What is builder’s risk insurance and what does it cover?

Builder’s risk coverage is a special kind of insurance that provides first-party coverage for damage to buildings while they are being constructed. Collapsed shoring, fires, an existing sprinkler line hit during tenant improvements and vandalism are just some examples of incidents that may call builder’s risk policies into play.

Builder’s risk contracts typically don’t provide coverage for natural disasters such as floods or earthquakes, and do not provide coverage for personal injuries that occur on the project. Unlike other insurance policies, builder’s risk protects against unknowns only while work is being done on the building. Although there can be exceptions, coverage usually lapses and provides no further covered lapses once the project has been completed.Streamline and automate processes to reduce project risks, increase productivity and boost profitability.

Every business, small or large, that embarks on a construction project needs builder’s risk insurance because it typically covers things that property and liability policies don’t. In particular, property policies will typically cover only designated or special risks, and usually will exclude damages arising from construction activities owners or contractors are engaging in on the property. Similarly, liability policies may protect against third-party claims for injuries or damage to the property of others, but liability policies will not protect against damage to property caused by construction activities. A builder’s risk insurance policy can complement the coverage provided by a liability policy so that a business has protection against a wide range of risks.

Note that some forms of builder’s risk policies may contain coverage provisions for delay damages caused as a result of a covered loss. For example, during tenant improvements, a plumbing pipe is hit by a backhoe and the building floods. Builder’s risk coverage will likely be triggered for the costs to repair the pipe and the flood damage, but if it delays the project for 6 months, who pays for the damages caused by the delay? A careful review of the policy is needed. One version of the policy may only provide coverage for extra costs incurred for overtime, as opposed to delay damages; another form might provide greater coverage.

Who needs builder’s risk insurance and when should the policy be purchased?

All construction processes should be associated with a form of builder’s risk insurance. Often is it provided by the owner of the property that is engaging the contractor — or the tenant, if the tenant is engaging the contractor for tenant improvements — but sometimes the contracting parties agree that it will be the contractor that will obtain and provide coverage for the work in progress.

Builder’s risk losses can occur from the moment the first shovel hits the dirt (think: oops, we hit a buried gas line!). As a result, the coverage should be in place before the project commences and before materials are even delivered to the site.

This article was originally written by Alan Packer and appeared here.