Builders Risk: Should the Owner or the General Contractor Buy It?

Who Has the Insurable Interest?

Builders risk insurance covers property under construction against physical loss or damage. Both the owner and the general contractor have an insurable interest in the project: the owner has invested capital and owns the land and the work in place, and the general contractor has a contractual obligation to complete the project and bears financial risk if the work is damaged or destroyed.

Because both parties have an insurable interest, either can technically purchase the coverage. The construction contract resolves the question of who is responsible for doing so. Most standard construction contracts assign the obligation to the owner, but this is a negotiable point, and some contracts place the obligation on the general contractor. The assignment matters because the party who purchases the policy controls the coverage, and the coverage available to each party differs depending on who buys it.

What the AIA A201 Says

The AIA A201 General Conditions (2017 edition) of the Contract for Construction is the most widely used standard construction contract in the United States. Under AIA A201, the owner is responsible for purchasing and maintaining property insurance on the project, written on a builder's risk or installation floater basis, covering the full insurable value of the work. The policy is to insure the interests of the owner, the contractor, and subcontractors in the work.

The AIA A201 also addresses what happens if the owner fails to purchase the required insurance: the contractor may purchase it and charge the cost to the owner. This provision underscores that the AIA framework treats builders risk as an owner obligation. When a project uses a non-AIA contract or a modified AIA form, the property insurance obligation may be assigned differently. Review the specific contract language before assuming who is responsible.

Soft Costs and Delay in Completion

Soft costs coverage reimburses the owner for additional expenses incurred because of a covered loss that delays project completion. Soft costs include additional financing costs, extended carrying costs, re-design fees, permit re-application fees, and marketing costs for a delayed project. These costs can be substantial on a large development project and are not covered by the basic builders risk form.

Delay in completion coverage, sometimes called loss of rents or loss of anticipated income, reimburses the owner for income lost because the project was not completed on schedule due to a covered loss. Both soft costs and delay in completion coverage are typically only available on owner-purchased builders risk forms. A contractor-provided builders risk policy is designed to cover the contractor's interest in the work, not the owner's financial exposure from a delayed project.

Lender Requirements

Construction lenders have a direct financial interest in the project and impose insurance requirements as a condition of the loan. Lenders commonly require the owner to purchase builders risk and to name the lender as a loss payee or additional insured. The lender's requirement is that the insurance proceeds from a covered loss be used to repair or rebuild the project, protecting the lender's collateral.

A lender commonly wants the policy in the owner's name with the lender as loss payee, and a contractor-provided policy often does not meet that requirement. If the project is financed, the owner often needs to purchase the builders risk policy regardless of what the construction contract says.

Coverage Comparison: Owner-Purchased vs. Contractor-Provided

The table below summarizes the key differences between owner-purchased and contractor-provided builders risk. The right structure depends on the project type, the financing, and the construction contract.

When the Policy Ends: The Completion Gap

Builders risk policies are temporary: they cover the project during construction and expire at a defined endpoint, typically substantial completion, occupancy, or a specified date. The transition from builders risk to permanent property insurance is a critical moment in the project timeline, and gaps in coverage during this transition are a common problem.

A project that is substantially complete but not yet fully occupied may not be covered by either the builders risk policy (which has expired) or the permanent property policy (which has not yet been bound). Renovation projects that are partially occupied during construction face a similar issue: the occupied portions may not be covered by the builders risk policy, and the permanent property policy may exclude the portions under construction.

Practical Guidance for Owners and Contractors

Owners should review the insurance section of the construction contract before signing and confirm that the builders risk obligation is clearly assigned. If the owner is responsible, engage an insurance broker early in the project to structure the program, including soft costs and delay in completion coverage if the project is financed or if the owner has significant income exposure from a delayed completion.

Contractors who are asked to provide builders risk should understand that a contractor-provided policy may not satisfy the owner's lender requirements and will not include soft costs or delay in completion coverage. Before agreeing to provide builders risk, confirm what the owner actually needs and whether a contractor-provided policy can meet those requirements. For a detailed discussion of builders risk coverage structures for development projects, see the related articles linked below.