Builder's Risk Insurance: The Policy Nobody Explains
What it covers, what it doesn't, and the gotchas I learned from an insurance broker
What Is Builder's Risk?
When you build something, things can go wrong. A fire could destroy the half-finished building. A storm could damage the framing. Someone could steal materials from the site.
Your regular homeowner's insurance doesn't cover construction. Your contractor has insurance, but it covers their mistakes -- not random disasters. Builder's risk insurance fills the gap. It's a property insurance policy that covers the building while it's being constructed.
Getting a Quote
I got my first quote through a friend's firm. Then I talked to another broker named Matt who specializes in builder's risk. He walked me through the policy in plain English, and I learned a lot.
The Key Numbers
| Coverage | Amount |
|---|---|
| Total finished property value | $2,600,000 |
| Existing structure (duplex) | $1,200,000 |
| Construction costs | $1,400,000 |
| All-perils deductible | $10,000 |
| Policy term | 12 months |
| Soft costs coverage | $77,000 |
The $10,000 deductible was actually very good. Matt said that's competitive for a project this size. Water damage and fire are the biggest risks, and some carriers want much higher deductibles for those.
What the Policy Covers
Builder's risk covers the building during construction. If a worst-case scenario happens -- say the whole thing burns down -- the insurance company pays the rebuild cost. In our case, that's up to $2.6 million.
It starts when construction begins and runs until you get your certificate of occupancy (the city's sign-off that the building is done and safe to live in).
What It Doesn't Cover
Here's what surprised me:
- Earthquakes -- not covered. Matt said sometimes you can get $50K-$100K of quake coverage thrown in for free, but it's not automatic.
- Floods -- not covered. Same deal.
- Rental income -- not covered. If your building burns down right before tenants move in, you don't get paid for the rent you would have collected. This matters a lot for rental projects. Matt said big developers always add rental income coverage. For our size, it might not be worth the extra premium.
- Your contractor quitting -- not covered. But Matt said it's better that I carry the policy, not the contractor. If the contractor's insurance gets canceled, you're exposed. As the owner, I control the coverage.
The Gotchas
1. The policy might not renew. If construction takes longer than expected, you can't always extend the policy. Costs jump if you need to buy a new one. Matt said to negotiate this on the front end.
2. You might not get a refund. If the project finishes early, some policies give money back. Others keep every dollar. I needed to ask whether mine was "prorated" or "minimum earned premium."
3. Soft costs are capped. The $77,000 soft costs coverage handles things like delays, damage to neighboring structures, or extra construction costs after a loss. It's not a lot for a $1.37M project.
4. The lender will want proof. Arixa needed to see the builder's risk policy before closing. It's a standard requirement for construction loans.
5. You need an engineering letter. Our carrier (CRC Insurance) required a letter from our structural engineer confirming the project details. I had to write to Patterson Engineering to request it. That's one more step nobody tells you about.
The Lesson
Builder's risk insurance is one of those costs that feels like a waste -- until you need it. A half-built building with no insurance is a ticking time bomb. The premium is a small price compared to losing everything in a fire or storm. Just make sure you understand what's covered and what's not before you sign.