What is Builders Risk Insurance?

builders risk insurance

Builder’s Risk Insurance is a type of insurance that protects the contractor and the owner of the property from loss of material, structures and equipment at a construction site. It can include materials before they are part of the structure. The policy must include the address of the building site, this can either one site or in the case of a blanket coverage, several sites that are currently under construction.

It is totally worth investing in a comprehensive and correctly valued builders risk insurance when buildings are being built, as they are much more vulnerable to things like weather, theft, etc. during this period. Setting up builder’s risk insurance correctly can be a life savior if disaster strikes, and can make the difference as to whether you can finish your project or not.

Usually, a builder’s risk insurance contract will specify the property owner, the contractor, and any subcontractors who are working on the project.

Either the contractor or the owner makes sure the insurance covers all building supplies and equipment. Whether the contractor or the owner handles getting the coverage depends on the contract, it can be either one. If, the contractor, handles the insurance, he can add it to the cost of the contract.

In some cases where the property owner has multiple building undergoing construction, it is possible to add builders risk to an existing insurance policy. For example, a city or corporation may add it to their commercial builders risk coverage though this will often only cover smaller projects.

General Contractors often have a blanket basis builders risk policy. The blanket policy is a sort of Contractors Risk Insurance that uses a reporting form to cover all current projects. Updating the report occurs on a monthly basis. At the beginning of the month, all newly started projects need to be added while those that are completed need to be removed.

Whatever the case, each project requires full builders risk coverage.

Builder’s Risk Insurance vs. Course of Construction

Despite the fact that many people define Builder’s Risk as “Course of Construction Insurance” (COCI), they are not the same thing. As mentioned above Builder’s Risk is a policy that only covers the property.

COCI, on the other hand, is a general term, which can include builders risk, but usually also includes some premises liability coverage. It might include General Liability for the General Contractor, or it might not. It may or may not include OCP.

In other words, “Course of Construction” is not a real name, just a general term that a lot of contractors use. So when someone uses it, you should find out exactly what they mean and what it covers.

Note: Only property damage is covered, Builders Risk Insurance does not protect against accidents on your property, this would need a separate general liability type of insurance cover.

Who Needs Builders Risk Insurance?

builders risk insurance definition

Anyone who is planning to build a new building or add to an existing building you need to get Builder’s Risk Insurance. Coverage makes sure you have financial protection against the loss of materials and equipment in case of damage or theft.

So in the event of loss of any materials required to complete the project, you can recover your expenses depending on what is covered up to the policy limit. The coverage usually includes materials at the site, the built-up structure, and labor cost, but not the land value.

To find out more, you should check out our article “Builder’s Risk Coverage” that talks about the things most commonly covered by this insurance. The policy does not include all situations that result in a loss, the cases excluded are listed in the exclusions section of the policy. To read about the most common exclusions look at “Builder’s risk insurance exclusions“.

When getting a Builder’s Risk policy, you can choose just to cover the structure, or you can include both the structure as well as the materials on site waiting to be installed. Sometimes you can even include materials that need to be transported to the job site as long as you identify the storage location.

Based on inland marine insurance, the fundamental structure of a Builders Risk policy is very similar to the inland marine insurance “special form”. What that this means is that what the policy must explicitly list exclusions, of what is not covered.

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Builders Risk Insurance Exclusions

What are Builders Risk Insurance Exclusions? And Why are the Exclusions Important?

All insurance policies have exclusions, usually things like war, many natural disasters and arbitrary government changes resulting from change of government or policy. Besides the items mentioned, builders risk insurance exclusions, insurers tend to add actions that are common and difficult to prevent. These include employee theft, a breakup of say any two or more parties crucial to the completion of the project, any penalties and more.

Listed below are some of the most common exclusions:

  • Earthquake;
  • Flood and other water damage;
  • Weather damage to property in the open;
  • War;
  • Government action;
  • Contract penalty;
  • Voluntary parting;
  • Mechanical breakdown; and
  • Employee theft

Also excluded are any damages done due to faulty construction. The coverage on any Builder’s risk insurance policy is intended to cover sudden and accidental events, not poor construction, this means is that the Builder’s Risk exclusions will not cover any damage caused by faulty:

  • design
  • planning
  • workmanship or
  • materials

Some insurance companies allow you to include some of the standard exclusions, usually on a one-on-one basis. The most common ones you may want to add are an earthquake, flood and weather damage, especially if the building under construction is in an area that is prone to one or more of these natural disasters.

I cannot emphasize enough that it is imperative that you read the exclusions clause carefully and in its entirety. You need to make sure you adequately covered for any eventuality common in the area.

Assumptions can be quite painful both financially and in terms of time and effort. When something happens, you can end up in a serious lurch, unable to finish your project and be out of time and money. For instance when a flood occurs in an area prone to floods, and you are not covered.

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