Builder's Risk Insurance for Homeowners

Purchased by contractors or developers, builder’s risk insurance is specialized property insurance for buildings and structures under construction. It covers financial losses from unforeseen damages such as fire or theft.

By Mark Fitzpatrick

Edited by Casie McCoskey

Updated: August 14, 2024

Advertising & Editorial Disclosure

Builder’s risk insurance is a type of property insurance that covers buildings and structures while they are under construction. The costs of these policies vary depending on several factors. This insurance is not bought by homeowners but by project owners or contractors.

This insurance safeguards the financial investment in the construction project from unexpected damages. Without it, any delays or damages could lead to substantial financial losses and project setbacks, so it's worthwhile for homeowners to understand its utility and how these policies work.

TABLE OF CONTENTS

What Is Builder’s Risk Insurance?
Who Needs Builder’s Risk Insurance
Cost of Builder’s Risk Insurance
FAQ

Key Takeaways

Builder’s risk insurance is property insurance for buildings under construction, with varying costs.

Builder’s risk insurance is usually purchased by the project owner or contractor, not the homeowner.

The cost of a builder’s risk insurance policy depends on factors such as project type, location and construction materials.

What Is Builder’s Risk Insurance?

Builder’s risk insurance is a specialized type of property insurance designed to cover buildings and structures while they are under construction. It is typically bought by the project owner, general contractor or developer. This type of insurance provides critical protection against financial loss due to damage from events like fire, vandalism or severe weather that could delay the project.

For homeowners, ensuring your contractor has builder’s risk insurance will help you avoid being personally liable for unexpected costs and delays. This insurance provides peace of mind and financial security, ensuring the completion of the project without significant disruptions.

Builder's risk insurance provides coverage for different incidents, including:

Fire and Lightning

Builder’s risk insurance covers damage caused by fire and lightning, financially protecting the construction project from potential total or partial destruction. This ensures the project can continue or be rebuilt without a significant financial burden.

Vandalism and Theft

Builder's risk insurance also covers damage or loss due to vandalism. This financial protection helps secure materials and equipment, minimizing delays and additional costs.

Severe Weather

Events like hail, windstorms and other severe weather conditions are covered, safeguarding the project financially from natural disasters. This coverage ensures that unexpected weather-related damages do not derail the project timeline or budget.

Explosion

In the event of an explosion, builder’s risk insurance provides financial coverage for the resulting damage. This coverage is essential for projects involving potentially hazardous materials or equipment.

Water Damage

Accidental water damage, such as from burst pipes or leaks, is included in builder’s risk coverage. This helps prevent costly repairs and project delays due to water-related incidents by providing financial support.

Debris Removal

The insurance also covers the cost of removing debris after a covered loss. This ensures that the site can be quickly cleared and work can resume without significant financial strain.

Equipment and Materials

Builder’s risk insurance covers equipment and materials on-site, in transit or temporarily stored elsewhere. This comprehensive financial coverage protects essential resources throughout construction, ensuring continuity and security.

What Builder’s Risk Insurance Won't Cover

Similar to homeowners insurance, builder’s risk insurance has limits, excluding employee theft or intentional acts of damage. Understanding these exclusions will help ensure you have complete protection for your construction project.

By knowing what isn't covered, project owners and contractors, along with you as a homeowner, can take additional steps to safeguard their investments. Here are some specific exclusions to be aware of:

Normal Wear and Tear

Builder’s risk insurance does not cover damage resulting from the normal aging or gradual deterioration of materials. This type of damage is considered an expected part of the construction process and must be managed through regular maintenance.

Employee Theft

Theft committed by employees or subcontractors is excluded from builder’s risk insurance. To mitigate this risk, additional security measures and employee fidelity bonds should be considered.

Intentional Acts

Damage caused by intentional acts, such as vandalism by disgruntled workers or fraud, is not covered. Ensuring a trustworthy workforce and implementing strict security protocols can help prevent such incidents.

Defective Workmanship

Faulty workmanship or design flaws are not covered under builder’s risk insurance. These issues must be addressed through quality control practices and potentially separate professional liability insurance policies.

Contractor's Tools and Equipment

Tools and equipment owned by contractors are generally not covered by builder’s risk insurance. Contractors should have their own insurance policies to protect their tools and equipment from damage or loss.

Who Needs Builder’s Risk Insurance

Builder’s risk insurance is relevant for anyone involved in a construction project, including project owners and general contractors.

Project Owners: Project owners need builder’s risk insurance to protect their financial investment in the construction project. This coverage ensures they are not personally liable for unexpected damages or delays.
General Contractors: General contractors require builder’s risk insurance to safeguard their work and materials on-site. This protection helps cover potential losses and keeps the project on track financially.
Developers: Developers benefit from builder’s risk insurance by mitigating the financial risks associated with construction projects. This insurance helps ensure that projects can proceed without significant financial setbacks due to unforeseen events.
Subcontractors: Subcontractors may need builder’s risk insurance if their contracts require it. This coverage protects their specific contributions to the project, ensuring covered losses do not financially impact them.

The above stakeholders are directly responsible for the completion and success of the project and face significant financial risk if the project encounters unexpected damage or delays, making builder's risk insurance a crucial investment.

Cost of Builder’s Risk Insurance

Builder’s risk insurance costs vary based on several factors, including project type and construction materials. These costs can fluctuate significantly depending on each construction project's specific details and risks. For example, a large commercial project with high-value materials will generally have a higher premium than a small residential build.

To get an accurate estimate, it’s important to consider all relevant factors and consult an insurance provider to tailor the coverage to the project's unique needs. We highlight the significant influencing factors below:

Project Type

The type of construction project, whether residential, commercial or industrial, influences the insurance cost. Due to scale and complexity, residential projects might have lower premiums than large commercial projects. Different project types carry different risk levels, which insurance companies consider when setting rates.

Project Location

The location of the construction project significantly affects insurance costs. Projects in areas prone to natural disasters, such as hurricanes or earthquakes, will have higher premiums. High-crime areas also increase costs due to the higher risk of theft and vandalism.

Number of Builders Involved

The more builders and subcontractors involved in a project, the higher the potential for accidents and damage, which can increase insurance costs. Projects with a large number of workers require more extensive coverage. This factor is important as it reflects the overall risk associated with human error and safety management on-site.

Construction Materials

The choice of construction materials directly impacts the cost of builder’s risk insurance. Materials that are more durable and less prone to damage, such as steel, may result in lower premiums. Conversely, using materials like wood, which are more susceptible to fire and damage, can raise insurance costs.

Coverage Levels

The amount of coverage purchased will directly influence the insurance premium. Higher coverage limits provide more financial protection but come with increased costs. Remember to balance the desired level of coverage with the budget to ensure adequate protection without overspending.

FAQ About Builder's Risk Insurance

Builder's risk insurance can be a complex topic, especially for homeowners embarking on construction or renovation projects. Here are some frequently asked questions to help you understand the essentials of builder’s risk insurance and how it might apply to your situation.

What is builder's risk insurance?

Builder’s risk insurance is a type of property insurance that covers buildings and structures while they are under construction. It provides financial protection against damage from events like fire, theft and severe weather.

What does builder’s risk insurance typically cover?

Builder’s risk insurance typically covers damages from fire, theft, vandalism and severe weather. It also includes protection for materials and equipment used in the project, both on-site and in transit.

How much does builder’s risk insurance cost?

The cost of builder’s risk insurance varies based on factors such as project type, construction materials and location. To get an accurate estimate, you should consult with an insurance provider and consider the specific details of their project. Note that the project owner or contractor is typically responsible for purchasing builder's risk insurance, not the homeowner.

Is builder’s risk insurance required by law?

Builder’s risk insurance is not always legally required, but it is highly recommended. Many lenders and municipalities may require it to ensure construction projects are financially protected against unforeseen events.

Do you need homeowners insurance during construction?

Having homeowners insurance during construction offers limited protection, which is why contractors should still have builder’s risk insurance.

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About Mark Fitzpatrick

Mark Fitzpatrick is a Licensed Property and Casualty Insurance Producer and MoneyGeek's Head of Insurance. He has analyzed the insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. He has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.

Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.

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