

  • Structure being built or renovated
  • Foundation of the structure being built or renovated
  • Building materials
  • Underground piping
  • Electrical work and wiring
  • Fixtures
  • Temporary structures
  • Cribbing
  • Fencing
  • Scaffolding
  • Construction signs
  • Soft costs

Soft costs may include architectural, engineering and legal fees that are incurred if the house or addition is damaged during construction. However, such soft costs may need to be covered by an endorsement, or a special extension of the builders risk policy. Other endorsements can cover project documents and electronic data, damaged trees and plants, debris removal, as well as pollutant cleanup and removal.

What's Excluded in a Builders Risk Insurance Policy?

Whether the builders risk policy is purchased by the general contractor or the homeowner, it is extremely important to find out what the policy covers and doesn't cover. Builders risk insurance does not typically cover the following losses:

  • Materials with manufacturing defects
  • Flawed planning
  • Flawed design
  • Flawed workmanship
  • Intentional damage
  • Employee theft
  • Damage to vehicles
  • Floods and other damage caused by water
  • Earthquakes
  • Hurricanes, tornadoes and other windy events
  • Fungus and rot
  • Mechanical breakdowns and testing
  • Weather-related damage to property left unprotected
  • War and other government activities
  • Nuclear events
  • Contractual penalties or voluntary partings
  • Ordinary wear and tear

Damage to Tools and Equipment

Builders risk coverage typically does not extend to tools and equipment. Some carriers may offer an endorsement, or a coverage extension, to cover tools and equipment, but that is rare. General contractors and subcontractors can purchase inland marine insurance separately, to protect their tools and equipment whether the tools are on site, in transit or in the hands of another person. 

Installation Floater

An installation floater is a type of inland marine coverage that insures a contractor's or subcontractor's equipment, tools and other property. Most installation floaters cover fire, explosions, theft and vandalism as well as installation-related labor costs. Not all installation floater policies cover materials that are damaged in storage or in transit, so it's important to discuss a policy's exclusions with a licensed insurance agent.

While builders risk coverage includes the primary insured and several named insureds, an installation floater has only a primary insured. The policy will be customized to suit the contractor or subcontractor, naming specific tools and equipment. Since an installation floater offers coverage that is much narrower than builders risk coverage, it typically costs less than builder risk coverage.

An installation floater is often purchased to insure expensive equipment that the builders risk policy does not cover, adding an extra layer of protection. Subcontractors may want to purchase an installation floater when they are not a named insured on a builders risk policy or when they are only performing isolated tasks on a larger project.

Worker Injury

Builders risk insurance does not cover an employee's injury or death. Those losses are covered by worker's compensation, whether purchased by the general contractor or a subcontractor.

However, if the workers' compensation insurance runs out before a claim is fully compensated, the homeowner may be sued. Before starting a major construction project on your property, you may consider increasing your liability limits on your homeowners insurance policy. This component pays for the bodily injury or property damage suffered by a visitor to your property. When the workers' compensation runs out, an injured or deceased job-site worker may be considered a visitor to your property, making you liable for damages.

For a layer of added protection, some homeowners purchase medical payments coverage. While homeowner liability coverage only pays for visitor injuries that the homeowner caused or should have prevented, medical payments coverage compensates for a visitor's injuries no matter who is at fault.

Non-worker Injury

Builders risk insurance does not cover a passerby's injury or death on a construction site, whether that person was trespassing or an unwitting visitor. Also, business risk insurance does not cover any property damage suffered by third parties. While the general contractor's general liability insurance will cover those claims, it may not be enough to satisfy a claim or claims. In that case, the property owner could be sued.

Homeowners should consider increasing liability limits on their homeowners policy, which covers both injury and property claims. They may also want to consider purchasing medical payments coverage, which will pay for the passerby's medical bills if liability coverage doesn't suffice.

If the GC's general liability insurance gets maxed out, your homeowner liability insurance will kick in. If your liability runs out, your medical payments coverage will pick up the slack.

Builders Risk Insurance - Find Affordable Home Insurance

Builders Risk Insurance Costs

The cost of a builders risk insurance varies from carrier to carrier and from construction project to construction project. You would also have to factor in the cost of any endorsements you decide to buy.

Here are some common variables that have an impact on a builders risk policy's cost:

  • Overall estimated cost of the construction project

  • Construction type, whether a one-floor or two-floor home and whether new construction or the renovation of an existing structure

  • Square footage of the construction site

  • Quality of construction materials—for example, using fire-resistive materials instead of wood

  • Project logistics, such as off-site storage of construction materials

  • Project's expected timeline

  • Experience and expertise of the general contractor and subcontractors

  • Soft costs

  •  Number of named insureds

  • General safety of the construction site

How Much Does Builders Risk Insurance Cost?

Builders risk insurance can cost up to four or 5% of a project's total construction cost. So, if the budget for your home addition is $50,000, your builders risk insurance would cost $2,000 to $3,000. However, that figure is subject to other factors, such as the project's expected duration and the general contractor's track record.

The cost of coverage depends on the location, duration and overall cost of the construction project, how many parties the policy names, and how many endorsements are purchased.

After the cost of your premium is calculated, you can pay in one lump-sum payment or you can pay in monthly installments as your construction project progresses.

Who Pays for Builders Risk Insurance? 

The person buying the builders risk coverage must have an "insurable interest" in the construction project, which means the homeowner, the general contractor, the architect or a subcontractor would purchase the policy. 

The party that buys the builders risk insurance is the "primary insured," but that won't be the only name on the policy. If the homeowner buys the policy, the general contractor, the architect, the engineer and the subcontractors may also be listed as a "named insured" on the policy. Some carriers allow more named insureds than others.

Hiring a General Contractor

When building a home, constructing an addition or making extensive renovations, most people hire a general contractor (GC) to do the job. While some states and municipalities require a general contractor to be licensed and registered, others do not.

If your state or municipality requires general contractors to be licensed, it would be unwise to hire an unlicensed GC. For example, your construction contract with an unlicensed GC may not be legally enforceable.

The general contractor will have their own building team, but the GC will hire several subcontractors to install the electricity, plumbing, and heating, ventilation and air-conditioning (HVAC) systems. Other hired specialists may include masons, carpenters, painters and landscapers.

While the GC's general liability coverage insures against bodily injury or property damage claims from uninvolved third parties, the GC's or subcontractors' workers' compensation insurance only pays for the medical bills of a worker who is injured on site.

Although many states and municipalities require a general contractor to have general liability insurance, workers' compensation insurance and/or a surety bond, no state or municipality requires a GC to purchase builders risk coverage.

Determining Your Builders-Risk Needs

If you are taking out a loan to pay for your new home or your new addition, your mortgage lender may demand that builders risk insurance be in place until the project is complete. If you are financing your building project with a Federal Housing Administration or other government loan, you will be required to purchase builders risk coverage. However, many homeowners choose to purchase builders risk insurance of their own free will.

Property owners need to have extensive conversations with their general contractor to properly understand their coverage needs. The policy should reflect any special agreements or terms found in the owner-contractor contract.

The following factors can affect the final cost of builders risk coverage:

  • The cost of the overall construction project

  • The cost of rebuilding after a loss event. If a named peril severely damaged your construction project, how much would it cost to remove the debris and start over? If you choose to replace damaged building materials based on their book value, or actual cash value, your builders risk insurance will cost less than replacing those same materials based on their replacement cost value.

  • Risks associated with the construction (high crime, extreme weather)

  • Risks associated with the construction project's location

  • Coverage limits. The higher the coverage limits, the more your builders risk insurance will cost.

  • Endorsements. The more policy extensions you purchase, the higher your builders risk premium.

  • The number of covered parties. If subcontractors carry their own insurance, the cost of builders risk insurance will be less.

  • Length of coverage. The longer the duration of coverage is, the higher your builders risk premium.

  • Deductible. A deductible is the dollar amount a policyholder must pay before the builders risk insurance will kick in. Deductibles can range from $1,000 to $10,000, so the policyholder should choose a deductible that makes sense for them. The higher the deductible is, the lower the premium will be.

  • Most insured perils have deductibles ranging from $1,000 to $10,000.

  • If flood is provided, flood deductibles can be up to $500,000.

  • Most insured perils have deductibles ranging from $1,000 to $10,000.

Best Companies for Builders Risk Insurance

State Farm offers builders risk insurance to homeowners and house flippers. In fact, if you have an existing State Farm homeowners policy, the carrier may give you a discount on your builders risk policy.

Travelers also offers building risk coverage, which provides for the replacement cost, not just the actual value, of damaged, destroyed or stolen materials.

Here are some other companies that offer business risk coverage to homeowners:

  • AIG

  • Equestrian Group

  • Franchino Insurance (New Jersey)

  • The Hartford

  • Hummel (Indiana and Ohio)

  • Marsh Insurance

  • North Star Mutual

  • Paradiso Insurance (Connecticut)

Builders Risk Coverage and Home Insurance

Builders risk insurance—also called "course of construction" coverage—can cover new construction, the building of a new addition or an extensive remodeling job. This coverage protects your construction site in the event of fire, a lighting strike, freezing rain that ruins lumber, theft of building materials and damage due to vandalism, among other losses. The property owner, the general contractor and the insurance agent should have a long talk about the costs and risks involved in the construction project to determine how much coverage is needed and for how long.

Builders risk insurance covers the building of a home, whereas homeowners insurance covers the completed home.

Even though your homeowners insurance may not cover a site in progress, it's important to have this coverage and to consider raising liability limits in case others are injured on the site. While you're looking to raise limits (and costs), why not compare homeowners insurance rates in your area to see if you can get a better deal? SmartFinancial can help you find a better carrier with a cheaper policy premium, saving you up to 40% on your insurance costs. For free, real-time quotes in just minutes, enter your zip code or call 855-214-2291 and answer a few questions.

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