Worker in Harness: Do you need builders risk insurance?

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Insurance is one of the most important investments a company makes. It protects them from unforeseen damages due to actions outside their control. There are many types of insurance available to contractors. One of the most important is builder’s risk insurance, also known as “course of construction” insurance.

Builder’s risk insurance protects contractors from damages and delays on projects that are under construction. This protection is also important for the project team members — including the owner and designers — as it protects everyone in one policy.

What is builder’s risk insurance?

Builder’s risk insurance (also called course of construction insurance) is property insurance that protects buildings while they are under construction, either during a remodel project or as they’re under construction. It helps mitigate the risk of certain damages while a project is in the construction process.

General liability or property insurance covers damages to existing buildings or structures but doesn’t cover them when they are under construction. That’s where builder’s risk comes in. It’s only used on privately funded projects, as municipal, state, and federal projects are self-insured by the government.

Contractors who perform small projects or install equipment may purchase a similar policy called an installation floater. It covers equipment and materials while installation is in progress.

Read more: Going Without Contractor Insurance Is Not Worth It

What does a builder’s risk insurance policy cover?

Builder’s risk covers damages to materials, supplies, and equipment on the job site. It covers them from the time they are in transit until the project is complete. If anything happens to them in a covered event during that time, the owner or contractor will be reimbursed for the cost to replace the damaged materials or equipment. It may also cover installation costs, depending on the policy endorsements.

A builder’s risk policy covers damages caused by:

  • Fires, lightning, or hail
  • Weather and other “acts of God
  • Impacts by vehicles or aircraft
  • Vandalism or burglary
  • Building or land collapse

While each policy has different terms, you can choose to purchase additional coverages to cover soft costs caused by delays due to a covered incident. The soft costs include lost sales, rental income, loan interest, and real estate taxes, as a few examples.

Common exclusions from course of construction insurance

There are several exclusions that are typically found in most builder’s risk/course of construction insurance policies. It’s important to note that in most cases additional coverage can be purchased to cover these types of incidents.

  • Employee theft
  • War and terrorism
  • Wear and tear
  • Rust and corrosion
  • Poor design or workmanship
  • Extra property
  • Temporary property (like scaffolding, concrete forms, or other structures)
  • Debris removal
  • Pollution cleanup

Who purchases a builder’s risk insurance policy — the owner or contractor?

Builder’s risk or course of construction insurance can be purchased by either the project owner or the contractor

When the insurance policy is bound or activated, all parties to the project should be added to the policy, including the general contractor, property owner, tenant (if applicable), and project lender. This ensures everyone who may have a claim is covered by the policy.

Usually, it makes the most sense for the property owner to purchase the builder’s risk insurance policy. If they already have insurance on the property because they have an existing building there, they’ll have an established relationship with a broker or agent. They also have the most to lose if damage occurs to the project during construction.

If the project owner self-insures the property or building, they may not be able to purchase a builder’s risk insurance policy, or it may be more expensive. They may ask the contractor to purchase a policy on their behalf. As long as the owner is added as an additional insured on the policy, this isn’t a problem. In fact, some contractors purchase builder’s risk insurance as a matter of course on all their private projects to ensure that the coverage is adequate and in place.

An example of builder’s risk insurance in action

“For example, say a bad storm sweeps in three months into a project. Rain and hail ruins the exposed walls of a new hotel being created. The general contractor doesn’t have builder’s risk insurance and most of their equipment was ruined in the storm. While they may have some insurance to cover their equipment, this means the project owner will have to pay for new materials and spend more time as the project is torn down and rebuilt.

With builder’s risk insurance, the project owner can receive compensation for the damaged or destroyed project materials that were not yet completed. This way, you don’t have to start all the way from square one after an incident.”

 – Porter-Brandenburg Agency, Inc.

Course of construction insurance protects contractors and project owners

Builder’s risk and course of construction insurance policies protect both contractors and project owners from damages to materials and supplies while a project is under construction. They help mitigate the risk of theft, weather, vandalism, and other potential causes of damage during a project. It really doesn’t matter who purchases the insurance, as long as the project is covered. Contractors should check with the project owner to determine who will initiate the policy.

While insurance can protect contractors from potential losses on the job site, they need to take action to protect payments from their customers. Sending preliminary notices, monthly notices as needed, and filing a mechanics lien when you aren’t getting paid are ways to ensure that you get paid for the work you’ve completed.