Builder's risk insurance can be defined as coverage that protects a person's or organization's insurable interest in materials, fixtures and/or equipment being used in the construction or renovation of a building or structure should those items sustain physical loss or damage from a covered cause.
As buildings are being constructed, they can be subject to a variety of risk such as fire, winds, theft and vandalism to name a few. Builder's risk insurance usually covers against losses due to fire, vandalism, lightning, wind, and similar forces.
Normally, it does not cover earthquake, flood, acts of war, or intentional acts of the owner. Coverage is typically for the construction phase only, and will terminate when the project is completed and ready for use or occupancy. While normally purchased by the owner of the project, insured’s can also be lending institutions or the contractor or contractors that are performing the work.
In addition to the structure, coverage also may include tools and other materials which are kept onsite. However, heavy equipment and machinery are not normally covered and may require a separate rider or policy. Materials in transit may also be covered in the policy.
Who Buys Builder's Risk Insurance?
Coverage is often purchased by the custom builder or general contractor and may also be purchased by the property owner. Builder's risk coverage may be necessary to show proof of insurance to comply with local city, county, and state building codes and is often required as a condition to many contracts. However, many architects believe that it is the property owner who should have the builder's risk policy, because they have already paid for the improvements to their land, and if the builder receives the funds directly from a claim, theoretically, he/she could abscond with that benefit. It is far safer for the property owner to obtain the builder's risk policy, because they already own the building, even while it is under construction. If something happens to the under-construction project, then they should be the beneficiary and control how it is spent. Yes, the builder ends up receiving the funds in the end, to rebuild damage, but this method gives the control of the insurance benefit to the owner.
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