Builder’s risk insurance: Protecting contractors, property owners, and lenders

Even the most carefully managed construction sites face unexpected risks. From sudden weather changes to unforeseen accidents, hazards can arise at any moment. Despite having a comprehensive risk management strategy and safety protocols in place, construction involves variables that are beyond anyone’s control. This is where builder’s risk insurance can serve as a financial safety net. This specialized insurance can help ensure that when things don’t go as planned, your project doesn’t come to a halt.

What is builder’s risk insurance?

Builder’s risk insurance is a specialized form of property insurance that protects project owners and contractors from financial losses throughout the duration of a construction project. Some key benefits are:

This coverage responds to the evolving nature of the construction process as the project progresses and acts as a safety net against the growing risks such as fire, theft, vandalism, and weather-related incident, as a construction project advances. More flexible than regular property insurance: Unlike traditional property insurance, builder’s risk insurance provides tailored coverage that evolves with the complexity and scale of the project.

This insurance acts as a safety net, ensuring construction continues smoothly despite unexpected setbacks.

What does builder’s risk insurance cover?

Builder’s risk insurance offers multifaceted protection, covering both hard costs (materials and labour) and soft costs. This type of insurance includes:

Hard costs

Property damage refers to damage caused to the structure or building during construction. This can happen due to natural disasters like windstorms, hail, and lightning to man-made risks such as fire from hot works, water infiltration from a burst pipe, or collapse of a shoring wall etc. This insurance helps cover repair or replacement hard costs, reducing the financial burden on project owners.

Material in-storage and Material in-transit

Construction sites store valuable materials like lumber and steel to electrical systems, which can be vulnerable to damage or theft. Builder’s risk insurance helps protect the value of these materials, ensuring your investment is secure.

Project interruption costs

Project interruption costs include soft costs, loss of rents, extra expense, other financial costs that arise as a result of an insured peril.

Testing of building systems

Before a construction project is complete, essential systems like electrical, plumbing, or HVAC must be rigorously tested. If any of these systems fail, builder’s risk insurance can help cover the costs of repairs or replacements, saving you from unexpected out-of-pocket expenses.

Sewer and road extension

Infrastructure development is often a prerequisite or concurrent requirement for many construction projects. This extension extends coverage to a project site that is shut-down due to seasonal weather.

Pollution clean-up and removal

Environmental risks are becoming a bigger concern in construction. Should there be accidental contamination or pollution during construction, the insurance can help cover the potentially hefty costs of clean-up and waste removal, preventing financial setbacks.

It’s crucial to recognize that builder’s risk insurance policies can differ significantly among various providers. Carefully examine the quotes from different insurers to make sure you’re receiving the coverage that best suits your project’s specific needs.

Who can benefit from builder’s risk insurance?

Builder’s risk insurance provides financial protection to key stakeholders involved in a construction project.

Property owners

Property owners have the most at stake in a construction project. Since they bear the ultimate financial responsibility, builder’s risk insurance helps safeguard their investment by covering potential losses due to damage or delays. This ensures that unexpected setbacks don’t impact the overall value of their property.

General contractors

As project managers, general contractors oversee the entire construction process and are responsible for keeping it on track. They may also be legally liable for project delays or mishaps. Builder’s risk insurance provides a financial cushion, helping them avoid out-of-pocket costs and legal complications.

Subcontractors

Subcontractors play a crucial role in construction projects, handling specialized tasks like electrical work, plumbing, and structural framing. Since their work often depends on other teams completing their tasks on time, delays in one area can have a cascading effect across the entire project. Builder’s risk insurance helps protect subcontractors by covering potential financial losses due to unexpected delays or disruptions.

Architects and engineers

Architects and engineers focus on designing and ensuring the structural integrity of a project. However, issues like material defects or workmanship errors can delay progress. Builder’s risk insurance provides a financial safety net, helping them address these challenges without taking on unexpected costs.

Development and investment companies

For development and investment companies, financial stability is a top priority. Insurance that covers potential losses and setbacks aligns directly with their objective of ensuring a profitable venture.

Lenders

Lenders, such as banks and financial institutions, provide capital for construction projects and need to minimize risk. Builder’s risk insurance is often required for securing construction loans, as it reassures lenders that their investment is protected against unforeseen setbacks.

Is builder’s risk insurance mandated by law?

In Canada, builder’s risk insurance is often recommended by associations like Canadian Construction Documents Committee (CCDC), which sets out standard terms and conditions between owners, contractors and sub-contractors. This means that stakeholders like property owners, contractors, and lenders may need to secure this insurance to comply with local guidelines. In some cases, municipalities even make builder’s risk insurance a condition for issuing building permits or official approvals.

Although the requirement may not extend to privately owned residential projects, homeowners should still seriously consider the financial implications of forgoing such coverage. Without coverage, unforeseen mishaps, ranging from natural disasters to theft, during the construction or renovation process can lead to significant financial losses.

Construction risks evolve over time, so, it’s important to review your policy regularly. Make sure it covers not just the active construction period but also any potential post-completion issues, such as defects that emerge after the project is finished.

Protect your business with insurance

Unexpected risks can derail even the most well-planned construction projects. Builder’s risk insurance helps safeguard your investment, keeping your project on track and within budget. To learn more, visit our Construction and Contractors Insurance page today!