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Whether you are building a new home or doing a major renovation, it's important to understand how your insurance needs change. New construction insurance for homeowners is a little different from a standard homeowners insurance policy, and even remodeling can change your needs.

If a builder is handling the construction of your house, they will usually provide an insurance policy. But to make sure you've got the right construction insurance for homeowners during building or renovation, you should review your coverage. Read on to learn all about builder’s risk insurance for homeowners and how to insure a home under construction.

KEY TAKEAWAYS
  • Builder's risk insurance is a policy that protects a home under construction against theft or vandalism. It also covers the tools and materials used to build the home.
  • Builder’s risk insurance generally lasts for 9 to 12 months. But it can be renewed if the construction is delayed for some reason.
  • Don't forget to ask your contractor about the insurance policy they carry and what their limits are.
  • The cost of builder's risk insurance can be between 1% and 4% of the budget, depending on multiple factors like the rebuilding cost of your completed home, size, and the materials to be used.

What is builder's risk insurance?

Builder’s risk is a type of home construction insurance that offers the specific financial protection needed during construction projects. A construction project could be anything from a new home build to a home renovation. Builder's risk insurance is often required by construction lenders and is sometimes called construction loan insurance, home building insurance, or renovation insurance.

How does builder's insurance work?

Builder's risk insurance provides extensive coverage for property damage and loss. It is designed to provide protection to construction sites against theft, vandalism, and natural disaster. Your policy may also cover you for damage to your construction materials, temporary structures like fencing, subdivision signs, scaffolding, and landscaping.

What does builders risk insurance cover?

Builder's risk coverage is specifically designed to cover the risks associated with construction. It typically covers on-site equipment, materials, and supplies.

Covered perils will 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 expensive lumber and it's stolen, your builder's risk policy will cover the loss.

What is not covered by builders risk insurance?

"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," says Benjamin Saine, product manager for homeowners insurance with USAA insurance in San Antonio, TX.

Your contractor still needs to have their own general liability insurance policy to cover things like bodily injury and property damage where they are deemed at fault.

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

Do I need builder's risk insurance?

If you have a financial interest in the construction project, you need builder's risk insurance. 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, MD.

"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.

"If you're having a home built in a community by a major builder like Pulte, there's generally no need for you to have insurance coverage because you don't actually own the lot or the home until you go to settlement," says Saine. "If you pre-purchased a lot and are having a home built on it, then you do need insurance coverage."

Saine says that the majority of consumers don't own their lot until the home is complete unless they're having a custom home built. Even then, some buyers don't own the lot until settlement.

"We recommend that you get a copy of your builder's insurance to check for adequate coverage," says Saine.

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

"You should get a certificate of insurance from your builder that is comprehensive and includes liability coverage even on completed construction operations," she says. "For instance, if your floor collapses because of shoddy construction and someone is injured, you want to be able to turn to the builder's insurance for coverage."

Brunetto says builder's insurance policies usually cover the three years after construction is complete.

Why do I need builder’s risk insurance?

There are many reasons why you should have a builder's risk insurance policy. These include:

  • Protecting your assets in the event of damage to your building during its construction phase.
  • Cover for loss or damage to materials on site.
  • Cover for damage caused by faulty workmanship.

Factors that determine the cost of builder's risk insurance

Just as the details of a construction project can have a significant impact on the quality of the build, they also influence the price you pay for the insurance. Below we list some factors that determine the cost of builder's risk insurance.

Project type. There are different types of projects that 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 when it comes to builder's risk insurance rates. This is because different locations have different risks. Areas prone to wildfire, hail damage, tornados, hurricanes, hail, or high winds will have higher builder's risk insurance costs.

Construction type and materials. The better the quality of construction, the more likely it is to withstand perils. 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.

Builder’s risk insurance cost for a homeowner

What is the average cost of builder's risk insurance? The cost of this type of 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.

Who pays for builder's risk insurance?

You’ll need to discuss with your builder how the insurance policy will be handled. In some cases, it’s built into the cost of construction, and the builder pays it while passing the cost onto you on the overall invoice.

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

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

Where can I buy a builder’s risk policy?

Many major insurance companies sell home building insurance. Here are a few to get you started:

  • 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

There are two types of insurance for homes: homeowners insurance and builder’s risk insurance. Homeowners insurance is for completed homes, while builder's risk insurance is for homes that are still under construction. Insuring a house that is being built from the ground up is different than insuring a house that is already built, as each requires different coverage.

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. Builder's risk insurance, on the other hand, covers the property while it is under construction and does not include personal liability protection. General liability insurance should be provided by the builder to protect both the builder and the homeowner.

Do I need homeowners insurance during construction?

Yes, if you own the lot. If you're having a custom home built, you'll need your own homeowners insurance policy.

"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," she 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."

Saine says most people purchase $300,000 of liability coverage, but other levels are available.

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

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