Homeowners Insurance ≠ Builders Risk
Builders risk insurance protects the home for the unique risks faced while under construction or renovation. A typical homeowners insurance policy will not protect these dwellings. That coverage is designed to protect completed homes, along with the personal liabilities of the owners. However, a house under construction is exposed to completely different risks and therefore requires the specialized coverage of a builders risk insurance policy.
For example, consider weather events. A completed home is fully enclosed whereas a home under construction is not – at least for a large portion of the project. Other differences include those frequenting the site: contractors and construction workers versus friends and family. Homes undergoing heavy renovation are similar. Any way you view it, the risks are different.
Who Obtains the Builders Risk Insurance?
Grab your contract with your general contractor. That document will specify which party is required to secure the policy. It will also state which additional parties should be named on it, if any.
Do not assume your builder carries builders risk insurance for your home. Just because they carry general liability or other business insurance coverages does not mean the physical structure of the home is protected. Without builders risk in place, the entire structure may be uncovered.
Builders risk insurance covers damage to the physical structure of the home. It also protects the owner’s interest in materials, equipment, or fixtures that are waiting for installation, whether on site, off site, or in transit. Other coverages can include temporary structures, scaffolding, landscaping, and subdivision signs.
Wind damage is usually an included coverage, but may be excluded depending upon the location of the home. Consider that protection carefully. Also, damage by flood or storm surge is usually not included, but can be added or a separate policy purchased. Earthquake is another option available for an additional fee.
Several types of policies exist, such as location-specific, reporting form, blanket policies, or blanket installation. The most common for the homeowner is a location-specific form, but the others are possibilities for general contractors who work on multiple projects.
What better way to estimate the replacement cost of a new home than using the cost of the construction contract minus any land value. For renovations, include the cost to replace the entire home as well as renovations when complete. Reference our Property Insurance Valuation page. Although it is written for commercial properties, it explains well the difference between market value and replacement cost. For builders risk insurance, final replacement cost should be the basis for your insured value.
Policy terms are usually six, twelve, or twenty-four months. Most residential construction projects are covered by a twelve-month policy. Some policies allow for renewal or extension, but a reason for the lengthened timeline will be necessary. Construction projects that are unnecessarily extended tend to have higher claims than those that are completed on time.
Builders Risk Insurance Versus Extended Homeowners
As noted, homeowners insurance typically does not protect homes under construction. In fact, most home policies exclude damage to property under construction. That said, some insurance companies will extend coverage to protect a home under construction for an existing client. This accommodation is provided as an incentive to keep the insurance for the new home with the existing insurance company. Although this is a nice benefit, it can often still exclude certain coverages protected under builders risk insurance.
For example, consider property waiting to be installed but not located at the job site. If the contractor purchased appliances which are damaged while in off-site storage, does their policy respond or yours? The answer depends on many factors, such as who owns the property at the time. The job site of one of our own contractors was recently robbed, the thief stealing thousands of dollars’ worth of lumber. This lumber was not a part of the home yet, so an extended homeowners policy may deny such a claim. However, builders risk is designed for all such issues and handled this claim in stride.
In summary, builders risk insurance covers the following:
- The building and associated property in the course of construction, installation, and/or renovation
- Associated property at off-site storage or in transit
- The existing structure (renovation)
- Testing of home systems when put under stress after installation
In the event of a claim, it also pays for resulting
- Additional interest payments on money borrowed
- Additional insurance premiums, real estate and property taxes, and assessments
- Additional construction permit, architect, engineering, and consulting fees
- Additional legal, lease administration, or accounting fees
- The additional cost to extend leases for construction equipment and temporary office space
For any builders risk or homeowners insurance questions, contact your Bankers Insurance agent. Not a client of ours? Let us compete for your business! Each of our clients is assigned a personal insurance agent and provided their email address as well as a phone number that rings right on their desk.