A builder’s risk insurance policy provides temporary coverage during the construction phase of a house or other building. Standard builder’s risk policies cover financial loss occurring from damage to the structure, to materials stored on the job site and to material in transit to the site. Policies are available for new construction as well as major renovation or remodeling projects such as additions or complete kitchen makeovers. The cost of a policy depends on the projected cost of the project, its location and the type of materials used in construction.
The Need for a Builder’s Risk Policy
Until your home is complete, it won’t qualify for protection under a homeowner’s policy, which only covers events that occur on or to residential property. During construction, however, you still have a large financial interest in the project. As the building progresses, you purchase materials and pay contractors and subs. If a storm or vandalism occurs now, you could end up being responsible for the loss if you don’t have a builder’s risk policy.
A builder’s risk policy is good for a set period, usually one year, after which, if the house is still under construction, you can extend the policy for another year. Once the house is complete, however, even if that occurs in as short as three months’ time, the policy terminates. Before that happens, arrange to purchase a comprehensive homeowner’s policy to prevent a gap in coverage.
A builder’s risk policy covers monetary loss to your investment in the project. Other losses or injury-related costs are covered by the contractor’s commercial liability policy. Reimbursement for loss through a builder’s risk policy is limited to the actual current investment. For example, if the wall and roof framing are in place when a fire breaks out and burns the structure, a builder’s risk policy will only compensate you for the money you’ve already invested in the building. The insurance company will not pay you for the value of the home were it complete. A standard builder’s risk policy does not cover losses you might incur as a result of having to live in a hotel for three months.
Who Buys the Policy?
Your lending company will probably ask for proof of a builder’s risk policy as a requirement of a construction loan. Your contractor might offer to take out the policy for you, but it’s up to you to examine the policy to ensure that your financial investment is adequately covered. The average cost of a builder’s risk policy is about 3 percent of the estimated project cost. Purchasing add-on coverage for “soft costs” such as marketing expenses, legal fees and loss of income due to project completion delays can add another 1 to 2 percent to the cost of the policy.
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