Insuring a Home Under Construction: Builders Risk

A house being built is not the risk a homeowners policy was written for. There is no occupant, the structure is open to weather, materials sit on the ground, strangers come and go, and the value changes every week. Standard forms handle that badly or not at all, which is why a separate category of coverage exists.

Why a homeowners policy does not fit

Several provisions in a normal policy work against a construction site:

• Vacancy and occupancy conditions. Most forms restrict or suspend coverages once a dwelling has been unoccupied or vacant for a set period. See vacant and unoccupied homes.
• Theft of building materials. Standard forms commonly exclude theft of materials and supplies from a dwelling under construction, which is the single most frequent loss on a residential build.
• A moving target for value. Coverage A is a fixed limit. A structure that is worth a foundation in March and a finished house in October does not match a fixed limit at any point in between.
• Who is on the property. Contractors, subcontractors and deliveries create a liability picture a residential policy is not rated for.
• Insurable interest in materials that have been delivered but not installed, or are in transit, or are sitting at a supplier.

What builders risk covers

Builders risk, also called course of construction coverage, is property insurance on a project rather than on a home. Written broadly, it typically covers physical loss or damage to:

• The structure under construction
• Materials, fixtures and equipment intended to become part of the building
• Materials stored on site, and often in transit or at a temporary location, subject to sublimits
• Temporary structures such as scaffolding, forms and fencing, where scheduled

Common covered causes include fire, lightning, wind, hail, vandalism, and theft of materials. Common exclusions include flood, earthquake, faulty workmanship or design, employee theft, wear and tear, and damage from the ordinary settling of the structure. Flood and earthquake generally need to be arranged separately, as they do on a finished home.

Builders risk is property coverage only. It does not include liability. Site liability comes from the contractor's general liability policy, from a liability endorsement, or from a separate policy, and it should be confirmed rather than assumed.

Additional coverages sometimes available, and worth asking about on a larger project, are soft costs (interest, permits, professional fees incurred because of a covered delay), debris removal, and ordinance or law coverage for code upgrades. See ordinance or law coverage.

Renovation is a different question

For work on an existing home you occupy, a dwelling under construction endorsement on your existing policy is often the appropriate route rather than a standalone builders risk policy. It adjusts the existing coverage for the period of the work.

The dividing line is roughly: new construction and long, whole-property projects point toward builders risk; shorter renovations where you remain in the house point toward the endorsement. Endorsement durations are usually limited, and different insurers set different maximum periods.

Either way, the existing structure needs to stay covered, not just the new work. That is a question to put in those words to your agent. The wider set of issues a renovation raises, including rebuild cost and liability, is covered in renovating a home.

A small project, such as replacing a kitchen without structural work, may need nothing beyond a conversation with your insurer. Have the conversation anyway. Insurers have notification requirements, and finding out afterward that coverage was suspended during the work is a bad way to learn about them.

Who buys the policy

There is no universal answer, and this is genuinely contract-driven.

The owner may buy it. The argument is control: the owner holds the property interest, would be the party suffering the loss, and as first named insured controls the claim and the settlement funds. On an owner-purchased policy the contractor is usually not automatically an insured, and adding them requires an endorsement.

The contractor may buy it. This is common, and the cost is generally built into the project price either way. If the contractor buys it, the owner should be named on the policy, and should see the actual policy rather than a summary.

A lender may require it. Construction financing frequently requires builders risk as a condition, sometimes with specified limits and a required listing for the lender.

What matters is that somebody has bought it, that the limit reflects the completed value, and that you know which party controls a claim. Put it in the construction contract, in writing, before work starts.

What to check before the first delivery

1. Get a copy of the actual policy, not a certificate summary, and read who the named insureds are.
2. Check the limit against the completed value, including materials and labor. Some policies use a provisional limit that adjusts as construction progresses.
3. Confirm theft of materials is covered, and at what sublimit. This is the loss that actually happens.
4. Check off-site and in-transit coverage for materials, including any storage location.
5. Confirm the deductible, and whether wind or hail carries a separate percentage deductible. See hurricane, wind and hail deductibles.
6. Confirm the policy term and what happens if the project runs long. Extensions are usually possible and are not automatic.
7. Verify the contractor's own coverage: general liability, workers compensation for their employees, and auto. Ask for certificates directly from their insurer or agent, not from the contractor.
8. Separate liability for the site, since builders risk will not provide it.
9. Address flood and earthquake if the location warrants it. NFIP policies carry a waiting period, so this is not a last-minute item. See flood insurance and the NFIP.

Transitioning to a permanent policy

Builders risk ends. Typically it ends at completion, at occupancy, or at a stated date, whichever comes first, and the wording is specific to the policy. The permanent homeowners policy needs to start at the same moment, not later.

• Line up the HO-3 before completion, not after. Underwriting takes time, and an inspection may be required.
• Base the dwelling limit on rebuild cost, which for a new build should be well documented since you have just paid it. See how much dwelling coverage do you need.
• Confirm the exact changeover date in writing, and check it against the builders risk expiry.
• Keep the construction records. Plans, specifications, invoices and photographs are the most complete documentation you will ever have of the structure, and they are valuable at claim time.
• Ask about credits for new construction, new wiring, new plumbing, new roof, and installed protective devices.

Coverage terms, what builders risk includes and excludes, endorsement durations, who is required to carry what, lender requirements and contractor licensing and insurance rules all vary by insurer, by policy, by contract and by state, and the policy documents and construction contract control. For your own situation, speak with a licensed agent, your lender or your state's Department of Insurance. You can also request home insurance quotes and get connected with licensed providers in your area.