Understanding Builders Risk Insurance: A Practical Guide

Buildings under construction face unique risks: fire, theft of materials, weather damage, vandalism, and structural collapse before completion. Standard commercial property insurance typically does not apply until a structure is finished and occupied.

Builders Risk insurance fills this temporary but critical gap by covering property during the course of construction.

This guide explains how Builders Risk works, who needs it, and what is typically covered and excluded.

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What Is Builders Risk Insurance?

Builders Risk insurance is a specialized property insurance policy that covers:

• Buildings under construction
• Materials and supplies
• Equipment installed during construction

Coverage applies from project commencement through substantial completion or occupancy.

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What Problem Does Builders Risk Insurance Solve?

Builders Risk addresses financial risks during construction, including:

• Fire or explosion damage
• Theft of building materials
• Storm damage
• Vandalism
• Collapse due to covered causes
• Certain water damage events

Without Builders Risk coverage, losses during construction are typically uninsured.

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Who Typically Needs Builders Risk Insurance?

Builders Risk insurance is commonly required for:

• Property owners undertaking new construction
• Developers
• General contractors
• Construction managers
• Lenders financing construction projects

The party responsible for purchasing the policy varies by contract.

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How Does Builders Risk Insurance Work?

At a high level:

1. A construction project begins.
2. Builders Risk coverage is placed with defined project value.
3. A covered physical loss occurs during construction.
4. The insured files a claim.
5. Covered repair or replacement costs are paid, subject to deductible and limits.

Coverage ends when the project is completed or occupied.

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Key Coverage Components

Builders Risk policies typically include:

Property Coverage

• Structure under construction
• Materials and supplies (on-site, in transit, or temporary storage)

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Soft Costs (Optional)

• Architectural and engineering fees
• Permit costs
• Interest on loans
• Additional expenses caused by delay

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Delay in Completion / Delay in Start-Up (Optional)

• Covers financial loss due to project delay from covered damage.

Coverage must be carefully structured based on project complexity.

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Coverage Forms

Builders Risk policies may be written as:

• Named peril coverage
• All-risk (special form) coverage

All-risk forms provide broader protection but still include exclusions.

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What Builders Risk Insurance Typically Does Not Cover

Common exclusions include:

• Faulty workmanship (though resulting damage may be covered)
• Design defects (unless endorsed)
• Wear and tear
• Mechanical breakdown
• Employee dishonesty
• Earthquake and flood (unless specifically endorsed)

Understanding exclusions is critical in construction projects.

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Project Valuation

Builders Risk limits are typically based on:

• Completed value of the project
• Construction contract amount
• Estimated replacement cost

Underinsuring the project can result in coinsurance penalties.

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What Affects the Cost of Builders Risk Insurance?

Premiums are influenced by:

• Project size and total value
• Construction type and materials
• Project duration
• Geographic location
• Natural catastrophe exposure
• Claims history

Longer and higher-value projects carry greater premium cost.

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Named Insured Structure

Builders Risk policies may include:

• Property owner
• General contractor
• Subcontractors
• Lender (loss payee)

Proper structuring avoids coverage disputes.

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Smart Questions to Ask an Agent or Broker

• Who is named as insured?
• Are soft costs included?
• Is flood or earthquake covered?
• What triggers coverage termination?
• Is delay in completion included?

Construction contracts should align with insurance terms.

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When Builders Risk Insurance Makes Sense — and When It Might Not

Builders Risk makes sense if:

• New construction is underway
• Major renovations are occurring
• Lender financing requires it
• Project value is significant

It may not be necessary if:

• Only minor maintenance is being performed
• No structural construction is involved

For most construction projects, Builders Risk is essential.

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Cheat Sheet

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Key Takeaway

Builders Risk insurance protects construction projects from physical loss during the building phase. Because standard property insurance does not apply to unfinished structures, Builders Risk coverage is critical for developers, contractors, and lenders managing construction risk.