Builders Risk Insurance: What Is it and When Is it Needed for Homeowners?
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If you have a home improvement project coming up, you're probably well aware that it's a very costly business. The price of construction materials has soared, and that's even before you add in the cost of the design and labor.
What you may not know is that while the work is in process, you could be exposed to an added financial risk. You may be on the hook for damage to building materials, equipment and partially-completed structures on-site during the course of construction.
Coverage for these costs goes beyond the scope of normal homeowner's insurance. You may need a builder's risk insurance policy.
Builder's risk insurance is a type of property insurance designed for a very specific purpose. During construction or renovation projects, the materials, equipment and work-in-progress are often left exposed to all kinds of risk.
Building materials may simply be piled up on the property, and structures may be left partially-completed for weeks at a time. This leaves them exposed to weather or accidents that could damage materials or work in progress. On top of that, construction sites are often targets for thieves. Especially if the property under construction is not yet occupied, valuable materials and equipment left there overnight can be tempting targets.
Builder's risk insurance covers certain kinds of loss or damage to materials, equipment and buildings under construction. As will be explained below, the exact nature of what's covered depends on the terms of the builder's risk insurance policy. You can customize a policy to protect the particular types of risk on your construction site.
Taking out a little insurance upfront could protect you from having some misfortune add a lot to the cost of your construction or home improvement project.
What is course of construction insurance?
Course of construction insurance is another term for builders risk insurance. The term "course of construction" helps explain the nature of this insurance. Policies are designed to run for a very specific period of time - the time from start to finish of a building project.
That means that it's very important to coordinate the terms of your builders risk insurance policy with the planned work schedule of your contractors.
Who Needs Builders Risk Insurance?
Don't be misled by the name. It may be called "builders risk" insurance, but depending on the project the financial responsibility for that risk may fall on the homeowner who has hired the builder.
Look at the written agreement between you and the builder. That agreement should spell out who is responsible for what, including the safekeeping of building supplies and equipment on the construction site.
If your contract does not spell out who is responsible for the condition of supplies stored on your property, you may want to make sure to establish in writing whether the builder will take that responsibility. Otherwise, you very well may be liable for any problems that occur on your property.
Your building contract may make you responsible for any materials stored on your property. If this is so, then think about the cost of those supplies. You may well decide that the builders risk insurance cost is worth paying rather than assuming the risk of having to replace damaged or stolen materials.
The financial consequences of problems with construction projects can extend beyond the cost of materials and equipment. Cost overruns are common with construction projects, so it may pay to insure against being on the hook for them.
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What Does Builders Risk Insurance Cover?
Again, builders risk insurance is designed for very specific circumstances over a limited time. To understand whether or not you are properly protected, you need to recognize what builders risk insurance covers.
Does homeowner's insurance cover builders risk?
When the construction project involves an addition or renovation of an existing house, there is probably already homeowner's insurance in place. However, homeowner's insurance typically applies to finished structures. An unfinished structure, and especially the raw materials for a project, would not fall under the coverage of such a policy.
Because your homeowner's policy will probably not cover building materials and equipment, things stored outside your home might be especially vulnerable to damage from weather, theft or other threats.
Given the cost of these supplies and their exposed condition during the building process, insuring them might be a very sound investment.
What Types of Property Does Builders Risk Insurance Cover?
Typically, a builders risk insurance policy covers the building under construction itself as well as property involved in that construction, including:
- Equipment being used for the project
Builders risk insurance coverage includes damage to property from:
- Severe weather events like lightning, hail, hurricanes or tornadoes
However, builders risk insurance policies are often very specific, so it's important to read the wording of the policy to find out what exactly is included and excluded.
A building project may involve several different parties. These include:
- The property owner
- Designers or architects
- The general contractor
Whether or not each of these parties is covered by a builders risk insurance policy depends on the wording of the specific policy. When buying a builders risk insurance policy, you should make sure that each party you want covered is named on the policy, especially the people involved in the project.
Builders risk coverage usually includes damage or theft to covered property resulting from events outside of the construction process itself.
These costs may go beyond replacement of the property itself. Costs resulting from construction delays are called soft costs, and these can include:
- Lost business due to the project taking longer than planned
- Lost rental income
- Rental costs, either because equipment is needed longer than planned or because the dwelling is not liveable while the construction is going on
- Extra interest costs if payback on loans is delayed along with the building process
Again, each policy is different so it all comes down to wording. Check any proposed policy to see not only how it covers hard costs, but also which soft costs it covers.
Also, check whether the policy covers the price originally paid for damaged or lost property, or the cost to replace it. Replacement costs can often be higher than the prices previously paid for property or materials, especially in times of high inflation. So, coverage at replacement cost will give you better protection but is also likely to cost more.
How Much Does Builders Risk Insurance Cost?
Builders risk insurance cost depends heavily on both the specific coverage of the policy and the circumstances of the project.
As a general rule of thumb, expect to pay anywhere from 1% to 5% of the total cost of the project for builders risk insurance. This is a small investment compared to the cost of having to replace materials and equipment necessary to the project.
Some of the variables that impact the cost of builders risk insurance include:
- The length of time the policy covers. This should be based on how long the project is expected to take, with some cushion for construction delays. The longer the policy, the more it is likely to cost.
- The cost of the construction materials and other property covered by the policy.
- Environmental conditions of the construction site. This may include everything from weather to fire risk.
- Exposure to criminal activity. The crime rate in the neighborhood and the accessibility of the job site can impact the risk of things being stolen from the job site.
- The type and number of extensions added to the policy. Extensions are added coverages for things that would normally be excluded from a basic builders risk insurance policy.
What's Excluded from Builders Risk Insurance?
Knowing what's excluded from builders risk insurance can be as important as knowing what's included. It can help you decide whether you need to pay for extensions to cover additional items, or simply take extra measures to safeguard against problems with things that aren't covered.
Exclusions are various hazards, perils, or property that are specifically named as not being covered by your insurance. Below is a list of various exclusions typically listed on a builders risk insurance policy:
Pollution and mold: Pollution and mold exclusions are common among insurance carriers. You can get additional coverage for pollution and mold should your builders policy list them as exclusions. Look for contractors pollution liability (CPL). CPL can provide coverage for bodily injury, cleanup, legal defense costs and property damage.
Professional services: Most builders insurance policies won't cover costs associated with repairing or replacing defective:
Water intrusion: Water intrusion broadly refers to damage done to a structure or personal property by water. An example would be a leak that occurs during a rainstorm due to the roof being improperly installed. Damages caused by the water intruding into the attic may be excluded from your coverage.
Earth movement: The earth movement exclusion can be very very broad. It can include but is not limited to earthquakes, erosion, landslides, mudslides, sinkholes, shockwaves, and tremors.
Cracking, settling, and shrinkage: This exclusion prevents coverage for homes that naturally crack, settle, or shrink over time. Typical locations of damage caused by settling can be found in large cracks in outer walls, inner walls, and pavement.
Other events not covered by builders risk insurance:
- Normal wear and tear
- Manufacturer's defects
- Acts of terrorism or war
- Theft by contractor employees (as opposed to by outside parties)
- Scaffolding and other construction infrastructure
- Removal and disposal of damaged materials
- Pollutant cleanup
- Temporary structures
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How Does Builders Risk Insurance Differ From Property Insurance?
Builders risk insurance is a type of property insurance, but it differs from the homeowner's insurance you are probably more familiar with.
Two important differences between builders risk insurance and homeowner's insurance are as follows:
A standard homeowner's policy only covers finished structures on the property and their contents. Builders risk insurance extends to unfinished structures and supplies involved in their construction.
Homeowner's policies would normally just cover the hard cost of property damages, while a builders risk policy may extend to certain soft costs, as described earlier. These can include costs resulting from construction delays due to damaged property.
Best Builders Risk Insurance Companies
Below is a list of some of the top-rated insurance companies that offer builders risk coverage:
Zurich: Zurich offers builders risk insurance for mid-sized and large construction projects. Whether you need coverage for a building under construction, materials at the job site, materials on their way to the job site, or a delay in construction, Zurich's builders risk insurance can provide coverage for both property owners and general contractors. Limits can be as high as $1 billion for qualified construction risks.
Liberty Mutual: Contractors with concurrent jobs and property owners with capital improvements can get builders risk insurance from Liberty Mutual. Liberty Mutual can tailor solutions for an array of projects, including high-rise office buildings, healthcare facilities, dams, and bridges.
Distinguished: Distinguished offers builders risk insurance for property owners and contractors responsible for insuring commercial and residential properties. Project types that are covered include:
- New construction: Covers property while it's being built
- Remodelers risks: Covers remodeling for existing structures
- Betterments only: Covers condo owners and tenants for internal improvements
Limits range from $100k to $10 million.
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Find Out if You Need Builders Risk Insurance for Your Home Improvement Project
If you have any type of home improvement or new construction projects taking place on your property, you should take steps to protect yourself. First, check with your contractor(s) to see if they already have insurance that covers the project. Ideally, that would be a question to ask while you are considering proposals from different contractors. Those that carry their own builders risk insurance as opposed to leaving the responsibility on your shoulders would save you the time and expense of getting your own policy.
If you do need your own builders risk insurance, work with your contractor to figure out the nature and cost of property that would need to be covered. This should shape the type and extent of the policy you buy. Also get a realistic sense of how long the project is likely to take. This will tell you how long your builders risk policy needs to last.
You may be able to get builders risk insurance as an extension of your current homeowner's policy at a reasonable price but first, it's important to make sure you've got the right homeowners insurance policy at the right price. You'll only know what the best deal is if you do some comparison shopping in your area. You can do this by entering your zip code below and answering a few questions in exchange for free home insurance quotes with builders risk added on.