Builders Risk Insurance: Coverage, Costs, and Coinsurance

Builders risk insurance is a specialized property policy that covers a structure while it’s under construction or substantially renovated, protecting the building, its materials, and supplies against fire, storms, theft, vandalism, and most other physical losses until the project is complete. Premiums usually run between 1% and 4% of total project value, and most construction lenders won’t release funds without proof of coverage. The policy fills a gap that homeowners and commercial property insurance were never designed to address: a half-finished building surrounded by loose materials.

Who Carries the Policy and Who’s Protected

The property owner and the general contractor are the primary parties on a builders risk policy because they carry the most financial exposure if the project is damaged or destroyed. Under the widely used AIA A201 model contract, the owner purchases the coverage, pays the premiums and deductibles, and handles claims with the insurer. The policy must include the interests of the owner, contractor, subcontractors, and sub-subcontractors as insureds.

Subcontractors are protected without buying separate policies. Once a plumber installs piping or an electrician runs wiring, that installed work becomes part of the insured structure. Lenders funding the construction appear on the policy as loss payees, meaning proceeds go toward protecting their loan collateral before anyone else gets paid. Fannie Mae, for example, requires builders risk coverage equal to at least 100% of the completed value for multifamily projects during construction or significant renovation.¹

Homeowners building a custom home or taking on a major renovation need this coverage too. A standard homeowners policy doesn’t adequately protect against the risks of active construction, and the gap often isn’t obvious until something burns or blows down. If you’re building from the ground up, you don’t yet have a homeowners policy at all, so builders risk is your only property protection during the build.

What the Policy Covers

Coverage attaches to the permanent structure, from foundation and framing through finishes, along with materials and supplies stored on the job site. Materials in transit to the site and in temporary off-site storage are also typically covered, so there’s no gap while lumber sits on a truck or fixtures wait in a warehouse across town.

Most builders risk policies use a “special form” (sometimes called “all-risk”), which covers every type of physical loss unless the policy specifically names it as an exclusion. That broad approach picks up damage from fire, lightning, hail, windstorms, explosions, vandalism, and theft of building materials. Copper wiring theft on construction sites has become common enough that it’s worth confirming your policy doesn’t sublimit or exclude it.

The coverage limit is set at the “completed value,” meaning the total estimated cost of the finished project rather than the value of work done so far. That approach avoids being underinsured as construction progresses and value accumulates on site. For larger or longer-duration projects, a “reporting form” method is an alternative: you report the current value at regular intervals and the premium adjusts to reflect what’s actually at risk. A value-at-risk reporting form charges premium only on completed work and on-site materials, while a total-completed-value reporting form charges premium on the full anticipated project cost from day one.¹

What’s Excluded

The “all-risk” label is misleading if you skip the exclusion list. Several categories of loss fall outside standard coverage:

Floods and earthquakes. These require separate endorsements or standalone catastrophe policies. If your site is in a flood zone or seismically active area, the added cost is unavoidable.
Employee dishonesty. An on-site manager or worker stealing equipment or materials is a fidelity issue, not a property loss. A commercial crime policy addresses that exposure.
Wear and tear. Rust, corrosion, gradual deterioration, and mechanical breakdown of construction equipment are treated as maintenance issues, not insurable events.
Faulty workmanship. If a subcontractor installs something incorrectly, the cost to redo that work isn’t covered. Many policies do cover the resulting damage, however. If a poorly installed pipe bursts and floods three floors, the water damage may be covered even though replacing the pipe is not.
Professional errors. An architect’s design flaw that causes structural problems falls under professional liability (errors and omissions) insurance.
Worker injuries. Any injury on the job site is a workers’ compensation claim, not a property insurance claim.

How Much It Costs

Premiums generally fall between 1% and 4% of total project value, with most residential builds toward the lower end and complex commercial projects or sites in catastrophe-prone areas running higher. A $500,000 home build might cost $5,000 to $10,000 for the policy, while a $5,000,000 commercial project could run $50,000 to $150,000 depending on the risk profile.

Deductibles typically range from $500 to $5,000, though higher deductibles are common on larger projects or for specific perils like wind or named storms. Several factors push premium up or down:

Construction type. Wood-frame buildings cost more to insure than non-combustible steel and concrete structures because they burn more easily.
Location. Projects in hurricane, wildfire, or flood zones carry higher rates, and flood and earthquake endorsements add cost on top of the base premium.
Project duration. Longer builds mean longer exposure for the insurer.
Site security. Perimeter fencing, lighting, security cameras, and on-site guards can lower premiums by reducing theft and vandalism risk.
Contractor track record. A contractor with completed projects and few claims may help secure better terms.

The Coinsurance Trap

Most builders risk policies include a coinsurance clause, and it’s where a surprising number of project owners get burned at claim time. Coinsurance requires you to maintain a coverage limit equal to a specified percentage of the property’s value, commonly 80% or 90%. Miss that threshold and the insurer reduces your claim payout proportionally, even for small losses well below your policy limit.

The math works like this: divide the amount of insurance you actually carry by the amount you were required to carry, then multiply by the loss. If a project worth $1,000,000 has a 90% coinsurance clause, you need at least $900,000 in coverage. Carry only $800,000 and suffer a $300,000 loss, and the insurer pays $300,000 × ($800,000 ÷ $900,000) = $266,700. After a $10,000 deductible you receive $256,700 and owe the remaining $43,300 out of pocket. The penalty hits hardest when costs escalated during construction but the policy limit was never updated.

The simplest way to avoid the penalty is to insure the project for 100% of its completed value from the start. Fannie Mae requires exactly this for conforming multifamily loans, specifying coverage “at least 100% of the completed value, on a non-reporting basis.”¹ Even if your lender doesn’t mandate it, insuring to full completed value eliminates coinsurance exposure and usually costs only marginally more than a lower limit.

Renovations and Existing Structures

Builders risk isn’t just for ground-up construction. If you’re renovating or adding onto an existing building, you can purchase a policy that covers just the renovation work, or one that also wraps in the existing structure. That choice matters because your permanent homeowners or commercial property insurance may limit or exclude damage that happens during active construction.

When you insure only the renovation value, the policy protects new materials, installed work, and construction supplies. When you add existing structure coverage, the policy also protects the original building against damage arising from the construction, like a contractor accidentally puncturing a water line and flooding the first floor. Under AIA contract provisions, when work involves remodeling or an addition, the owner is expected to purchase all-risk property insurance on a replacement cost basis protecting the existing structure for the duration of the project.

Insurers typically apply a sublimit to existing structure coverage rather than insuring it at full replacement cost under the builders risk policy. You and your contractor should agree on that sublimit in writing before the project starts. If the existing structure is already covered under a homeowners or commercial property policy, coordinate with both insurers to confirm there are no gaps or overlapping exclusions.

Soft Costs and Delay Coverage

A standard builders risk policy covers physical damage to the structure and materials, but it doesn’t cover the financial fallout from a construction delay. If a covered loss pushes your completion date back three months, the extra loan interest, extended property taxes, additional insurance premiums, and re-advertising costs pile up fast. Those are “soft costs,” and covering them requires a separate endorsement.

A soft costs endorsement typically reimburses expenses that wouldn’t have been incurred if the delay hadn’t happened, including:

Additional interest on construction financing during the delay period.
Property taxes and ground rent that continue while the project sits stalled.
Architectural and engineering fees for redesign or re-inspection triggered by the damage.
Advertising and promotional expenses for re-launching marketing on a delayed commercial opening or residential sale.
The cost of extending your builders risk and other project-related policies.
Legal and accounting fees associated with managing the delay.
Permit and municipal re-filing or extension fees.

Delay coverage only kicks in when the delay results from physical damage covered under the base policy. A labor shortage or permit dispute won’t trigger it. Most delay endorsements also include a waiting period, often 30 to 90 days, that functions like a time-based deductible: you absorb soft costs during that window before the insurer starts paying. On commercial projects where a delayed opening means lost revenue, a “delay in start-up” endorsement can also cover projected net profit that would have been earned during the delay.

When Coverage Starts and Ends

Coverage typically begins when the construction contract is executed or when materials first arrive on site, whichever the policy specifies. It ends at the earliest of several triggers: the owner takes possession, the building is occupied for its intended purpose, the policy term expires, or the project is abandoned. Some policies give a specific window after occupancy, such as 60 or 90 days, before coverage terminates.

Partial Occupancy

Partial occupancy is where many projects run into trouble. If you move into part of the building while construction continues elsewhere, the standard policy may terminate coverage entirely. On some policy forms, coverage ends 60 days after the property is occupied in whole or in part or put to its intended use. Charging rent or operating a business from the space can trigger termination immediately.

A “permission to occupy” or “beneficial occupancy” endorsement prevents premature cancellation by allowing the owner to use part of the building while construction finishes. This endorsement isn’t available on every type of risk, and your insurer needs the full picture of how the space will be used. If you’re renovating a building you currently live or work in, your contractor should secure this endorsement at the start of the project, not after you’ve already triggered a termination clause.

Extensions When Construction Runs Long

Construction projects rarely finish on time, and builders risk policies don’t automatically extend to match. Coverage ends on the policy’s stated expiration date regardless of whether the building is done. If your project runs past the original timeline, request a renewal or extension before the current policy expires. Insurers almost never retroactively reinstate coverage for losses during a gap.

Extensions typically require updated completion schedules and proof that construction is actively progressing. Many insurers ask for 7 to 21 days of advance notice. The additional premium depends on project size and the length of the delay, but it adds meaningfully to your overall insurance cost. Build this possibility into your contingency budget from the start.

Applying for Coverage

Applying for builders risk coverage requires a detailed package of project information. Most of this data goes onto the ACORD 147 form, the standardized application for this type of insurance. You’ll need to provide:

A construction budget broken into hard costs (lumber, concrete, labor) and soft costs (architectural fees, permits, financing charges).
Estimated start and completion dates.
Blueprints and plans detailed enough for the underwriter to assess complexity.
Construction type classification: frame, joisted masonry, non-combustible, or other categories that affect fire risk.
Site security measures, including fencing, lighting, cameras, alarm systems, or guard services.
Total completed value, which sets the coverage limit.

The application typically goes through an insurance broker who specializes in construction, though some carriers offer direct digital portals. Underwriters evaluate the risk against factors like local building codes, fire protection ratings, and the financial stability of the parties involved. A project that looks likely to stall halfway through is a worse risk than one backed by well-capitalized parties with a track record. Once underwriting approves the risk and the premium is paid, the carrier issues a binder or certificate of insurance, which is the document your lender, general contractor, and other stakeholders need before work begins and draws are released.

If You Need to File a Claim

Read your actual policy, not a summary or your broker’s description of it. Identify which coverages and endorsements apply to your specific loss, including whether you have soft cost or delay coverage. Designate a small team to document the claim, with clear assignments for who handles what. Retaining a lawyer early is worth considering on large losses, where coverage disputes are more likely.

The most common mistake is failing to separate loss-related costs from normal project expenses in your accounting. Set up dedicated accounting codes to track everything caused by the damage: cleanup, temporary protection, repair labor, re-ordered materials, and any delay-related soft costs. Adjusters will scrutinize whether claimed costs are truly loss-related or just routine construction expenses you would have incurred anyway. If those costs are mixed together in your books, expect the adjuster to challenge far more of the claim.

Collect supporting documents aggressively: daily construction reports, meeting minutes, progress photos, payment applications, and schedule updates. These records establish where the project stood before the loss and the impact of the damage. Document every communication with the insurer in writing, including follow-up emails after phone calls summarizing what was discussed, requested, and provided. Many policies also reimburse the internal cost of documenting and calculating the claim, so track that time separately.

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Fannie Mae Multifamily Guide. Fannie Mae Multifamily Guide – Builder’s Risk Insurance