Builders Risk Insurance: Who Needs It and What It Covers

Business Insurance · Construction and Renovation Projects

A building that is halfway finished is one of the most exposed pieces of property you can own. The walls are open, the roof may not be dried in, expensive materials are stacked on the lot, and the site sits empty every night and weekend. A regular homeowners or commercial property policy usually is not designed for that situation. Builders risk insurance is. This guide explains what builders risk coverage is, who should buy it, what it pays for, what it leaves out, and how the weather and rules in Texas, Colorado, Missouri, and Tennessee change the conversation.

What Builders Risk Insurance Is

Builders risk insurance, sometimes called course of construction insurance, is a form of property insurance. Property insurance pays to repair or replace physical things that are damaged or destroyed, as opposed to liability insurance, which pays when you are legally responsible for hurting someone else or damaging their property. What makes builders risk different from an ordinary property policy is timing and value. An ordinary policy insures a finished building with a fairly stable value. A builders risk policy insures a project whose value grows every week, from an empty slab to a finished structure, and it is written for the length of the job rather than for a standard one-year term.

The Insurance Information Institute, a nonprofit research group funded by the insurance industry, describes it this way: because a building under construction gains value as more of it is completed, a builders risk policy is set up so the coverage tracks the value at the time of a loss. If a storm destroys a project that is half finished, a policy written on a completed value basis pays based on the half that existed, up to the policy limit, rather than penalizing the owner for having bought a limit equal to the finished value.

Builders risk is often described as first-party coverage, which means it pays the people who have a financial stake in the project for their own damaged property. It does not depend on proving that anyone was at fault. If a fire starts from a worker’s space heater, or a thief backs a trailer up to the site at two in the morning, the question is simply whether the cause of loss is covered under the policy wording.

Who Needs Builders Risk Coverage

Anyone with money tied up in a structure that is not finished yet should think about builders risk coverage. In practice, that includes the following groups.

Lenders frequently require builders risk coverage as a condition of a construction loan. The lender wants to know that if the project burns down, there will be money to rebuild it so the loan stays secured, and it will usually ask to be listed on the policy as the mortgagee, which is the party with a lending interest that gets paid alongside the owner after a covered loss. The construction contract may also spell out who buys the policy, so read the contract before assuming the other party has it handled.

What a Builders Risk Policy Usually Covers

Every insurance company writes its own form, so the details vary, but most builders risk policies share a common core. Coverage usually applies to the structure under construction, including the foundation, framing, roof, and anything permanently attached as work progresses. It also applies to building materials and supplies that are on the job site and intended to become part of the building, such as lumber, drywall, windows, roofing materials, cabinets, and fixtures waiting to be installed.

Many policies also include, either automatically or as an option, the following extensions:

• Materials in transit: coverage while materials are being trucked from the supplier to the job site, which matters because a load of windows or trusses can be worth thousands of dollars.
• Materials at a temporary storage location: coverage for materials kept in a rented storage yard or warehouse before they are delivered to the site.
• Temporary structures: scaffolding, construction forms, fencing, and job site trailers that are needed to complete the work, though some policies limit or exclude certain items.
• Debris removal: the cost of clearing away the wreckage after a covered loss so rebuilding can start, which can be surprisingly expensive after a fire or a tornado.
• Soft costs: an optional coverage for expenses that are not bricks and mortar but still increase when a covered loss delays the project, such as extra loan interest, additional architect fees, permit fees, real estate taxes, or lost rental income for a building that was supposed to open by a certain date.

Most builders risk policies are written on what the industry calls an open perils basis, sometimes described as all risk. That means the policy covers any cause of physical loss that is not specifically excluded, rather than listing only a handful of covered causes. The exclusions list is therefore the most important part of the policy to read.

What Builders Risk Insurance Does Not Cover

Builders risk coverage is narrow by design. Knowing its gaps keeps owners and contractors from assuming one policy handles everything on a job.

Injuries and lawsuits

A builders risk policy does not pay when a worker is injured or when a neighbor, delivery driver, or visitor sues because of something that happened on the site. Injuries to employees are handled by workers compensation insurance, which pays medical bills and lost wages for injured workers. Injuries to the public and damage to other people’s property are handled by general liability insurance. Contractors should carry both, and owners should ask for a certificate of insurance, a one-page summary showing the contractor’s policies, before work begins. Our guide on certificates of insurance for businesses explains how to read one.

Tools and equipment that will not become part of the building

A contractor’s own tools, generators, compressors, and heavy machinery are usually not covered by builders risk, because they are not part of the structure. Those items belong on a separate contractor’s equipment policy, which is a type of inland marine insurance, a category of coverage for property that moves from place to place.

Faulty work and design

Most policies exclude the cost of fixing poor workmanship, defective materials, or a design error. Some policies will cover resulting damage, meaning damage to other parts of the building caused by the defect, but not the cost of redoing the defective work itself. For example, if a plumber installs a fitting incorrectly and it leaks, the policy may help with the water-damaged drywall but not with replacing the fitting.

Wear, tear, and gradual problems

Rust, corrosion, mold that develops over time, settling, and mechanical breakdown are typically excluded. Builders risk is meant for sudden, accidental damage, not slow deterioration.

Flood, earthquake, and sometimes wind

Flood and earthquake are commonly excluded unless added back by endorsement, which is a written change to the policy. In coastal areas and some hail-prone areas, wind and hail may carry a much higher deductible, may require separate approval, or may be excluded and need to be insured elsewhere. This is where the state you build in matters a great deal.

Theft by employees and certain thefts of unattached materials

Theft by your own employees is commonly excluded. Some policies also restrict theft of materials that have not yet been installed unless the site is fenced or the materials are locked up, so security conditions in the policy deserve close attention.

How the Four States Change the Picture

Builders risk policies are written on similar forms across the country, but the weather and local rules in each state shape which coverages and deductibles matter most. Freedom Insurance Group works with owners and contractors in Texas, Colorado, Missouri, and Tennessee, and each state has its own pressure points.

Texas: coastal wind and hail

Inland Texas projects usually include wind and hail in the builders risk policy, often with a separate, higher deductible for those storms. Along the coast, many private insurance companies exclude wind and hail or will only offer it with special approval. For projects in the coastal counties served by the Texas Windstorm Insurance Association, which is the state-created insurer of last resort for wind and hail along the Gulf Coast, that association offers builders risk wind and hail coverage. Its guidelines say coverage needs to be bound on or before the date construction begins with no lapse, and that construction officially begins when materials are delivered to the building site, not counting fill dirt and grading.

To be eligible, coastal construction generally must be inspected and certified as meeting the windstorm building code. The Texas Department of Insurance issues a certificate of compliance known as form WPI-8 for work that was inspected while it was underway, and a form called WPI-8-E for work that is inspected after it is finished. Both are simply official certificates proving the building meets the windstorm code. The practical advice is to talk to your contractor about inspections before work starts, because certifying a finished building after the walls are closed can be slower and more expensive. Our Texas commercial property insurance guide covers how coverage works once the building is complete.

Colorado: hail and wildfire

Colorado’s Front Range sees some of the most frequent large hail in the country, and a project with new roofing materials, windows, and siding exposed on site can suffer heavy damage in a single storm. Pay close attention to the wind and hail deductible, which may be a percentage of the project value rather than a flat dollar amount. In mountain and foothill areas, wildfire is the other major concern. Ask how the insurance company handles projects in high wildfire risk zones and whether defensible space or site clearing is required. Our article on Colorado hail insurance costs explains why hail drives so much of the state’s property insurance pricing, and the Colorado business insurance page covers the other policies a Colorado contractor or business owner typically carries.

Missouri: tornadoes and freezing weather

Missouri sits at the edge of the central United States region that sees frequent tornadoes and severe spring storms, and an open frame with no sheathing or roof decking is especially vulnerable to wind. Winter projects add a different risk: freezing temperatures can burst newly installed water lines in a building that is not yet heated. Ask whether the policy requires heat to be maintained or water to be shut off and drained during cold weather, because failing to meet that condition can affect a claim. If you are planning a new home, our article on how much it costs to build a house in Missouri can help you estimate the completed value you will need to insure, and our Missouri business insurance page outlines coverage for contractors working there.

Tennessee: severe storms, tornadoes, and flooding

Middle and West Tennessee experience severe thunderstorms and tornadoes, and heavy rain can cause flash flooding in low-lying areas. Because flood is commonly excluded from builders risk policies, a Tennessee project near a creek, river, or poorly drained lot should be checked against flood maps before construction starts, and separate flood coverage should be discussed if the risk is real. West Tennessee also sits near the New Madrid seismic zone, so owners of larger projects may want to ask whether earthquake coverage can be added. Our article on the average cost to build a house in Tennessee is a helpful starting point for estimating values, and the Tennessee small business insurance page explains the coverage Tennessee contractors usually need.

How the Coverage Amount Is Set

The most common way to set a builders risk limit is to use the total completed value of the project. That means the full cost of the finished building, including materials, labor, and the contractor’s overhead and profit, but usually not the value of the land, because land does not burn down. Some companies also let you include design fees and other costs if they would have to be paid again after a loss.

There are two common ways the policy handles the growing value of a project:

• Completed value form: you insure the project for its full finished value from the start. The premium is often figured on a reduced average because the building is only worth the full amount at the very end, and you do not need to report changes as the project grows. This is the simpler option for most homes and small commercial jobs.
• Reporting form: you report the actual value in place to the insurance company on a regular schedule, often monthly, and the premium is adjusted to match. This can save money on long projects, but if you forget to report or under-report, a loss may not be fully paid.

Underinsuring is a real risk. If change orders, upgraded finishes, or rising material prices push the project above the original estimate, ask your agent to increase the limit. Some policies include a coinsurance clause, which is a rule that reduces your claim payment if the limit you bought is too low compared with the actual value, so keeping the limit current protects the full claim.

What Affects the Price

Builders risk premiums depend on several factors, and every insurance company weighs them differently. The most important factors include the total completed value of the project, the type of construction (a wood frame house usually costs more to insure than a building with a concrete or steel frame, because wood burns), the location and its exposure to wind, hail, wildfire, and flood, the length of the project, the security on the site such as fencing, lighting, and cameras, the experience and claim history of the builder, and the deductible you choose. A higher deductible lowers the premium but means you pay more of each loss yourself.

Because the policy term matches the length of the project, delays matter. If the job runs longer than planned, the policy may need to be extended, sometimes for an additional premium. Ask how extensions work before you buy, and keep your agent informed if the schedule slips.

Renovations Need Special Attention

Remodeling an existing building raises a question that new construction does not: what happens to coverage for the part of the building that already existed? Some builders risk policies cover only the new work, leaving the existing structure to be insured under the regular homeowners or commercial property policy. Others can cover both, sometimes paying replacement cost for the new work and actual cash value, meaning replacement cost minus depreciation, for the existing structure.

Meanwhile, many regular homeowners and property policies restrict coverage if a building is vacant or unoccupied for an extended period, and a major renovation often leaves a house empty. Tell your current insurance company about the project before work starts so you can find out whether your existing policy still applies, whether it needs an endorsement, or whether a separate renovation policy is the better fit. Waiting until after a loss to ask that question is how renovation projects end up with no coverage at all.

When Coverage Starts and Ends

Builders risk coverage should start no later than the day work begins or materials are delivered, whichever comes first. Many companies will not insure a project that has already started without extra underwriting, and as noted above, the Texas Windstorm Insurance Association specifically requires coverage to be bound by the start of construction for its standard form.

Coverage usually ends at the earliest of several events: the policy expiration date, the building being occupied or put to its intended use, the project being accepted by the owner, or the owner’s interest in the property ending, such as when a builder sells a finished house. Some policies allow limited occupancy, like a tenant moving into part of a building, only with the insurance company’s written permission. Before the builders risk policy ends, the owner should have a permanent homeowners or commercial property policy ready to take over so there is no gap between the two.

A Simple Checklist Before Breaking Ground

1. Read the construction contract to see whether the owner or the contractor is responsible for buying builders risk coverage, and confirm that the responsible party actually has it.
2. Estimate the total completed value, including labor, materials, overhead, and profit, and decide whether soft cost coverage makes sense for your loan and schedule.
3. Check the wind, hail, flood, and earthquake terms for your location, including any separate deductibles, and arrange separate coverage for anything excluded that is a real risk at your site.
4. Ask what security conditions apply to theft coverage, such as fencing, locked storage, or lighting, and make sure the site meets them.
5. Collect certificates of insurance from the general contractor and major subcontractors showing general liability and workers compensation coverage, and confirm whether you should be added as an additional insured, meaning a party who is protected under someone else’s liability policy.
6. Make sure the lender is listed correctly on the policy if the project is financed.
7. Line up the permanent policy that will begin when construction ends, so the finished building is never uninsured.

Frequently Asked Questions