Contractor’s Guide to Builder’s Risk Insurance – Master Estimators

Builders risk insurance is a critical safeguard for contractors, providing protection against various unforeseen events that can disrupt construction projects. This type of insurance helps mitigate financial risks, ensuring that projects can proceed smoothly even when unexpected challenges arise.

What is Builders Risk Insurance?

Builders risk insurance is a specialized type of property insurance designed to cover buildings under construction. It protects against various risks that can cause damage or loss during the building process. This insurance is crucial for contractors, property owners, and developers to ensure financial stability and project continuity.

Types of Coverage

Builders risk insurance typically includes coverage for:

• Fire
• Theft
• Vandalism
• Natural Disasters (excluding earthquakes and floods, unless specifically added)
• Materials and Equipment on-site, in transit, or stored off-site.

Who Should Purchase Builders Risk Insurance?

Any party with a financial interest in the construction project should consider this insurance.

Role	Description
General Contractors	Oversee the entire construction project, managing various aspects from hiring subcontractors to ensuring the project stays on schedule and within budget. Builders risk insurance protects their significant financial stake in the project.
Property Owners	Commission construction projects and bear the financial burden. Builders risk insurance protects their investment, ensuring financial interests are safeguarded throughout the construction process.
Developers	Undertake large-scale projects with substantial financial commitments. Builders risk insurance helps mitigate risks, ensuring financial viability and investor confidence.
Subcontractors	Complete specific parts of the project (e.g., electrical work, plumbing). Builders risk insurance provides additional protection for their materials and equipment, covering their work in case of damage or loss.
Lenders and Financial Institutions	Require builders risk insurance as a loan condition. This ensures their investment is protected, providing peace of mind that the project can continue despite unforeseen events.
Architects and Engineers	Play a critical role in design and planning. Builders risk insurance can protect their contributions, ensuring that damage to the project does not negatively impact their professional reputation or financial involvement.
Government Entities	Involved in public infrastructure projects. Builders risk insurance protects significant public funds, ensuring the project can proceed without undue financial burden from unforeseen events.

Why Builders Risk Insurance is Essential for Contractors

Construction projects involve significant financial investment. The main reason insurance is essential is that it covers the risk of financial loss and protecting cash flows, however, there are a few other reasons – and we’ve outlined these in the table below.

Benefit	Description
Protects Against Financial Loss	Builders risk insurance mitigates financial risks involved in construction projects, covering unexpected delays and repairs.
Covers a Range of Hazards	Common hazards covered include fire, theft, vandalism, and natural disasters.
Compliance and Requirements	Often required by construction contracts and financing agreements to protect the financial interests of all parties involved.

Protects Against Financial Loss

Construction projects involve significant financial investment. Builders risk insurance helps mitigate the impact of unexpected events that can lead to costly delays and repairs. Without this insurance, contractors may face substantial out-of-pocket expenses that can jeopardize the project’s completion.

Covers a Range of Hazards

Hazards are a part of everyday life, and builders insurance can cover against the following; 

• Fire
• Theft
• Vandalism
• Natural Disasters (Includes coverage for windstorms, hail, and other natural events (specifics vary by policy).
  
  

Compliance and Requirements

Many construction contracts and financing agreements require builders risk insurance as a condition of the contract. Lenders and investors often mandate this coverage to protect their financial interests in the project.

Key Components of Builders Risk Insurance (Things You Really Need To Look Out For)

Coverage Period

Coverage typically begins when construction starts and ends when the project is completed or the property is occupied. It’s crucial to align the coverage period with the project timeline to avoid gaps in protection.

Scope of Coverage

Builders risk insurance usually covers:

• Buildings Under Construction: Protection for the structure itself.
• Materials: Covers materials on-site, in transit, or stored off-site.
• Equipment: Insures construction equipment and tools used on the project.
  
  

Exclusions

Common exclusions include:

• Worker Injuries: Covered by workers’ compensation insurance.
• Poor Workmanship: Defects due to substandard work are not covered.
• Design Flaws: Errors in design or planning are excluded from coverage.
  
  

What Builder’s Insurance Doesn’t Cover

It’s essential to understand what builders’ risk insurance does not cover to avoid surprises. Typically, it excludes:

• Earthquakes and Floods: Unless specifically added through endorsements.
• Wear and Tear: Regular wear and tear of materials and equipment.
• Voluntary Parting: Losses due to voluntarily parting with property, such as in the case of fraud.
  
  

How To Determine the Right Coverage For Your Project

Choosing the right builders risk insurance coverage is crucial to ensure that your construction project is fully protected. Here’s how to accurately determine the appropriate coverage:

#1 Perform an Accurate Project Valuation

Properly estimating the value of the project is critical. This includes all costs associated with construction, such as:

• Materials: Calculate the total cost of all construction materials.
• Labor: Include wages for all workers involved in the project.
• Equipment: Factor in the cost of machinery and tools.
• Overheads: Consider additional expenses like permits, fees, and administrative costs.

Avoiding Underinsurance: Underestimating the project’s value can lead to insufficient coverage, leaving the contractor exposed to significant financial risks. It’s better to slightly overestimate to ensure comprehensive coverage.

Accurate estimation is one of the key reasons you should choose a quality construction estimator. 

#2 Review Duration of Coverage

Builders risk insurance coverage typically begins when construction starts and ends when the project is completed or occupied. To avoid gaps in protection:

• Initial Estimate: Align the coverage period with the expected project timeline.
• Extensions: Account for potential delays and plan for possible extensions of the coverage period.
• Occupancy Transition: Ensure coverage includes the transition period until the property is officially occupied or operational.
  

#3 Review Policy Extensions and Endorsements

Standard builders risk insurance policies may not cover all potential risks. Consider adding endorsements for:

• Earthquake Coverage: Protection against damages caused by seismic activity.
• Flood Insurance: Coverage for flood-related damages, especially in flood-prone areas.
• Soft Costs: Includes additional expenses incurred due to project delays, such as interest on loans, legal fees, and architectural costs.
• Equipment Breakdown: Covers losses due to mechanical failures of construction equipment.
  

#4 Assess Specific Project Needs

Evaluate any unique risks associated with the project location, type of construction, and specific materials used. Customized coverage can address these particular vulnerabilities.

You should work with insurance professionals who specialize in builders risk insurance. Their expertise can help identify potential gaps in coverage and recommend appropriate endorsements.

#5 Regular Review and Adjustment

As the project progresses, regularly review the insurance policy to ensure it continues to provide adequate coverage. Adjustments may be necessary due to changes in project scope, timeline, or costs.

It’s recommended tomaintain detailed records of all project-related expenses and changes. This documentation will be crucial for updating coverage and in the event of filing a claim.

Real-Life Example

Consider a large-scale residential development project in Texas. 

Initially, the project was valued at $10 million with an expected completion time of 18 months. Midway through construction, unexpected supply chain disruptions and regulatory changes increased costs and extended the timeline by six months. By regularly reviewing and adjusting their builders risk insurance, the developers were able to extend their coverage period and increase their coverage limits, ensuring continuous protection against new risks.

How to Buy A Builders Risk Insurance Policy

It’s not difficult to choose a policy, but you will need to spend some time choosing the right policy. Here’s a step by step guide of how to choose a policy that works for you:

#1 Choose an Insurer

Select a reputable insurer with experience in construction insurance. Look for:

• Industry Expertise: Insurers with a strong track record in construction projects.
• Customer Reviews: Positive feedback from other contractors and clients.
• Financial Stability: Ensure the insurer has the financial strength to handle large claims.
  

#2 Work Out Your Budget

Several factors influence the cost of builders risk insurance, including:

• Project Size: Larger projects typically have higher premiums.
• Location: Areas prone to natural disasters may attract higher costs.
• Risk Factors: Specific project risks, such as high-value materials or complex designs, can increase premiums.

You should discuss your budget, and any concerns you have with your insurer.

#3 Apply

Applying for builders risk insurance involves several steps:

1. Provide Project Details: Submit information about the project, including timelines, budgets, and construction plans.
2. Risk Assessment: The insurer will assess the project risks based on the provided details.
3. Quote and Policy Issuance: Receive a quote and, upon acceptance, the policy will be issued.

Once you’ve been accepted, the final step is the on-going management of your policy. 

Managing Builders Risk Insurance

You should regularly review the insurance policy to ensure it remains adequate as the project progresses. Adjust coverage as necessary to reflect any changes in project scope or timeline – remember, you don’t want to be without insurance at any point in time.

Ensure coverage extends to cover project delays. Failing to do so can leave the project exposed to risks after the original coverage period ends.

Builder’s Insurance Starts With a Quality Estimate

Builders risk insurance is vital for contractors, providing essential protection against financial loss and project disruptions – and it all starts with a quality estimate. 

The foundation of effective builders risk insurance is a comprehensive and accurate project estimate. Ensuring a precise valuation from the outset guarantees that your coverage is adequate, providing peace of mind and safeguarding your investment throughout the construction process – to get started, reach out to our team today!