The Ultimate Guide to Builder's Risk Insurance
If you worry about a sudden fire or a vandalism attempt at your halfway constructed property, you're not alone. Many contractors and building owners also sweat about the theft of costly equipment and construction materials.
In fact, a Chartered Institute of Building study reported a clear majority of people (92%) in the construction industry experiencing regular site theft. Around 1 in 5 of these respondents further said that thefts happen weekly on their sites.
That's when the builder's risk insurance helps the general contractors or property owners out.
This type of insurance covers the buildings in the construction or renovation phase. Unlike ordinary property insurance, the builder's risk policy provides coverage from the first brick of the building till its completion.
Let's dig deeper into what builders' risk insurance is, what it includes and excludes, and how much it costs.
Who Should Go for Builders Risk Insurance?
Builders risk insurance, or construction risk insurance, is a type of property insurance. This type of insurance covers both types of construction, residential and commercial.
Anyone with a financial interest in the renovation or construction of a property should opt for builders' risk insurance.
It provides coverage to:
- Property owners
When multiple parties agree on a construction project, the general contractor must purchase the builder's risk policy. They will then serve as the primary insured party.
On the other hand, the contractors, subcontractors, architects, and engineers will be listed as other insured parties.
Types of Coverages Included
Typically, builders' risk insurance provides coverage to the under-construction properties when they get affected or destroyed by wind, fire, vandalism, accidents, or damage to in-transit equipment.
On the other hand, some policies may also include construction materials stored off-site, debris removal, and soft costs.
So, there are no standard clauses for a builder's risk policy. It could vary from provider to provider and may be customized as per the mutual agreement from the parties involved.
A builders risk insurance usually covers:
Related Reading: Builder's Risk Coverage Form
As mentioned before, the builder's risk insurance primarily applies to only the structures or buildings under construction and renovation. Such properties have higher chances of getting damaged by weather-related tragedies, such as heavy rainfalls or strong winds.
Moreover, they are also easy targets for vandalism and other main accidents.
On the other hand, the other parts of the building that may not seem vulnerable to damage from the outside are also at risk.
Fortunately, the builder's risk insurance provides coverage to the building from all such risks until the project is completed.
Materials and Supplies
The materials and supplies used in construction are mostly left in temporary storage, in a trailer, somewhere else, or maybe out in the open.
Since the materials you purchase are not a permanent part of the building, protecting them from thefts and vandalism can be pretty challenging.
Luckily, if the materials and supplies you store off-site get damaged on the construction site, the builder's risk insurance policy will cover them.
Equipment in Transit
Transporting equipment from one place to another is normal in construction; however, it comes with lots of risks. Auto accidents are major daily headaches for project owners and general contractors.
These accidents get very costly when the vehicle is carrying building material or equipment from one site to the other. Usually, the construction equipment costs more than the vehicle transporting it.
Builders' risk insurance policy also covers the costs incurred in the damage of equipment in transit.
Generally, both contractors and property owners don't think about the cleanup costs that may incur if the building experiences any sort of damage. Of course, constructing the entire building is pretty much overwhelming itself.
In case you don't know, the debris removal after a catastrophe can cost you between $10,000 to $100,000.
But if you've got builders' risk insurance, you don't have to worry about it.
Soft costs are those expenses that are not considered direct construction costs. They include real estate taxes, architectural, financing, and permit fees.
These expenses add up during the entire construction and make your project way out of the budget over time. Some builders' risk insurance policies may cover these costs, but others may not.
Business Income and Rental Value
Whether building a new business or a home, every construction project has a specific timeline. If this project gets delayed due to any damage, your entire life schedule may get disrupted.
You won't be able to open your startup, and since it won't be operating, it may cost you a serious loss in profit.
Luckily, some builders' risk insurance also covers these costs.
Types of Coverage Excluded
A majority of builders risk insurance policies exclude certain aspects. It is important to be familiar with these aspects. They include:
If any employee involved in the project steals something from the site, unfortunately, builders risk policy won't cover that up. In such cases, building owners or general contractors need to buy a commercial crime policy.
Builders insurance policy doesn't cover any sort of damages to the vehicles involved in the project. So to provide coverage to their work vehicles, general contractors require commercial auto insurance.
Damage from Natural Disasters
Although builders risk insurance covers weather-related damages, it doesn't involve earthquake and flood damages.
Even standard homeowners and commercial property policies also don't cover damage caused by earthquakes. However, they do involve some secondary damages resulting from earthquakes.
Manufacturing Design and Workforce Defects
If any employee gets injured on your construction site, the contractors need general liability insurance to cover their defense and settlement costs.
Not just that, but if any contractor gets accused of making defects in the design, they would want professional liability insurance.
If a loss has been caused by any sudden or unexpected source, insurance policies can cover it up. Builders risk insurance policy doesn't include any damage or loss that occurs after the project completion. As soon as the project ends, the coverage ends.
Related Reading: What Does Landlord Insurance Cover?
The Average Cost of a Builder's Risk Policy
The average builders' risk insurance quote costs between 1% to 5% of the total construction budget. For example, your team has decided on a construction budget of $150,000. You have already got a four-month builders risk insurance policy, so you have to pay any amount between $350 to $1,900 monthly in premiums.
Several factors contribute to determining the cost of a builders risk insurance policy, including:
- Coverage amount
- Project's total cost
- Project's location
- Project's duration
- Quality of construction materials used
- Construction materials logistics
- Area of the construction site in square footage
- Experience of the contractors and subcontractors involved in the project
So, before you contact a builders risk policy provider, carefully evaluate how much of a construction budget your business can bear.
The builder's risk insurance quote includes the total value of the constructed building, including materials costs and labor costs, and excluding the value of the land.
Moreover, you also have to see what your policy covers and if you can purchase any add-on coverage or not. Depending on the insurance, you may also have to evaluate the soft costs beforehand.
Doing so will help you estimate the average cost of a builders risk policy.
What to Consider Before Buying a Builders Risk Insurance Policy?
To leverage your builders risk insurance, you need to consider a few essential things before investing your money. Here are some:
Most people don't consider the additional or supplementary coverages while customizing their builders risk insurance policy. Plus, you can also alter the limit of your coverage.
Some effective supplementary coverages include:
- Equipment or supplies breakdown
- Equipment In transit
- Fungi or microbes
- Trees and plants
Most of the builders risk policies don't account for the testing damage in the contract. This is not good for you as damages in testing are quite normal.
Let's take the example of a brand-new gas connection installed during the construction. The gas company tests the gas pipes to see if the supply is flawless or not. But unfortunately, these tests caused gas damage in the under-constructed building.
Your builders risk insurance won't cover these costs.
Thus, it's better to purchase the "Testing Endorsement" (also called the IM 7962 01 12 form) that includes "Direct Physical Loss Resulting From Testing" in the covered reasons for the damage.
Non-standardized Insurance Policy
At the end of the day, you need to read the insurance policy carefully with an open mind. This helps you understand what damages your builders risk insurance covers and excludes.
Builders risk policies are usually different from other forms of insurance. It doesn't have a standard template, so every insurance provider develops it differently.
Choosing Your Builders Risk Insurance Policy
As a property owner, you can't risk your "new dream" just for saving a few bucks. Getting builders risk insurance policy is crucial to protect your property's construction site from any unexpected loss.
While builders risk insurance policy covers damages from vandalism, fire, and property in transit, it doesn't account for any loss after the project completion.
Thus, even if you have shifted to your newly-constructed house, you'll want a property insurance policy that covers you up.
At Steadily, you'll find landlord insurance for all types of properties, and that too in a wide range of cities. So, whether your new cafe or home is in Chicago or Austin, consider yourself covered.
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