Builder's risk insurance: covering a building while it is under construction

Builder's risk insurance is a property policy for a building or other structure while it is being built, renovated or expanded. It covers the structure, the materials stored for it and, often, temporary structures like scaffolding, against fire, wind, theft, vandalism and similar perils, but it ends when the project is finished or occupied, and it normally excludes defective workmanship and the contractor's own tools. Who has to buy it is a contract question, and getting that question wrong is the most common way a project ends up uninsured.

What the policy covers

The ISO Builders Risk Coverage Form, CP 00 20, covers a building or structure under construction, including its foundations, and the materials, supplies and equipment intended to become part of it, when they are at the site or within a stated distance of it. Many carrier forms add temporary structures and, by endorsement, soft costs and similar extras. Coverage is usually written on a completed-value basis, meaning the limit should equal the final value of the structure including permanent fixtures, not the value on the day the policy starts.

Insurers describe the same coverage in their own words. Travelers says builders risk covers the cost to repair or replace materials at the covered structure, listing fire, wind, theft, collapse, lightning, hail, explosion and vandalism, with flood or natural disaster coverage available depending on the area. It lists protected property as the structure, materials on site or in transit, equipment awaiting installation or already installed, reasonable labor, overhead and profit, and other project costs such as building permit fees. Nationwide lists optional endorsements for earthquake, flood, equipment breakdown and testing, sewer backup, pollutant cleanup, ordinance or law, expediting expenses and similar extensions. Liberty Mutual describes builders risk as protection for structures and materials during construction projects.

Who buys it

Nothing in the insurance market assigns builder's risk to one party. The construction contract does. Under the AIA A201 general conditions, builder's risk property insurance is by default the owner's responsibility unless the contract says otherwise, and other contract families and many owner-drafted agreements put it on the general contractor. The result in practice:

Whoever buys it, the policy should list the owner, the general contractor and the subcontractors as named insureds, with waivers of subrogation among them (waiver of subrogation: what it is and when contracts require it), and the lender as mortgagee or loss payee. Large projects may use a wrap-up (Wrap-up programs: how OCIPs and CCIPs work) that includes builder's risk. Read the contract's insurance article first (how to review the insurance requirements in a contract).

What it excludes or limits

• Faulty workmanship, design errors and defective materials. Standard forms exclude the cost to correct the defect itself. Some carriers offer limited resulting damage cover by endorsement.
• Contractor's tools and equipment. The builders risk form does not automatically cover them. See contractor's equipment insurance: covering tools, machinery and rentals.
• Flood, earthquake and named storm. Often excluded, sublimited or subject to a high deductible unless added (named storm deductibles: how percentage wind deductibles work, Commercial flood insurance: NFIP limits and private options).
• Theft of building materials. Often limited, or requiring site security or documented storage.
• Excavation, grading and backfilling, land and water. Typically excluded.
• Water damage not caused by a named peril. Underwriters commonly ask about water-leak detection and shutoff controls, because leaks and burst pipes are a frequent and costly kind of construction loss.
• Ordinance or law. Increased costs to rebuild to current code after a loss are not covered unless purchased (ordinance or law coverage: paying for code upgrades after a loss).

Soft costs and delay

A fire during construction costs more than the burned material. The owner still pays loan interest, property taxes, extended general conditions and loses expected rent or sales during the delay. The base builder's risk form does not cover these. A delay in completion or soft cost endorsement does, subject to a waiting period and a limit. If you are borrowing to build, ask for it, and size it from the loan terms.

Worked example (hypothetical)

Say an owner is building a $4.2 million warehouse with a $3 million construction loan at 8% interest. The loan costs $20,000 a month in interest, and the general contractor's extended site costs are $15,000 a month. The owner buys a completed-value builder's risk policy for $4.2 million with a soft cost endorsement.

• A fire in month nine destroys the framing and delays completion by three months.
• The policy pays to rebuild the covered work, less the deductible.
• Soft cost coverage, if it applies after its waiting period, may pay the extra interest and extended site costs. For three months that is $105,000 ($60,000 of interest plus $45,000 of site costs), subject to limits.
• Without the endorsement, the owner pays the $105,000 out of pocket.

The numbers are invented for illustration; limits, waiting periods and rating vary by carrier.

When coverage ends

Builder's risk is temporary. The ISO form ends coverage on the earliest of several events, including policy expiration, acceptance of the property by the purchaser, the insured's interest ceasing, abandonment of the project, a set number of days after construction is complete, and occupancy or intended use of the building. Check the days in your edition. The classic mistakes:

1. Project runs late. The policy expires on the original date while the roof is still open. Extensions should be priced at inception.
2. Tenant moves in early. Partial occupancy can end coverage while work continues. Ask about a permission to occupy endorsement.
3. No permanent policy in place. The owner needs a commercial property policy to attach the day builder's risk ends (commercial property insurance: what it covers and what it doesn't). A finished, empty building then raises vacant building insurance and the vacancy clause questions.

How it is priced

Premium follows the completed value of the project, construction type (frame, masonry, steel), the duration, the location and its exposure to storm, flood or wildfire, the deductible and the site's protection: fencing, security, fire watch, water controls and sprinklers installed early. Wood-frame construction generally draws more underwriting attention for fire and water than non-combustible construction. Quotes require a project description, a budget, a schedule and the contractor's experience.

Buying checklist

1. Read the contract to see who must buy builder's risk, the minimum limit and required endorsements.
2. Set the limit at completed value, including owner-supplied materials and change orders.
3. Confirm all parties are named, the lender is listed and waivers of subrogation are in place.
4. Ask about soft costs, delay in completion, ordinance or law, flood and named storm.
5. Check the theft limit, the storage-on-site rules and the water damage conditions.
6. Plan the expiration date, extension rights and the handoff to permanent insurance.

Key takeaways

• Builder's risk covers a structure and materials under construction on a completed-value basis, and it ends at completion or occupancy.
• The contract decides who buys it; confirm that before the first draw, and name every party that has an insurable interest.
• Defective workmanship, contractor's tools, flood and earthquake, and soft costs usually need separate treatment.
• Time is the quiet risk. Delays, early occupancy and the gap before permanent coverage are where uninsured losses happen.