Guide to builder’s risk insurance for homeowners

What is builder's risk insurance?

Builder’s risk insurance is coverage for a home while it is being built or undergoing a major renovation. It protects the structure, materials, supplies and equipment tied to the project. You need it because a construction site has risks that a standard homeowners policy is not designed to cover.

Construction lenders often require builder's risk insurance, sometimes called construction loan insurance, home building insurance, or renovation insurance.

Do I need homeowners insurance during construction?

Yes, you need homeowners insurance during construction if you own the lot because builder’s risk insurance does not include personal liability coverage. A construction site creates injury risks, and liability coverage protects your assets if someone is hurt. You may need both homeowners insurance and builder’s risk insurance.

"Before the first shovel hits the ground on your home, you need to get your homeowners insurance in place so that you have liability coverage," says Saine. "The biggest risk of building a home is your liability in the case of a construction site accident."

Home buyers should purchase a home insurance policy with liability coverage in addition to the builder's risk insurance policy, says Brunetto. Homeowners insurance will also provide coverage in case of fire or storm damage.

Many home insurance companies offer a homeowners policy that’s specifically designed for homes under construction.

If this is your first home, review insurance for new homeowners for tips before you purchase.

"Liability coverage is critical for a construction site because of the risk that someone working on the site or a child or a visitor to the site could be injured," Brunetto says. "You should take responsibility to inspect the site and make sure your builder is adequately protecting the site, but you also need to buy insurance to protect your assets in case you are sued."

Benjamin Saine, product manager for homeowners insurance with USAA Insurance in San Antonio, Texas, says most people purchase $300,000 of liability coverage, but other levels are available.

Brunetto says that you may want to buy umbrella insurance for extra liability protection, particularly if you have significant assets.

Who needs builder's risk insurance?

You need builder’s risk insurance if you have a financial interest in the construction project. People with a financial interest can include you, your lender, the builder, contractors, subcontractors and architects.

The following is a list of some of the people to add to your insurance policy:

Owner of property
Lenders
Architects
General contractor
Subcontractors

"Whether you need insurance depends on your contract," says Carol A. Brunetto, a State Farm insurance agent in Bethesda, Maryland.

"Sometimes, the general contractor is responsible for insurance, while other contracts say the homeowner needs to purchase builder’s risk insurance."

In most cases, you won't need a policy if you don't own your property yet or your contractor does have coverage. Be sure to ask your contractor what type of insurance they are carrying and what the limits are.

Brunetto says new home buyers should review the purchase contract to make sure they aren't on the hook for insuring home construction.

What does builder's risk insurance cover?

Builder’s risk insurance covers construction site losses such as fire, explosion, hail, lightning, theft, vandalism and vehicle or aircraft damage. It can also cover building materials, supplies and equipment on-site.

Covered perils vary, but most builder's risk policies cover damages or loss resulting from the following:

Explosion or fire
Hail
Lightning
Theft
Vandalism
Vehicle or aircraft collision

For example, if your contractor drops off a load of lumber and it's stolen, your builder's risk policy will cover the loss. If vandals leave graffiti and other damage on the property, that's covered as well.

What isn't covered by builder's risk insurance?

Builder’s risk insurance excludes personal liability, personal belongings, flood, earthquake, poor workmanship, faulty design, wear and tear and some mechanical breakdowns. Your contractor still needs general liability insurance, and you may need separate policies for flood, earthquake or extra liability protection.

"This insurance doesn't provide liability coverage or any protection for the home's contents since there typically won't be any personal possessions at the construction site," Saine says.

You also need to ensure you have the right liability coverage; empty homes under construction can be tempting for kids looking to explore or teens seeking a hangout spot, and someone could get hurt.

Additionally, many builder’s risk policies list exclusions for things like earthquakes, floods, acts of terrorism and war, employee theft, mechanical breakdowns, workmanship, faulty design, and wear and tear.

How much does builder's risk insurance cost?

The average cost of construction insurance can be anywhere from 1% to 4% of what is budgeted for construction, depending on multiple factors. Typically, the amount of insurance you need to purchase depends on the estimated rebuilding cost of your completed home, based on the size, the finishes and the materials to be used, says Saine.

Saine says most insurance companies will steeply discount the premiums because the home hasn't been completed. Once your home is complete, with flooring and appliances in place, you need to contact your insurance company to convert your insurance to a standard home insurance policy.

Factors that determine the cost of builder's risk insurance

Several project details affect builder’s risk insurance costs, including the type of construction, location, materials and expected completion date. A home in a wildfire-prone or hurricane-prone area costs more to insure. High-end materials also raise the price because they cost more to replace after a covered loss.

Below, we list some factors that affect a builder's risk insurance quote.

Project type. Different types of projects can affect how much builder’s risk coverage costs. The most common types are new construction, remodeling excluding the existing structure, installation, and remodeling including the existing structure.
Location. Location is an important factor in builder's risk insurance quotes. This is because different locations have different risks. Areas prone to wildfire, hail damage, tornadoes, hurricanes, or high winds will have higher builder's risk insurance costs.
Construction type and materials. The better the quality of construction, the lower the risk of damage. For example, a project that is built with fire-resistant materials is likely to be rated more favorably. On the other hand, wood-frame construction (the most common construction type for residential areas) catches fire easily and is not as sturdy. Additionally, higher-end materials, like granite countertops, are more expensive and, therefore, increase the cost of insurance.
Expected completion date. The other key factor that determines how much builder's risk insurance costs is the expected date of completion of your project.

Who pays for builder's risk insurance?

The person who pays for builder’s risk insurance depends on your construction contract and lender requirements. Sometimes the builder buys it and includes the cost in your project price. In other cases, you must buy the policy yourself, especially if your construction lender requires it.

In other cases, the builder may recommend a policy, but you must buy it and pay for it. In that case, it’s wise to shop around.

If your lender requires construction loan insurance, they may require you, the homeowner, to pay for the policy. However, this varies by lender.

Builder's risk insurance companies

Many large insurers sell builder’s risk insurance, including The Hartford, Nationwide, State Farm, AIG, Liberty Mutual, Chubb, Travelers and Progressive. Your builder or insurance agent can help you compare options.

The Hartford
Nationwide
State Farm
AIG
Liberty Mutual
Chubb
Travelers
Progressive

Your builder will likely be able to make a recommendation.

How long does home building insurance coverage last?

Policies are generally written for 9 to 12 months. Most can be renewed if there are construction delays, says Saine, but the insurance company will usually assess the project to make sure progress is being made on the home.

Builder’s risk vs. homeowners insurance

Builder’s risk insurance covers the home, materials and supplies while construction is underway. Homeowners insurance covers a finished home, personal belongings, liability and extra living expenses. You need the right policy for the home's stage, as construction risks differ from everyday homeowner risks.

Homeowners insurance protects the structure of your home, covers its contents, provides coverage for additional living expenses, and offers liability protection in case someone is injured on your property. On the other hand, the builder's risk insurance covers the property while it is under construction and does not include personal liability protection. The builder should provide general liability insurance to protect both the builder and the homeowner.

FAQ:

Is builder's risk insurance required?

Yes, you'll require some form of builder's risk insurance while building a house. The company that is financing your home construction will require that the project be insured. This may be a policy provided by you or the builder.

When is builder's risk insurance required?

Builder's risk insurance needs to be in place at the time of closing on the loan to build your home, as the lender will require it.

How much builder's risk insurance do I need?

You need enough builder’s risk insurance to cover the full value of the construction project, including materials, supplies and work already completed. Your lender may set minimum requirements. If your builder handles the policy, confirm the limits are high enough to protect your financial interest.