Builder’s risk insurance: What’s covered and what’s not

You have decided to take the plunge and construct a building or home. Because you’re making a substantial investment in land and construction, you wonder if you should spend some more and get builder’s risk insurance to cover the building as it’s being constructed. The coverage can also be extended to the on-site building materials waiting to be installed.

Protection from fire and more

Builder’s risk insurance pays for damages to the insured structure up to the coverage limit – an amount often determined by the construction budget. It typically covers a wide range of events:

• Fire
• Wind (might be limited nearer the coast)
• Lightning
• Hail
• Theft
• Vandalism
• Explosion
• Vehicle or aircraft

Ask your attorney to examine the policy and tell you about limitations and exclusions.

Events not covered

Standard builder’s risk insurance policy exclusions include:

• Employee theft
• Earthquakes
• Water damage
• Weather damage to property in the open
• Contract penalty
• Voluntary parting
• Mechanical breakdown
• Government action
• War

Another exclusion to add to the list: damage to the structure due to faulty design, planning, workmanship or materials. This important exclusion should also be part of your discussion with an attorney who understands construction law and is experienced in real estate development litigation.

It is in many cases possible to add coverage extensions that reduce risks involving the transportation of building materials, scaffolding, debris from covered damages and more.

In many projects, it makes more sense for the general contractor to purchase builder’s risk insurance than for the property owner or developer to do so.