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If you're having a home built, you may have some questions, including whether you need to carry builder's risk insurance. Like the home insurance policy you'll buy once you move into the finished house, builder's risk coverage is designed to protect your financial interest if anything goes wrong. Here, we'll outline the ins and outs of builder's risk insurance and help you understand what it can, and cannot, do for you.
A lot can go wrong when you're having a home built. Vandals may strike, materials could be lost in transit, or a fire could break out, destroying your partially-built home. That's where a builder's risk policy comes in. This unique coverage protects the policyholder against damage or losses outside of their control.
Let's say a home is partially built when a lightning strike causes a fire and the house must be rebuilt. Or maybe vandals come onto the property and steal or destroy building materials. Builder's risk insurance covers losses and helps the property owner and contractor stay on budget.
If you're renovating your home and not building from scratch, builder's risk insurance is a type of insurance for home renovation. As in new home construction, things can go wrong here too. If your house is damaged or destroyed while renovations are taking place, the policy can protect you.
You may sometimes hear builder's risk insurance called "course of construction insurance." Whatever it's called, it's important to note that coverages vary by the insurance company. Just as no two homeowners insurance policies are exactly the same, you can't count on builder's insurance to be the same, which makes reading the fine print even more important.
Two important terms to know are "direct effects" and "indirect effects." Direct effects include things like damaged materials. Indirect effects apply to issues like loss of revenue if you're building or renovating a property that you plan to lease. Builder's risk insurance covers both types of loss. Here's a sample list of covered damages:
Builder's risk insurance even covers things like materials lost in transit, supplies stored off-site, damaged or destroyed project plans or blueprints, and the physical property upon which the home is being built or renovated.
As mentioned, every policy is different, but here are some of the most common exclusions:
Some contractors require you to take out a builder's risk policy before construction or renovation begins. That way, the cost of premiums comes out of your pocket rather than out of their profits. However, who pays for the policy may be something you want to negotiate with a builder.
Like terms of the policy, premiums vary by insurer. Generally, the cost of a builder's risk policy runs between 1% and 4% of the project cost. Let's say your total budget to build a new lake cottage is $300,000. The cost of your policy is likely to be between $3,000 and $12,000. That wide range illustrates why it's so important to shop around. Just as you consider different homeowners insurance policies before settling for one, it pays to search for the best deal on builder's risk insurance.
Premiums are based on the value of your structure when the job is completed. This includes the cost of labor and materials. It does not include the land value.
There's no blanket answer to who typically covers the cost. If a home is being built or renovated, there's usually an agreement between the property owner and the contractor regarding who will carry builder's risk insurance.
If a contractor is completing a residential construction project, commercial construction, or installation project, that contractor will normally cover the cost of builder's risk insurance. The same is true of someone flipping a house for profit. Whether or not they are a licensed contractor, the house flipper should carry builder's risk coverage to protect themselves from financial loss.
Homeowners insurance protects a homeowner against a multitude of perils, and homeowners normally carry a policy the entire time they reside in the home. If a homeowner has a mortgage, their mortgage company will require them to keep the policy active.
Builder's risk insurance has a more narrow focus and is meant to be carried only until the job is complete. Like a homeowners policy, it's there to protect the policyholder in the event of peril.
Both types of insurance are important, and both can prevent a homeowner from taking a financial hit if anything goes wrong. There's no way to plan for or protect oneself from every possible peril, but builder's risk insurance does a good job of covering property while construction or renovation is taking place.
The primary difference is the time frame a person carries the two types of policies. A builder's risk policy is only in play while a construction or renovation job is being completed. A homeowners insurance policy is typically active the entire time a person lives in a home. If not, it's certainly kept up to date until a homeowner has paid their mortgage off in full.
There is no difference. Builder's risk insurance and course of construction insurance are two names for the same product.
No. A builder's risk policy will pay out if a project is damaged or destroyed during construction or renovation. It will not cover an injury at the worksite. That's where general liability coverage comes into play. General liability insurance covers medical and legal expenses if someone is hurt. Contracts are normally required to carry general liability coverage.
Builder's risk insurance covers existing structures when renovations are taking place. Let's say you're having a sunroom added to your home and the ceiling collapses during a huge storm. Builder's risk coverage would kick in to rebuild the sunroom.
Yes. A building collapse is one of the perils covered by some builder's risk insurance policies.
Dana has spent the last two decades as a business writer and news reporter, specializing in loans, debt management, investments, and business. She considers herself lucky to love her job and appreciates the opportunity to learn something new every day.
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