Builders risk vs standard property insurance

A building under construction is a different risk from the same building once it is finished. Its value rises every week as materials arrive and are installed. It is often empty at night, open to the weather before the roof and windows go in, and attractive to thieves looking for copper, appliances and lumber. Standard property policies are not written for that situation, and their conditions usually say so.

Builders risk insurance, also called course-of-construction coverage, fills that period. Knowing where it ends and a standard homeowner or commercial property policy begins matters to owners building a house, contractors building for clients, landlords renovating a rental and investors rehabbing a property for sale.

What builders risk covers

A builders risk policy insures the structure being built or renovated and the materials, supplies and fixtures intended to become part of it, whether they are installed, stored on site, stored at another location or in transit. It is usually written on an open-peril basis, so fire, wind, hail, theft of materials, vandalism and collapse are covered unless excluded. The limit is set at the completed value of the project, or on a reporting form that rises as values are reported.

The term follows the project rather than the calendar. Coverage typically ends at the earliest of completion, occupancy, the sale of the property or the end of the stated policy period, which can often be extended if the job runs late. Optional extensions add soft costs such as extra interest, permit fees and lost rents caused by a covered delay, debris removal above the base amount, and testing of new building systems.

• Common exclusions include faulty design, workmanship or materials, though resulting damage to other parts of the structure is often covered.
• Contractors' tools and equipment are excluded and belong on a contractor's equipment floater.
• Employee theft, wear and tear, mechanical breakdown and losses discovered only by inventory are excluded.
• Flood and earthquake are excluded or sublimited on many forms.

What a standard property policy covers

A homeowner or commercial property policy insures a completed building on an annual, renewable basis, along with the owner's contents, liability on a homeowner form, and loss of use or business income. It assumes the building is occupied and maintained. Most forms contain a vacancy or unoccupancy condition that, after a stated period, removes coverage for vandalism, glass breakage, theft and water damage or reduces the claim payment, and many restrict or exclude losses to a building under construction or major renovation.

Some homeowner and property policies will tolerate minor remodelling with the building occupied, and a carrier may allow a larger renovation by endorsement. What a standard policy generally will not do is cover a structure being built from the foundation up, or materials sitting in a driveway waiting to be installed.

The mechanism that actually differs

The two policies are priced on different exposures. A standard policy prices a stable value, an occupant who will notice a leak and a building that is closed to weather. Builders risk prices a value that grows from little to its full amount over the term, an unoccupied site and an unfinished shell. That is why builders risk is sold for the length of the project with a limit set at completed value, and why its conditions address theft from open sites, materials in transit and testing, while a standard policy's conditions address vacancy and maintenance.

Contracts decide who buys it. On a new home or commercial project, the construction contract states whether the owner or the general contractor carries builders risk and whose interests it names. Subcontractors and lenders frequently need to be listed. When both sides assume the other bought it, nobody did.

A worked example of each

Suppose an owner in Eagle, Idaho, contracts to build a custom home with a completed value of $600,000, and the contract makes the owner responsible for builders risk. Say a twelve-month policy costs $2,400. Five months in, with framing and roof sheathing up, a windstorm collapses two walls and damages trusses, and a week later thieves take $15,000 of stored windows and a pallet of copper wire. The builders risk policy pays the wind loss at $70,000 and the theft of materials, less the deductible. The framing crew's stolen nail guns and compressor are not covered; they belong on the contractor's equipment coverage.

Now suppose a landlord in Tucson guts the kitchen and bathrooms of a rental house between tenants, a project expected to take four months, and keeps only the existing dwelling policy. For example, in the third month a supply line left capped by the plumber leaks for a weekend, ruining new flooring and subfloor worth $25,000. The dwelling policy's vacancy condition and its renovation restrictions give the carrier grounds to limit or deny the claim. A renovation builders risk policy, or a carrier-approved renovation endorsement arranged before work began, would have addressed exactly that exposure. The figures are hypothetical.

Who needs which

The question to ask is whether the building will be finished and occupied throughout the policy period.

• Owners building a new home or commercial building need builders risk from the day materials arrive until the permanent policy starts, whether they buy it or the contract requires the builder to.
• Owners and landlords undertaking a renovation that leaves the building unoccupied, removes walls or roof, or represents a large share of the building's value need renovation builders risk or an explicit endorsement to the existing policy.
• House flippers and investors buying vacant homes to rehab need builders risk or a vacant dwelling policy with renovation coverage, never an owner-occupied homeowner form.
• Homeowners doing a modest, occupied remodel, such as replacing cabinets or a bathroom while living in the house, can usually stay on the homeowner policy after telling the carrier about the project and adjusting the limit afterward.
• Contractors building speculative homes carry builders risk for their own inventory and need a separate equipment floater and general liability policy alongside it.

Regional notes

New construction across the Phoenix and Tucson exurbs, the Boise and Meridian suburbs, the Reno and Sparks corridor and the St. George area puts many unfinished homes on open lots at once, and theft of appliances, copper and lumber from those sites is a routine builders risk claim. Monsoon winds in Arizona and southern Nevada topple framing and tear sheathing from unfinished roofs, while in Idaho and northern Utah a winter build faces freeze damage to plumbing in unheated structures and snow load on incomplete roofs; many forms require heat to be maintained once plumbing is installed. Wildfire exposure at the urban edge affects both the builders risk rate and the permanent property policy that follows.

When to keep what you have

An owner whose contract places builders risk with a general contractor, and who has seen a certificate naming the owner and lender, may need nothing more until completion. A homeowner doing a small remodel while living in the house, who has told the carrier and whose policy allows it, is also correctly insured. The important step for everyone is the handoff: the permanent homeowner or commercial property policy should be bound to start on the day of occupancy or completion so the builders risk coverage ends with no gap. We read the contract and the existing policy, arrange builders risk for the project where it is missing, set up the permanent policy with the carriers we represent in Arizona, Nevada, Utah and Idaho, and if the existing arrangement already covers the work, we tell you so.