Construction projects are full of surprises—some good and some expensive. Protecting your investment is essential between supply delays, unpredictable weather, and unexpected mishaps. That’s where Builder’s Risk insurance comes into play. This specialized insurance policy safeguards against financial loss by covering damage to structures, materials, and equipment during construction.
However, a key question remains: Who pays for builder’s risk insurance?
The answer can be complicated. Payment responsibility can vary based on project agreements, size, and risk levels. In this article, we’ll explain what Builder’s Risk insurance covers, who typically foots the bill, and why clarifying this in advance helps prevent headaches down the road.
Read on to explore expert insights from Thomas McMillan, a commercial lines staff underwriter at Central Insurance.
What is Builder’s Risk Insurance?
Builder’s Risk insurance, also known as course of construction insurance, is a short-term property insurance policy designed to protect buildings under construction. This coverage extends to materials, fixtures, and even equipment stored on-site or in transit, shielding project stakeholders from financial losses if accidents or damage occur before completion.
This coverage is essential for those looking to build a home. With the total cost of new home construction ranging from $136,000 to $523,400, homeowners and contractors need this coverage to ensure their investment remains protected against the unexpected. A Builder’s Risk insurance policy is often required to comply with government regulations or as a condition to meet banking or contractual arrangements.
“Builder’s Risk is critical,” McMillan explains. “It’s essentially an inland marine coverage where your building is being insured while it’s under construction., That coverage can make all the difference if something goes wrong during construction.”
What Does Builder’s Risk Insurance Cover?
This policy offers standard coverages and optional endorsements to tailor coverage for almost any course of construction project. In McMillan’s experience, the policy could typically cover the following losses:
- Fire and lightning
- Theft
- Vandalism or arson
- Wind, hail, and certain weather events
- Vehicle or aircraft accidents
- Explosion
- Materials in transit to and from the project site
- Debris removal
- Backup of sewers, drains, or sump pumps
However, Builder’s Risk policies often exclude damage from floods or earthquakes unless additional coverage is purchased. Other common exclusions include routine wear and tear, faulty workmanship, and employee theft.
Learn More: Additional Coverage – Inland Marine Insurance
Depending on the project types and total completed value, the contractor or client may consider purchasing a handful of other endorsements. Your insurance agent is a great resource for determining the coverage you may need for your next construction project.
Who Typically Pays for Builder’s Risk Insurance?
Determining who pays for a Builder’s Risk insurance depends on how the project is structured. Depending on the terms outlined in the construction contract, the responsibility can lie with the property owner, the contractor, or both. McMillan emphasizes a clear and mutually understood contract between clients and contractors before starting a project.
Below are the most common scenarios:
Owner Pays:
In many cases, the project owner—whether a real estate developer or property owner—assumes the responsibility for purchasing the Builder’s Risk insurance.
The owner benefits from maintaining control over the policy, ensuring that their investment is protected from start to finish, regardless of any changes with contractors. This arrangement is more common for commercial developments or large-scale projects where the property owner holds the financial stake in the built structure.
Contractor Pays:
For some projects, the general contractor takes responsibility for the Builder’s Risk policy. The contractor may prefer to manage risk and control any potential claims that might arise during construction.
This setup works well in projects where the contractor bears significant responsibility for project execution and materials, such as residential builds. Contractors might also bundle insurance costs into their project bids.
Learn More: Construction Risk Management and Loss Control Tips
Shared Cost:
Some contracts specify that both the owner and contractor will share the cost, often when both parties want coverage but must control expenses. Shared responsibility agreements might allocate a percentage of the policy cost to each party, ensuring the contractor and owner have some level of involvement in protecting the project.
Get insights like this right in your inbox. Subscribe to the Central Blog below.
Factors Influencing Who Pays for Builder’s Risk Insurance
Several factors influence how payment responsibility is assigned. Here’s a breakdown of the most important considerations, according to McMillan:
- Project Size: Due to the higher premiums, larger, high-value projects are more likely to involve shared responsibility. The property manager or real estate company tends to insure large commercial builds. Homeowners looking to renovate or build small residential projects will often rely on the general contractor to provide a Builder’s Risk policy.
- Project Type: High-risk projects like wood-frame buildings or coastal developments tend to shift costs toward the contractor.
- Local Regulations: Some municipalities or lenders may require the property owner to hold the policy to ensure compliance with loan conditions.
- Risk Tolerance: If one party wants more control over claims and policy management, they may choose to pay the premium, even if the contract doesn’t require it
Choosing the right Builder’s Risk policy involves more than just finding the lowest premium—it requires careful consideration of several key factors. First, the coverage limits should align with the project’s full value, including materials and labor. Additionally, the policy duration must span the entire construction timeline, with options to extend coverage if delays occur.
McMillan stresses the importance of reviewing exclusions and riders. For example, flood damage is often excluded but can be added through endorsements. For some states, this endorsement is critical.
Larger projects should ensure they include soft cost coverage, which can mitigate unexpected expenses like additional legal or financing fees due to delays. Lastly, the policy must meet any compliance requirements set by lenders or local building codes to avoid disruptions or penalties down the line.
The Central Difference
Builder’s Risk insurance protects construction projects from unforeseen damage and delays. Whether the policy is paid for by the property owner, the contractor, or shared between both, the key is to clarify these responsibilities in the construction agreement to avoid disputes.
A knowledgeable insurance agent can assist you in ensuring your contract has the proper coverage for your investment, regardless of who is responsible for the bill. Having an insurer carrier that has extensive experience in the construction sphere can make all the difference.
At Central, our construction expertise allows us to provide exceptional customer service, coverage, and support to our policyholders. That way, you can focus on your projects with peace of mind. “We are building a wealth of knowledge regarding the controls contractors need to have in place to ensure they mitigate losses and reduce exposures,” McMillan describes. “Our construction underwriters tailor coverage for specific contractors and price them appropriately. We have experts that truly understand the industry.”
