What is Builder's Risk Insurance?

Builder's risk insurance covers a building or other type of structure while it is under construction. Many lenders will not provide financing for a project unless this type of coverage is in place. The policy provides protection from a loss resulting from fire, acts of vandalism, or wind damage. Other types of losses, such as flood, earthquake, or terrorism, may be added to the policy, if desired or needed.

The building owner is usually responsible for buying builder's risk insurance. The contractor on the project may be added to the policy as a named insured. Under this type of policy, the building or structure itself is insured against loss. Any materials or supplies on the job site will also be covered while the policy is in force.

A builder's risk insurance policy should be handled by an experienced insurance broker. In some cases, the level of coverage needed is several million dollars, and the policy must be prepared carefully so that the building owner gets the appropriate type and level of protection. To get the right level of coverage in place, the insurance broker will need an accurate estimate of the costs of materials and labor for the project, as well as the value of the completed building.

In addition, the broker providing the builder's risk insurance policy needs to know the details about the size and scope of the project. The number of stories in the building, which materials will be used, what type of roof is being used, and its location are considered when underwriters are asked to determine the level of risk to the insurance company. Information must be provided about the contractor in charge of the project before a builder's risk insurance policy can be issued. The number of years the contractor has been in business, the number of years of experience the construction company has with similar projects, and whether it has reported any losses are considered.

The broker will also need to know the scheduled start date for the construction project and the projected dates for each stage of the process before the builder's risk insurance policy will be issued. Some phases of construction may present a higher level of risk of loss, and the insurer wants to know when these will take place. After the construction phase has been completed, the insurance coverage needs to be switched to a property and liability insurance policy.