Builder's Risk Insurance

The standard form covers the building under construction, including its foundations, the fixtures, machinery and equipment that will be permanently installed, and the building materials and supplies at or near the site. Extensions add limited cover for:

• materials stored at another location or in transit to the site;
• temporary structures such as scaffolding, construction forms, site offices and fencing;
• debris removal, the fire department service charge and pollutant cleanup, as on the property form.

Most projects are written on the special causes of loss form, so any direct physical loss not excluded is covered: fire, wind, hail, theft of installed and stored materials, vandalism, collapse during construction and water damage. The broader forms used on larger projects often add or allow:

• Soft costs. The extra interest on the construction loan, real estate taxes, insurance, permit fees, architect and engineering fees, and leasing costs incurred because a covered loss delayed the project.
• Delay in completion. The rent or income the owner would have earned had the project opened on time, after a waiting period.
• Flood and earth movement. Often available by endorsement on builder's risk even where hard to buy on the finished building.
• Existing structure. For renovations, cover for the building being renovated as well as the new work.
• Testing. Cover during hot testing and commissioning of mechanical and electrical systems.

Builder's risk carries most of the property form's exclusions, including flood and earthquake unless added, wear and tear, war and nuclear hazard. The exclusions specific to construction are the ones that cause disputes:

• Faulty design, workmanship and materials. The defective work itself is excluded; resulting damage from a covered cause is paid. Manuscript forms use graded defect clauses that decide how much of the damaged work is recoverable, and the clause chosen can change the outcome of a claim.
• Mechanical and electrical breakdown and testing. Excluded on the standard form unless testing is added.
• Theft of unsecured materials. Many forms limit or exclude theft of materials not yet installed unless the site is fenced or the materials are locked away.
• Contractors' tools and equipment. Excavators, cranes and tools belong on the contractor's own equipment policy, the subject of the inland marine guide to equipment and transit.
• Penalties and liability. Contract penalties and injury to people are outside the form entirely.

Two conditions end or reduce coverage without a loss. Coverage ends when the building is occupied or put to its intended use, after a short grace period, or a set number of days after construction is complete, whichever comes first. And a project abandoned with no intention of completing it is no longer covered. For renovations, the existing building is not covered unless the policy says so, and the owner's regular property policy for the finished building may exclude it once work starts or the vacancy period runs.

Builder's risk is usually written on a completed value basis: the limit equals the full value of the project at completion, hard costs only, excluding land and site preparation that cannot be damaged. The premium is a rate applied to that value for the project term, reflecting the fact that the value at risk is low at the start and highest at the end. A reporting form, where the owner reports values monthly, is the alternative for projects with an uncertain schedule.

The rate reflects construction type, location, catastrophe exposure, the length of the term and the site's protection. Wood frame construction carries a higher fire rate than noncombustible construction, and large wood frame projects attract high water damage deductibles and fire watch requirements. Wind, hail and named storm deductibles on builder's risk follow the same percentage patterns as on finished buildings in catastrophe areas.

The soft cost and delay limits are set separately, from the project budget and pro forma: how much interest, tax, fees and lost rent would be incurred if the opening slipped by the time it would take to rebuild. They carry their own waiting periods, commonly measured in days.

• The construction contract, schedule and budget, with hard and soft costs broken out.
• The general contractor's experience with similar projects, and their safety and quality programs.
• Construction type, number of stories, square footage and when the building will be enclosed and sprinklers live.
• Site security: fencing, lighting, cameras, guards and how materials are stored.
• Fire prevention: hot work permits, fire watch, temporary standpipes and access for the fire department.
• A water damage plan: who monitors temporary roofing and plumbing, and whether leak detection is installed during construction.
• For renovations, the scope, the existing building's value and whether any part stays occupied.

Lenders read the same file. An agency or bank loan on a building being repositioned expects the right form in place: in Michigan, where lenders flag repositioning projects, an agency loan on a property under renovation needs a builder's risk or vacant property form rather than a standard property policy, and using the wrong one is a compliance problem as well as a coverage gap.

A loss on a site affects everyone on the project, so the first steps are practical: secure the site, stop further damage, document the loss with photographs and the construction schedule, and notify the carrier and the lender. The general contractor usually leads the physical claim, pricing the damaged work from the schedule of values and the subcontract costs. The carrier's adjuster and consultant review the scope and the cost.

The harder questions on a builder's risk claim are usually these: whether the damage came from a defect in the work, which the policy treats differently from resulting damage; what share of the loss was materials not yet installed; and how long the loss delayed completion. The delay claim is where soft cost and delay in completion coverage pay, and it depends on a credible schedule before and after the loss, so keep dated schedule updates throughout the project.

Because the owner, the contractor and the subcontractors are usually all insureds under one policy, most construction contracts include waivers of subrogation, so the carrier does not pursue the trade whose work caused the loss. The contract should say so and the policy should allow it. Injuries on the site are not builder's risk claims: they go to liability policies covering the site and the owner and to the contractors' workers compensation. On facade and exterior work in New York City, where Local Law 11 inspections drive scaffold work, that liability exposure falls on owners under section 240 of the New York Labor Law.

Any project large enough that a fire, storm or theft during construction would be a serious loss needs builder's risk, whether the owner or the contractor buys it. Standard construction contracts often make the owner responsible for buying it on a completed value basis, with the contractor and subcontractors as insureds. Read the contract before assuming.

Build-to-rent developers delivering homes in phases face the hardest handover problem: homes finish and lease one by one while the rest of the community is still under construction, and each home has to move from the builder's risk to the permanent schedule on the day it is occupied. Hotel owners running a property improvement plan are often renovating floors while guests stay on others, which makes the existing structure and the division between builder's risk and property coverage the key questions.

Operators building new wash sites put expensive tunnel equipment on site before the building is enclosed, and theft and water damage to that equipment belong on the builder's risk until it is commissioned. Associations funding major structural repairs may need builder's risk for the project while the master policy continues on the rest of the building.

• The handover gap. Builder's risk ends at occupancy and the permanent property policy has not started.
• Renovation with no existing structure cover. The new work is insured and the building it sits in is not.
• No soft cost or delay cover. The rebuild is paid and the interest, taxes and lost rent from a late opening are not. Income cover for the finished building does not start until the building is on the property policy.
• Theft conditions not met. Unfenced sites and unsecured materials that the form required to be protected.
• An expired term. A project that runs past the policy period with no extension arranged.
• Flood left off. A project in a flood-prone area with no flood endorsement, when it was available.