Understanding Builder’s Risk Insurance: Common Coverages, Limitations and Other Considerations

Construction projects can be complex, fast-moving, and exposed to a wide range of risks, from weather events and theft to design changes and material delays. Builder’s risk insurance is an important consideration in a broader risk management and insurance strategy to help address those risks.

It’s important for project stakeholders to fully understand what builder’s risk insurance helps cover, or, just as importantly, what it may not cover.

If you’ve ever asked what builder’s risk insurance is, this guide helps break it down in practical terms: what’s typically covered, what’s commonly excluded, and where costly coverage gaps can arise.

What Is Builder’s Risk Insurance?

Builder’s risk insurance is a specialized form of property insurance designed to cover certain buildings and structures while they are under construction, renovation, or repair.

Unlike traditional commercial property insurance, which addresses completed structures, builder’s risk insurance is generally intended for projects during active construction.

It is typically considered by:

• Property owners
• Developers
• General contractors
• In some cases, subcontractors (depending on contract requirements)

Builder’s risk insurance may be obtained by different project stakeholders, including project owners, developers or general contractors, depending on how the project, financing arrangements and contractual responsibilities are structured. In some projects, lenders may require this coverage, but they typically do not purchase it themselves.

Builder’s risk policies are often written on a ‘special causes of loss’ (sometimes called ‘all-risk’ or ‘open peril’) basis, which generally provides coverage for direct physical loss or damage arising from covered, subject to policy terms, limitations and exclusions. 

What Does Builder’s Risk Insurance Typically Cover?

Coverage can vary by policy, but builder’s risk insurance is generally intended to address certain direct physical loss or damage exposures during construction.  While the terms and conditions of each policy will vary, examples of covered property exposures include:

1. Structures Under Construction

• The building itself (whether ground-up or renovation)
• Temporary structures (e.g., scaffolding, forms, temporary fencing)

2. Materials and Equipment

• Materials on-site
• Materials in transit (where coverage is included or endorsed)

Materials stored off-site (where coverage is included or endorsed)
Where included, in-transit and off-site coverage may be important considerations, particularly where project schedules or supply chain factors affect the storage or movement of materials.

3. Examples of Covered Loss

• Fire and explosion
• Theft and vandalism
• Wind, hail, and certain weather events
• Lightning

Covered causes of loss and policy exclusions vary and are subject to specific terms, conditions, and endorsements of the policy.  

4. Soft Costs (Optional Coverage)

Builder’s risk policies often focus on direct project costs like labor, materials, and equipment. Coverage for soft costs may be available by endorsement and can include certain additional expenses resulting from a covered delay, such as:

• Architectural and engineering fees
• Permit costs
• Interest on loans
• Additional legal or consulting expenses due to delays

Availability and scope of soft cost coverage vary by policy terms and endorsements.  Soft cost coverage may be an important consideration where covered losses could affect project timelines or result in additional project-related expenses.

What Is Not Typically Covered by Builder’s Risk Insurance?

Builder’s risk insurance policies often contain exclusions, limitations and conditions that can vary by insurer and policy language. Understanding these provisions may help identify potential coverage considerations:

1. Faulty Workmanship or Design

Certain builder’s risk policies may contain exclusions or limitations relating to:

• Defective design
• Faulty workmanship
• Use of improper or defective materials

Depending on policy language, coverage may distinguish between the cost to repair defective workmanship itself and resulting direct physical damage arising from a covered loss. Treatment of these issues can vary by policy.

2. Wear and Tear or Maintenance Issues

Coverage for normal wear and tear, corrosion, deterioration, or maintenance-related issues may be limited or excluded.

3. Employee Theft

While certain theft-related losses may be covered, coverage for employee theft may be limited, excluded or require specific coverage endorsements.

4. Mechanical Breakdown

Coverage for equipment failure due to internal issues (not caused by an external covered peril) is generally limited or exclude unless resulting from a covered cause of loss, depending on the policy terms.

5. Floods and Earthquakes

Coverage for catastrophic events, such as flood and earthquake, may not be included in standard policy forms and may require separate coverage or endorsements.

6. Liability Risks

Builder’s risk insurance generally focuses on property-related risks and may not include liability-related exposures.  Depending on the circumstances and policy structure, separate insurance coverages may be needed for exposures involving:

• Commercial general liability insurance
• Workers’ compensation insurance

Common Considerations in Builder’s Risk Coverage

Even when a policy is in place, coverage considerations can arise, especially on larger or more complex construction projects. These considerations can be influenced by project assumptions, contract language, policy structure and evolving project conditions.

1. Project Valuation Considerations

Builder’s risk policies may use project valuation methodologies that take into consideration anticipated project costs, which can include hard construction costs and, where applicable, certain covered soft costs. If project values do not align with policy requirements or project considerations change:  

• Coverage available following a loss may be affected by policy valuation provisions or coverage limits
• Coverage limits may not align with the cost of reconstruction or project completion following a covered loss
• Changes in labor, material, and construction costs may be important considerations when evaluating coverage limits.

2. Delayed Project Timelines

Builder’s risk policies are generally issued for a defined policy period or project duration. If a project runs longer than expected:

Coverage periods may need to be reviewed if project timelines extend beyond original expectations

Coverage extensions may be needed, depending on policy terms
Project delays resulting from labor shortages, permitting issues, or supply chain disruptions can create additional project and coverage considerations if not proactively managed.

3.  Transit and Off-Site Storage Coverage Considerations

Coverage for the following may vary depending on policy structure and endorsements:

• Materials in transit
• Materials stored off-site

Given today’s supply chain and logistics environment, evaluating in-transit and off-site storage coverage may be important for projects involving high-value materials. f

4. Soft Cost Coverage Considerations

Certain project-related expenses may increase following a covered delay or project disruption and can include:

• Extended financing costs
• Additional professional fees
• Potential business or project-related revenue impacts

If soft cost coverage is not included or the limits are insufficient, additional project-related expenses may arise even where physical damage coverage applies.

5. Misalignment with Contract Requirements

Construction contracts may address:

• Responsibility for purchasing builder’s risk insurance
• Coverage requirements and project-specific provisions
• Parties to be named as insured under the policy

If the policy doesn’t align with contract terms, disputes can arise between owners, contractors, and lenders.

6. Testing and Commissioning Considerations

As projects approach completion, testing and commissioning activities may introduce additional coverage considerations. Depending on policy terms, some policies may:

• Limit or exclude coverage during testing phases
• Require specific endorsements or additional provisions as systems become operational or transition to intended use

The transition from construction to operational use may present additional considerations when evaluating project risks and coverage needs.

How Builder’s Risk Insurance Fits into a Broader Risk Management Strategy

Builder’s risk insurance is just one component of a comprehensive construction risk management approach. It can operate in conjunction with coverages such as:

• Commercial general liability insurance (addresses third-party bodily injury and property damage claims)
• Workers’ compensation insurance (addresses work-related employee injuries or illnesses)
• Professional liability insurance (addresses design-related risks and exposures)
• Inland marine insurance (addresses tools and equipment in transit or at temporary locations)

Understanding how these coverages interact can help address overlaps or gaps in coverage.

Practical Considerations for Construction Businesses

When evaluating builder’s risk insurance, construction stakeholders may wish to consider factors such as:

• Reviewing policy terms, exclusions and conditions carefully
• Evaluating whether project values remain aligned with construction costs
• Assessing whether coverage aligns with applicable contractual requirements
• Considering location-specific exposures, such as flood or earthquake risks
• Considering whether soft cost or delay-related coverage options may be appropriate for the project

Builder’s risk insurance should not be treated as a “set it and forget it” policy.  It should generally be reviewed periodically as projects evolve, since coverage needs, project scope and risk exposures may change over time.

Final Thoughts

So, what is builder’s risk insurance? It is designed to help protect certain physical property exposures associated with constriction projects while work is in process.  However, coverage scope, limitations, exclusions and project-specific factors can vary significantly depending the project and underwriting structure.

For contractors, developers, and project owners, understanding how coverage may apply to a particular project, including potential gaps, exclusions and operations risks, can be an important part of a broader construction risk management plan.

If you’re evaluating builder’s risk insurance as part of your overall construction risk strategy, Acrisure can help you find coverage options based on your project’s scope, timeline, and risk profile. Our team of professionals has deep expertise in construction and risk management.

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