A builders’ risk policy is a specialized type of property insurance designed to cover damage to buildings while they are in the process of being constructed, renovated or remodeled. It typically covers materials, equipment, and fixtures in the event that any of these items suffer physical damage or loss during construction operations and may extend to cover materials and equipment during storage and transit to the job site.
Since there is no standard builders risk policy applicable in all situations, each contract is drawn up to outline the specifics of the coverage contained therein. There are two generalized types of coverage available:
- Specified Perils – also called Named Perils, this covers only losses specified in the policy
- Special Perils – most expensive but also most inclusive. This covers all losses except those specifically excluded
What’s Covered and What’s Not
Like any type of insurance, a builders’ risk policy can be written to cover just about any type of loss as long as a written agreement is executed between the insurer and the insured and the appropriate policy premium amount is paid. Earthquake and flood damage, for example, are almost always excluded in basic policies but, for an additional premium amount, these can normally be added if desired. Besides flood and earthquake damage, other types of losses often excluded from a typical builders risk policy include:
- Defects in design or construction
- Settling, shrinking or cracking
- Intentional damage by the policyholder
- Insect or vermin damage
Losses traditionally covered include damage caused by fire, wind, lightning strikes or explosions. Theft of materials stored onsite may or may not be covered, depending on the policy, and some policies may require you to have a secure storage area. Building collapse is also something that may or may not be covered, depending on the individual policy.
Coverage Add-Ons and Limitations
Liability coverage for protection against bodily injury or damage to the property of other parties is normally not covered under a builders’ risk policy. The addition of a loss of income clause, however, is not uncommon in certain situations. An example of this would be a hotel that suffers significant damage just before completion and the opening of the business is delayed substantially, causing a major loss in projected business income. This is a type of loss for which a special provision within the policy can provide coverage.
If you have occasion to make a claim under your builders’ risk policy and the amount paid is less than expected, it’s probably because, by default, claims are typically paid according to Actual Cash Value rather than Actual Replacement Costs. Unless your policy specifies that it will pay Actual Replacement Costs for any loss claimed, the amount paid will be depreciated to the lesser amount. When going over your policy make sure to check this detail.
Who Should Obtain Coverage and Why
Buildings are subject to a variety of risks during construction operations and a quality builders risk insurance policy can minimize the exposure to unexpected setbacks. The policy may be purchased by a custom builder, a general contractor or by the property owner. Coverage is meant to protect throughout the construction phase and to terminate when the building has been completed and is ready for occupancy. The amount of coverage will generally be in line with the total cost of labor and materials involved, with an upside limit of the total valuation of the completed project. As the construction process proceeds, the value of the existing structure in its present condition will be constantly changing, adding to the complications involved in underwriting precise coverage.