Building the home of your dreams requires you to think about insurance. Homeowners insure their homes with a homeowners policy—but what about the home that is still under construction? Perhaps some expensive lumber or copper piping is stolen from the construction site in the middle of the night: Some homeowners insurance policies might cover some losses, but their primary purpose is to cover existing homes.
While your new home is under construction, builders risk insurance will financially protect it from perils related to its construction, as outlined in the policy. While builders risk insurance is not usually compulsory, it can sometimes be required by construction lenders or outlined in construction contract terms.
Who should buy the builders risk insurance?
Depending on the new build contract, either the homeowner or contractor will be required to purchase a builders risk insurance policy. However, even if the contract terms state that the contractor must purchase the coverage, it is recommended that homeowners check the policy’s limits and ask their agent if they should consider insurance to cover any gaps.
Who owns the land on which the new home is being constructed? That’s another important piece of the insurance puzzle. If the homeowner owns it from the get-go, they will need to work with their contractor and insurance agent to get coverage. If the new home is being built by a major builder in a new subdivision or similar community, then the builder is the owner of the lot and will handle the builders risk insurance.
What does builders risk insurance cover?
Most builders risk insurance policies cover the buildings and structures on the construction site, including structures outside the house itself like swimming pools, storage sheds, retaining walls, and garages. Depending on what is outlined in the policy, builders risk insurance can also cover items either at the new build site or in transit to it, including:
- Building materials (such as lumber, pipes, hardware)
- Construction signs
- Electrical supplies
- Fixtures (such as faucets, dishwashers, light fixtures, etc.)
- Machinery (although heavy machinery and equipment are typically not covered)
- Structural foundations
- Temporary structures
- Underground piping
A builders risk insurance policy will typically pay out for the cost of repair for damage to these items, replacement of stolen materials, or recovery of the project value. Covered perils include those commonly found in homeowners insurance policies, such as:
- Explosions or fire
- Hail and lightning
- Vehicle collision
The exclusions are also similar to those found in homeowners policies. Ask your agent if a policy extension would be available or advisable to cover exclusions. Common exclusions can include:
- Acts of terrorism and war
- Employee theft
- Faulty design
- Mechanical breakdowns
- Wear and tear
Many of the excluded perils—those that are related to the contractor or construction company working on the new build—are covered in the contractor’s own general liability policies purchased before starting any build. These policies also cover bodily injury and property damage where the employees of the construction company are deemed to be at fault.
Policies and what they cover differ from carrier to carrier. Your agent can help you determine the right coverages for your situation.
Cost and changes
The price of builders risk insurance can fall somewhere between 1% to 5% of the cost of the construction project. It depends on a few factors, including the value of the completed home, the new build’s size, and the materials used.
Before you meet with your agent to discuss builders risk insurance, prepare a full description of the new home to be built, including an inventory of the appliances, lighting fixtures, and other design elements. Those details will help your agent assemble the most accurate coverages and premium for your situation.
What if your plans for the new home change? It happens frequently. While builders risk insurance is required from the start of the build, if you decide mid-construction to upgrade building materials or to make other changes that will affect the final cost of the build, notify your agent. Usually, the policy can be updated to reflect the changes. Some policies even have automatic coverage for change orders built into them. Your agent can help navigate the options.
How long should the builders risk policy be in force?
A builders risk insurance policy lasts through the completion of the construction project. After that, a homeowners insurance policy is required. Work with your agent to be sure your new homeowners insurance policy is already in place when your dream home is completed.