by Geoff Stanton | Jan 18, 2025

Who Pays for Builders Risk Insurance? Top Facts 2025

Who pays for builders risk insurance is a common question among those involved in construction projects. Generally, the party with the most significant financial interest in the construction—or those insuring their assets against risks during the building process—takes on the responsibility. This could be the property owner, contractor, or developer, depending on the project’s contractual agreements.

Builders risk insurance serves as a crucial safety net for stakeholders such as homeowners starting on renovations, developers setting up new complexes, and even government entities like city councils involved in public projects. Its flexibility to cover various aspects of construction makes it vital for safeguarding materials, fixtures, and equipment against unforeseen events such as fire, theft, or natural disasters before the project’s completion.

Understanding who pays for builders risk insurance not only ensures the protection of financial interests during construction but also facilitates smoother project timelines by reducing disputes and financial-related delays.

As Geoff Stanton, President at Stanton Insurance, my expertise within commercial property and liability coverage has equipped me with a deep understanding of how builders risk insurance secures projects in Massachusetts, New Hampshire, and Maine. Over the years, I’ve guided countless clients in determining the best approaches for securing their investments. In the next section, we’ll dig deeper into what makes builders risk insurance an indispensable part of any construction project.

Easy who pays for builders risk insurance glossary:
– builder’s risk insurance policy
– how much does builder’s risk insurance cost
– what does builders risk cover

What is Builders Risk Insurance?

Builders Risk Insurance, also known as course of construction insurance, is a specialized type of property insurance designed to protect buildings and structures while they are under construction. This coverage is crucial for safeguarding against potential financial losses that may occur during the building process.

Coverage Details

Builders risk insurance provides coverage for a variety of risks associated with construction projects. It typically includes protection for:

Property and Materials: Coverage extends to the building itself, as well as materials, fixtures, and equipment used during construction. This includes items stored on-site, off-site, or in transit.
Perils Covered: The policy shields against several perils, such as:
Theft
Vandalism
Fire damage
Water damage
Weather-related incidents like wind, lightning, and hail
Explosions
Structural collapse

Additionally, builders risk insurance often covers the cost of debris removal or decontamination of the construction site following a covered event.

Why It Matters

Imagine you’re a developer constructing a new apartment complex. Partway through the build, a severe storm damages the structure. Without builders risk insurance, you’d face significant out-of-pocket expenses. With this insurance, however, those costs are covered, allowing you to continue the project without financial strain.

This insurance is flexible, allowing policyholders to customize their coverage based on specific needs and risks associated with their project. Builders risk insurance is not just for large-scale developers. Homeowners renovating their homes, city councils undertaking public projects, and even subcontractors with insurable interests in specific materials can benefit from it.

Understanding the details of builders risk insurance ensures that all parties involved in construction projects are adequately protected from financial setbacks due to unforeseen events. This makes it an indispensable tool for anyone with a vested interest in a construction project.

When it comes to who pays for builders risk insurance, the answer often depends on the construction contract and who holds the financial interest in the project. Both property owners and contractors can be responsible for purchasing the policy, depending on the agreement between the parties involved.

Owner’s Responsibility

Property owners, including developers, typically have a significant financial interest in the construction project. They stand to incur substantial losses if the project is damaged or delayed. Because of this, property owners often take on the responsibility of purchasing builders risk insurance to protect their investment.

Insurable Interest: The property owner has an insurable interest in the project, meaning they would suffer financial loss if the construction is damaged or destroyed. This makes them a primary candidate for securing builders risk insurance.
Contract Terms: The construction contract may stipulate that the property owner is responsible for obtaining builders risk insurance. This is common in situations where the owner wants to ensure comprehensive coverage that aligns with their specific needs and expectations.
Additional Insured Endorsement: Even if the owner purchases the policy, they can include the contractor and other stakeholders as additional insured parties. This ensures that all parties with a financial interest are protected under the same policy.

Contractor’s Responsibility

General contractors, who oversee the construction process, may also have a financial interest in the project. They are often responsible for the day-to-day management and completion of the construction. This involvement can make them suitable candidates for purchasing builders risk insurance.

Project Oversight: Contractors are typically involved in every aspect of the construction, from hiring subcontractors to ensuring timelines are met. This oversight can make them directly responsible for any damage or delays.
Insurable Interest: Like property owners, contractors have an insurable interest because they can face financial losses if the project is disrupted. This is particularly true if they are working on a fixed-price contract where delays could lead to penalties.
Contract Terms: In some cases, the construction contract may require the contractor to secure builders risk insurance. This is often the case when contractors can obtain the policy at a lower cost due to negotiated rates with insurers.

The decision of who pays for builders risk insurance—whether it’s the owner or the contractor—should be clearly defined in the construction contract. This ensures that there are no disputes or gaps in coverage during the project.

Understanding the nuances of builders risk insurance is crucial for all parties involved in a construction project. Whether it’s the property owner or the contractor who secures the policy, having the right coverage in place is key to protecting the financial interests of everyone involved.

Factors Influencing the Cost of Builders Risk Insurance

When determining the cost of builders risk insurance, several key factors come into play. These can significantly impact the premium and overall cost of the policy.

Project Size and Scope

The size and scope of the construction project are primary factors. Larger projects with more complex structures generally require higher coverage limits, which can increase the cost. For example, a small residential remodel will likely cost less to insure than a large commercial development.

Location

Location plays a crucial role in determining insurance costs. Projects situated in areas prone to natural disasters like hurricanes or earthquakes can expect higher premiums due to increased risk. Conversely, locations with lower risk factors may benefit from reduced insurance costs.

Policy Duration

The length of time the insurance policy is needed, known as policy duration, also affects cost. Longer projects require extended coverage, which can lead to higher premiums. It’s important to align the policy duration with the expected timeline of the construction to avoid unnecessary expenses.

Material Quality

The quality of materials used in the construction impacts insurance costs. Projects utilizing high-end or rare materials may face higher premiums due to the increased cost of replacement in the event of damage or theft.

Optional Endorsements

Adding optional endorsements to the policy can provide additional coverage but will also increase the cost. Common endorsements include coverage for temporary structures, debris removal, and protection against specific perils not included in the standard policy.

Calculating Builders Risk Insurance

When calculating builders risk insurance, consider the total completed value of the project. This includes the cost of materials and labor but excludes the land value. The insurance is designed to cover the construction aspects, not the land itself.

By understanding these factors, stakeholders can better estimate the cost of builders risk insurance and ensure they have adequate coverage tailored to their specific project needs.

Coverage and Exclusions in Builders Risk Insurance

What Builders Risk Insurance Doesn’t Cover

While builder’s risk insurance provides essential coverage for construction projects, it’s crucial to understand what it doesn’t cover. Here’s a breakdown of common exclusions:

Liability: Builder’s risk insurance does not cover liability for injuries or damage to third parties. For such coverage, you’ll need a separate general liability policy.
Wear and Tear: Damage resulting from normal wear and tear is not covered. This includes deterioration over time due to regular use.
Employee Theft: If an employee steals materials or equipment, builder’s risk insurance won’t cover the loss. Other business insurance policies are needed for this type of theft.
Manufacturing Defects: Flaws in materials or products used in construction are not covered. Coverage for these defects must come from other commercial insurance policies.
Mechanical Breakdown: The policy does not cover the repair of equipment that fails during construction. Separate equipment breakdown insurance might be required.
Theft: While theft from the site can be covered, certain conditions apply. For instance, if security measures were inadequate, a theft claim might be denied.
Vandalism: Coverage for vandalism is included, but as with theft, inadequate security can lead to a denied claim.
Fire Damage: Builder’s risk insurance covers fire damage to structures under construction. However, it does not cover fires resulting from negligence or lack of safety measures.
Weather Damage: Damage from weather events like windstorms and hail is typically covered. However, certain severe weather conditions may require additional endorsements.
Explosions: Coverage includes damage from explosions, unless caused by negligence or certain excluded activities.
Structural Collapse: Collapse due to poor workmanship or design flaws is not covered. Coverage is typically limited to collapses from covered perils like fire or weather events.
Debris Removal: While some policies include debris removal, it might come with sub-limits. Ensure your policy covers this adequately if it’s a concern.

Understanding these exclusions is vital for stakeholders to ensure comprehensive protection. Always review your policy in detail and consider additional coverages where necessary. This insight helps in mitigating risks and planning effectively for unforeseen events during the course of construction.

Who Needs Builders Risk Insurance?

Builders risk insurance is essential for a variety of stakeholders involved in construction projects. This coverage is not just for the main players but also for anyone with a financial interest in the project. Here’s a breakdown of who typically needs this insurance:

General Contractors

General contractors are often the primary party responsible for overseeing the entire construction project. They have a significant financial interest in ensuring the project is completed without unexpected losses. As they manage various subcontractors and coordinate different phases of construction, having builders risk insurance is crucial to protect against potential damage or delays.

Specialty Contractors

Specialty contractors, such as electricians or plumbers, are also key players who need builders risk insurance. Their insurable interest lies in the specific work they perform on a project. If an accident or weather event damages their completed work, this insurance helps cover their financial losses.

Developers

Developers usually invest heavily in construction projects, making them major stakeholders. They need builders risk insurance to safeguard their investments against unforeseen events that could derail a project. This insurance helps protect their financial interest and ensures the project can proceed smoothly.

Engineers and Architects

While engineers and architects might not be directly involved in the physical construction, their work is integral to the project. Errors or unexpected damages can impact their designs and plans. Builders risk insurance can cover the costs associated with redesign or repair, protecting their professional interest in the project.

Owners and Investors

Property owners and investors have a vested interest in the project’s success. They are often the ones funding the construction and stand to lose the most if something goes wrong. Builders risk insurance provides peace of mind by covering potential losses during construction.

Lenders

Banks and other financial institutions that provide loans for construction projects also require builders risk insurance. As part of protecting their financial stake, lenders need assurance that the project will be completed and their investment secured. Listing them as a mortgagee on the insurance policy offers this protection.

These stakeholders must assess their roles and responsibilities within a construction project to determine the necessity of builders risk insurance. By understanding their specific needs and insurable interests, they can ensure adequate protection and smooth project execution.

Frequently Asked Questions about Builders Risk Insurance

Why is Builders Risk Insurance So Expensive?

Builders risk insurance often comes with a hefty price tag due to several factors. One major factor is climate risks. Construction projects in areas prone to natural disasters, like hurricanes or wildfires, face higher premiums because the likelihood of damage is greater. For instance, projects in Florida are at risk for hurricanes, while those in California might deal with wildfires or earthquakes.

Economic risks also play a role. Fluctuating market conditions can affect the cost of materials and labor, leading to increased insurance costs. When the economy is unstable, insurers may raise rates to cover potential losses.

Finally, supply chain risks add to the expense. Delays in receiving materials can stall projects, increasing the time under coverage and thus the cost. When supply chains are disrupted, insurers see a higher risk of project delays and adjust premiums accordingly.

What is the Difference Between Builders Risk and Property Insurance?

The primary difference between builders risk and property insurance lies in what they cover. Builders risk insurance is specifically for structures under construction. It covers perils such as theft, vandalism, and weather damage during the building process. This type of insurance is temporary and ends once the construction is completed.

In contrast, property insurance covers completed structures. It protects against risks like fire, theft, and certain natural disasters after the building is finished and occupied. Builders risk insurance is essential during the construction phase, while property insurance takes over once the project is done.

Who Pays for Builders Risk Insurance in Different States?

The responsibility for paying builders risk insurance can vary by state and project agreements. In states like Florida, where climate risks are high, the property owner often purchases the insurance to protect their investment. In California, with its earthquake risks, either the owner or contractor may bear the cost, depending on contract terms.

In Texas, where both weather and economic risks are factors, it’s common for the contractor to purchase the insurance, especially if they have a significant financial interest in the project. However, the final decision often depends on who holds the most financial interest and the specific arrangements made in the contract.

Conclusion

Builders risk insurance is a crucial part of any construction project. It protects against unforeseen events like theft, vandalism, and weather-related damages during the building phase. This coverage ensures that projects can proceed smoothly without financial setbacks from unexpected incidents.

Understanding who pays for builders risk insurance is key. The responsibility can fall on either the property owner or the contractor, depending on who has the most financial interest and what the contract stipulates. In some cases, both parties might share the cost. This flexibility allows for custom solutions that fit the unique needs of each project.

The importance of builders risk insurance cannot be overstated. Without it, both owners and contractors face significant financial risks. It not only protects the physical structure but also the investment and effort put into the project.

At Stanton Insurance Agency, we recognize the value of safeguarding your construction endeavors. Our team is dedicated to providing comprehensive builders risk insurance that aligns with your specific needs. We offer trusted protection that can help you steer the complexities of construction insurance with ease.

For more information on how we can assist with your builders risk insurance needs, visit our Business Insurance page. Let us help you protect your valuable assets and ensure the success of your construction projects.