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What is Builders Risk Insurance?
TLTR: This blog answers the question, “What is builders risk insurance?” and explains why you might need it to protect your construction project. It also discusses costs and suggests ways to help you lower your premiums.
“We shape our buildings; thereafter they shape us.” – Winston Churchill.
Constructing a building is not an easy financial and physical undertaking. Not only is it an enormous, time-intensive undertaking, but the cost of labor, materials, equipment, and other fees can total thousands if not millions of dollars.
So, if you’re looking to keep your building structure financially protected against any unforeseen, unfortunate events while it’s under construction, getting builders risk insurance is an absolute must.
In this blog
- What is Builders Risk Insurance Policy?
- Do I need Builders Risk Insurance?
- What does Builders Risk Insurance Cover?
- What does Builders Risk Insurance Exclude?
- How much is Builders Risk Insurance?
- How can you save on your Builders Risk Insurance?
- What are the Best Builders Risk Insurance Companies?
What is Builders Risk Insurance Policy?
Also known as “course of construction insurance,” builders risk insurance is a specialized type of commercial property insurance. It provides financial protection to buildings that are under construction if damage should occur due to various causes.
This policy offers a level of financial assistance that can help cover the cost of repair and replacement for the structure of the building, the construction area, machinery, and the materials and supplies being used for the construction project.
Do I need Builders Risk Insurance?
Unless you have an unlimited pool of funds, every business owner or contractor that has a financial interest in a construction project needs to seriously consider getting business risk insurance.
Any business construction project that is either started from the ground up or is a renovation project needs to have this policy in place. Doing so can help you rest assured that you have a financial safety net to fall back on if an unforeseen event were to cause a heavy loss.
The insurance policy helps pay for any structural damage that the construction site might experience up to the coverage limit.
Most lenders or lending institutions require owners or contractors to purchase this policy for protection.
You can buy a builders risk insurance policy if you are a:
- Home or property owner
- Retail company
- House flipper
- Investment company
What does Builders Risk Insurance Cover?
The policy coverage differs between carriers. However, a standard policy will cover both the structure of the building and the construction materials that are used. The coverage further extends to supplies and construction equipment in transit to a different location.
It covers both residential and commercial structures and protects the owners and contractors in the event of a massive financial loss.
Builders risk insurance also covers the area around the primary construction project. It covers, among other things, the contractor’s property, equipment, machinery, and materials.
Having proper builders risk insurance in place is vital and is central to a successful risk management program.
A builders risk insurance covers damage to construction projects that results from:
Weather damage: This coverage comprises protection against fire, hurricanes, tornados, lightning, hail, and other natural disasters.
If the construction site is damaged due to one of the above, the insurance company will provide compensation up to the coverage amount.
Theft and Vandalism: This policy will provide coverage against any acts of theft and vandalism within the construction site.
It will cover losses of supplies and materials including construction tools, machinery, raw materials, and supplies.
Vehicle and Aircraft damages: The policy will cover any damage caused by a vehicle or aircraft.
For example, if a car crashes into the building structure inside the construction site, the policy will cover the cost of materials and labor that are required to repair the damage.
Apart from providing financial protection against various forms of physical property damage, some builders risk insurance policies also help cover miscellaneous “soft” costs that aren’t directly related to the construction. These expenses include:
- Rental income
- Administrative costs
- Construction loan interest
- Real estate taxes
- Lost sales
- Contract renegotiations
Note: You will need to ask the insurance company to include the soft costs in the policy. You might also need to pay more in premiums.
Furthermore, you can add additional liability extensions to these coverages if you want more comprehensive protection. These extensions include:
Materials and property in transit: Inland marine insurance can protect building materials from damage while they are in transit from one place to another.
Scaffoldings: You can extend the coverage to scaffoldings and other temporary structures.
Valuable documents coverage: This coverage will ensure that essential documents like blueprint and site plans are protected.
What does Builders Risk Insurance Exclude?
Every construction project is different and will have different policy exclusions. Two common exclusions that standard builders risk insurance has are damage caused by earthquakes and floods. But you can include these coverages for additional fees.
It’s a good idea to add these additional policies, especially if your construction project is taking place in an area that is prone to floods and earthquakes. According to the Insurance Information Institute (III), California had the largest amount of earthquake premiums, amounting to a staggering $2.1 billion in 2019. Furthermore, Statista states that damage from floods and flash floods amounted to $3.75 million in 2019.
So, be sure to consult with an insurance agent regarding what your policy will cover. As a professional, an agent can also advise you on whether you might need to get any additional coverage. They can assess your situation and be of great help in suggesting any additional coverage that you might need.
Other standard exclusions of the policy include:
- Workplace accidents and injuries
- War and acts of terrorism
- Damage caused by rust and corrosion
- Damage as a result of faulty planning and design
- Theft from employees
- Intentional damage
- Mechanical and equipment breakdown
It should be noted that, according to the New York Daily News, since the start of 2021, over 300 construction sites were shut down because building inspectors uncovered glaring safety violations.
So, if you’re looking to cover your employees or workforce against any unforeseen injuries, illness, or even death in the workplace or construction project, you can consider getting workers compensation insurance.
How much is Builders Risk Insurance?
The premium for your policy will vary according to the type of coverage and its exclusions. But standard builders risk insurance usually ranges anywhere from 1% to 4% of the entire construction cost.
On average, you might need to pay around $200 per month if it’s a small construction project. But the rates can go up to about $2,000 for larger construction projects.
You can discuss this with your insurance agent to figure out the exact rates you’ll need to pay in premiums.
Some factors that influence the premiums are:
The location of the project
The location of the construction project has a huge impact on the rates that carriers set as premiums. If the location is prone to unfavorable weather conditions and natural disasters, the premium that you’ll need to pay will be comparatively higher.
The duration of the project
The longer the construction project, the longer it’s exposed to risks and danger. So, the rate of premiums will typically increase the longer the project’s duration.
The quality of the materials that you use for your construction also influences the cost. Comparing high-quality construction materials to low-quality construction materials, you’ll need to pay more for the high-quality materials.
Renovations and remodeling projects
If you insure an existing structure while it’s being renovated, your premiums will be higher.
The physical area of the construction project also influences the rates. The larger the landmass, the higher the premium will be.
The height of the building
Taller buildings are more vulnerable to certain natural disasters like lightning strikes and hurricanes because of their proximity to the clouds. Your insurance company will consider the height of the building structure while setting the premium.
How can you save on your Builders Risk Insurance?
There are some ways by which you can lower the cost of your premium. These include:
Check for risks involved
Many contractors and owners end up getting insurance packages they don’t need. They end up spending unnecessary money on purchases and premiums.
Remember to check the protection requirements of your construction project and only get the coverage that you need. For example, if you’re a contractor working on a construction project in a location that has never had issues of flooding, adding the coverage to your standard insurance will hike up your premium.
As with all insurance, you should always compare coverage from several different insurance companies. Make sure that you’re comparing the same coverage and see what features they’re offering. Doing so can help you find a policy that meets both your needs and your budget.
Increase your deductible
One of the best ways to lower your premium is by asking your insurance provider to increase your deductible.
Be punctual with your construction project
The moment you get builders risk insurance, you’re locked into making timely payments. So, starting your project as soon as you’ve purchased the insurance would be well advised.
Insurance companies will be wary of any delays with the project and might end up increasing the premium.
Consult with an insurance agent
While you can take the necessary steps all by yourself, consulting with a reliable insurance agent can help you significantly reduce the amount of time and effort you put in.
As professionals in the field, insurance agents can promptly help find the right policy for you that can meet your budget range.
So, find an agent to help you acquire the right builder’s risk insurance.
Did you find this blog helpful? Let us know in the comments below.
Do you need Builders Risk Insurance for Renovations?
While you’re not obligated to get builders risk insurance for your renovation project, you should still consider getting it for the peace of mind that it brings you. If the renovation project is being financed, it’s more than likely that the lender will require proof of builders risk insurance.
What are the Terms of Policy?
Builders risk insurance is issued in term periods of three, six, or 12 months. If the construction project isn’t completed by the end of the initial term period, a maximum of one extension can be requested.
It’s important to check with your insurance agent to find out what policy terms your insurance company provides.
What Insurance Packages include Builders Risk Insurance?
Is Builders Risk Insurance necessary if I have Homeowners Insurance?
Homeowners insurance provides financial protection for the insured’s home, their personal belongings, loss of use, and personal liability. Builders risk insurance offers financial coverage for building structures under construction and building materials.
What are the Best Builders Risk Insurance Companies?
Construction coverage carried out research in which they narrowed down the top builders risk insurance companies in various categories. They were:
- Top Overall (The Hartford)
- Best for Custom Policies (State Farm)
- Best for Homeowners (AIG)
- Top for Contractors (Nationwide)
- Best for Commercial Developers (Chubb)