Insurance Essentials: What is builder’s risk insurance and why does it matter?

Any general contractor, subcontractor or small construction business with a financial stake in a project needs the protection a builder’s risk policy provides. Here’s what you should know.

Every construction site poses a certain amount of danger in that incidents, unexpected events or damages may occur regardless of how conscientious you are about safety. So while your risk management plans may be meticulous and you have comprehensive safety protocols in place, you always need a backup strategy in case something goes awry.

For general contractors, that means having a builder’s risk insurance policy. Also known as course of construction insurance, a builder’s risk policy is designed to protect your construction projects from specific kinds of property damage. It also typically includes coverage for expenses related to construction should property damage occur and delay the completion of a project.

A property owner should also purchase builder’s risk if, for example, they hire contractors to do major renovations or build additions to a building or home. But, depending on the type of construction contract, general contractors should have this policy in their back pockets.

Moreover, it’s possible the municipality where your construction project is will require you to show proof of builder’s risk policy before the city will issue you a permit. Usually, both you as the general contractor, and the building owner, need to be named in the policy.

How builder’s risk insurance can protect your construction project

Any general contractor, subcontractor or small construction business with a financial stake in a project needs the protection a builder’s risk policy provides. The same can be said of architects and financial lenders.

In general, a builder’s risk policy protects construction projects from a broad range of property damage, including fire, explosions, theft and vandalism, and severe weather events such as lightning, hail or a tornado or hurricane. In addition, it provides financial coverage for the cost of repairing buildings or structures under construction, as well as your materials, supplies and the equipment you have onsite, in transit, or at another location.

For example, suppose you’re conducting construction work at a new residential housing project. During the night, vandals break into the building where you’re working and cause significant damage to the area by igniting a fire. A builder’s risk policy would cover the cost of repairing and cleaning up the damages so you can complete the project. 

Of course, every construction project is unique, and your policy needs to be customized to suit your needs. That may mean extending the coverages in your policy for things such as temporary structures, scaffolding, pollution cleanup or debris removal. But as with any insurance policy, there are exclusions to what you are covered for and builder’s risk insurance will typically not cover floods, employee theft, mechanical breakdowns of equipment, or damages resulting from faulty design, planning or materials.

Does a builder’s risk policy cover all liability risks?

As a builder’s risk policy is designed to protect construction sites from losses and damages, it does not typically include additional liability such as coverage for third-party bodily injury, property damage or incidents in the workplace. You would need to add premises liability coverage to the policy, although some builder’s risk policies include premises liability coverage (depending on the insurance company). Or you can add what’s known as “wrap-up liability” for high-value projects such as large commercial spaces or condo highrises, which applies to a specific project and covers contractors and the property owner involved in the project.

Regardless of the type of project you’re undertaking – residential, commercial, or industrial – or its size, a customized builder’s risk policy is a must-have. After all, it serves as the backbone of your risk management strategy.

Aharshan Thangarasa is a licensed broker and team lead, contractors at Zensurance, Canada’s leading digital business insurance brokerage. Get a free quote for your insurance needs by visiting Zensurance.com/DCN.