Homeowners ≠ Builders Risk Insurance
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.
Coverages Provided
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.
How Much?
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.
Term
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.
Expert Note
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.
Thank you so much for your reply. I am hoping to get someone on the phone today to go over that builder’s risk policy. If we happen to drop homeowners at the time of reno, I will be sure to add liability. Thanks again.
If I am closing on a house in October, living in the house for a month and a half, and then beginning a renovation where we will not be living in the house for 4-6 months starting in December, would I purchase a homeowners policy for the month and a half we will be living in the house, drop it then pick up a builders risk policy, then pick the homeowners policy back up once renovations are complete? Or, do we keep the homeowners insurance and pick up an additional builders risk insurance policy once renovations begin? Lastly, could I purchase a builders risk policy instead of a homeowners policy for the month and a half we live in the house, through the renovation period (4-6 months), and then drop it to start a homeowners policy once reno is completed and still be covered? Thanks in advance for any feedback. After speaking to three different insurance companies, no one seems to have a clear answer…leaving me feeling uneasy…and unprotected!
Rachel,
Great questions. I will give you some guidance, but with a huge caveot of “it all depends”. Not to be evasive, but just becuase it depends upon how each insurance company would want to handle it. There are other variables such as where the home is located, the kind of renovations you will be doing, the value of the home, etc. With that…
Since you will be in the home for 1 or 2 months, it is best to cover it with traditional homeowners during that time. Depending upon the extent of your renovations (I am assuming extensive renovations since you are moving out for 4 to 6 months) some insurance companies will continue the coverage throughout the renovation by adding builder’s risk to the homeowners policy. That is probably the best way to do it if possible. Explain your situation to your insurance agent ahead of time so they can shop your insurance with companies willing to do this.
If instead you do a homeowners policy for 1 or 2 months then switch to a separate builder’s risk policy during the renovation, the builder’s risk does not provide personal liability protection. Thus, if the home is damaged during the renovation, that would be covered by the builder’s risk. But if you are sued because a renovation contractor fell down your steps and alleges they were unsafe (this really happened to a client of ours a couple years ago) then that would not be covered by builder’s risk. Such personal liability protection is provided under a homeowners policy or a renters policy. So…if you have a 2nd home, it isn’t uncommon for that insurance company to extent personal liability protection over the new home’s location. There are lots of possibilities depending upon your specific situation, but yours is not an uncommon challenge. My suggestion is, assuming this is a major renovation, protect yourself during that time with builder’s risk one way or another, but ensure personal liability protection is in place as well.