What Builder's Risk Insurance Covers
Builder's risk insurance — also called course of construction insurance — covers a building or structure under construction against physical loss or damage. Standard covered perils include fire, lightning, windstorm, hail, explosion, theft, and vandalism. The policy attaches when construction begins and terminates at substantial completion or when the building is occupied, whichever comes first.
The policy covers the structure itself, materials stored on-site or in transit, and temporary structures. It does not cover the contractor's tools and equipment (covered by inland marine), liability for bodily injury or property damage (covered by CGL), or design errors (covered by professional liability).
Valuation: Completed Value vs. Reporting Form
Builder's risk policies are written on either a completed value basis or a reporting form basis. The completed value form insures the project at its anticipated completed value from day one — the premium is based on the full project value even though the structure is not yet complete. This is the most common form for straightforward projects.
The reporting form requires the insured to report the value of work in place periodically (monthly or quarterly). Premiums are adjusted based on actual values at risk. Reporting forms can be more cost-effective for large, long-duration projects but require disciplined reporting — failure to report accurately can result in a coinsurance penalty at claim time.
Soft Costs Coverage: Often Overlooked, Always Important
Soft costs coverage extends the builder's risk policy to cover indirect costs that increase when a project is delayed by a covered loss. These costs — which can easily reach 10%–20% of the hard construction cost — include:
- Additional interest expense on the construction loan during the delay period
- Additional architectural, engineering, and consulting fees
- Additional permit and inspection fees
- Real estate taxes during the extended construction period
- Insurance premiums for the extended policy period
- Marketing and leasing costs incurred during the delay
Delay in Completion (Loss of Rents) Coverage
Delay in completion coverage — also called loss of anticipated rents or loss of income — compensates the developer for rental income or revenue lost because the project was not completed on schedule due to a covered loss. For income-producing properties, this coverage can be as valuable as the property coverage itself.
Coverage is typically subject to a waiting period (30–60 days) and a maximum indemnity period. The indemnity period should be long enough to cover the realistic worst-case delay scenario — for complex projects in New York City, a 12–24 month indemnity period is often appropriate.
Lender Requirements and Policy Conditions
Construction lenders impose specific builder's risk requirements as a condition of the loan. These typically include minimum limits equal to 100% of the completed project value, the lender named as loss payee or additional insured, evidence of soft costs and delay in completion coverage, and flood insurance for projects in FEMA flood zones.
Review lender requirements at the term sheet stage — some requirements take time to satisfy, and last-minute insurance issues can delay loan closings. Grandbay Financial works directly with construction lenders and their counsel to ensure policy terms satisfy loan requirements.
Transitioning from Builder's Risk to Permanent Coverage
The transition from builder's risk to permanent property and liability coverage is a critical risk management moment. The builder's risk policy terminates at substantial completion; if permanent coverage is not in place, there is a gap. For projects with a lease-up period, confirm that the permanent property policy covers the building during partial occupancy without vacancy exclusions.
For developers with multiple projects, a master builder's risk program — which provides a single policy covering all projects in the portfolio — can simplify administration and often provides better terms than individual project policies.