Construction projects are inherently risky. From theft of materials to fire, flooding, or unexpected project delays, the financial stakes can be high. To mitigate these risks, construction contracts typically require the building owner, investor, or general contractor to purchase builder’s risk insurance. This specialized property insurance covers loss or damage to the unfinished building and construction materials at the job site during the course of construction.
Because no two projects are the same, builder’s risk policies vary widely among insurers. A sound program not only protects physical structures but also cushions against the cascading financial consequences of project delays. Understanding the categories of covered losses and tailoring coverage to a project’s unique characteristics are essential steps toward proper protection.
Builder’s risk exposures generally fall into three categories: hard costs, soft costs, and business interruption (BI) or loss of rent.
Hard Costs – These are the “sticks and bricks” of construction: physical property such as labor, materials, and landscaping. Losses to these tangible assets from perils like severe weather, fire, vandalism, or theft are typically covered. In their most basic form, builder’s risk policies cover only hard costs.
Soft Costs – Damage often leads to delays, which in turn create additional expenses. Examples include extended construction loan interest, re-inspection fees, and costs for renewing permits or licenses. These “soft costs” only exist because of a project delay caused by a covered peril. Unless specifically endorsed in the policy, they are excluded.
Business Interruption/Loss of Rent – For income-generating properties, delays may also mean lost rental income or revenue opportunities. Coverage for BI or loss of rent typically requires a separate endorsement and should be carefully evaluated if the project involves tenants or phased occupancy.
Understanding the Project
Setting the right policy limit is critical. Relying on the contract price alone is a common mistake, as it may fail to account for material cost inflation, soft costs, or change orders. Limits should reflect the total completed value—including labor, materials, anticipated changes, and a cushion for price increases. Location is also crucial: many builder’s risk policies exclude flood, earthquake, or windstorm damage in high-risk areas unless specifically added.
Key Endorsements
Several endorsements can close important coverage gaps:
Permission to Occupy – Ensures limited coverage continues once tenants move in before full completion. Without it, losses during partial occupancy may be excluded.
Equipment Breakdown – Testing Phase – Covers “cold testing” of installed systems (electrical, mechanical, HVAC).
Transit and Offsite Coverage – Extends coverage to high-valued materials stored in warehouses, in transit, or at staging yards.
Change Orders – Keeps the insured value aligned with design modifications and scope changes throughout construction.
Renovation and Expansion Projects
Builder’s risk usually excludes existing structures. For renovations and expansions, coverage can be extended (for an additional premium) to include damage to the existing building caused by construction activities. However, this typically comes with sublimits and does not replace the owner’s property or liability policies. Careful coordination is needed to avoid coverage gaps.
Per Project vs. Master Builder’s Risk (MBR) Policies
Per Project policies suit individual, high-valued builds by providing fixed coverage for one site.
Master Builder’s Risk policies are cost-effective for contractors managing multiple projects at one time. They provide immediate coverage for new projects added during the policy term, with contractors reporting builds monthly or quarterly. Advantages include predictable rates and improved cash flow, since premiums are tied to active projects only.
Builder’s risk insurance is more than a contractual requirement—it is a financial safeguard that ensures the successful completion of construction projects. By distinguishing between hard and soft costs, accounting for project-specific risks, and adding the right endorsements, owners and contractors can avoid costly coverage gaps.
Given the complexity and variability of these policies, partnering with experienced insurance consultant like Jeremy Riddle at Roehr. Each construction project carries its own set of exposures, and a carefully structured builder’s risk program helps ensure that when the unexpected occurs, the project—and the investment behind it—remains protected.
