We all know that insurance is important. That is why we insure our cars, home, and health. However, these are items that are already in our possession. What about a dream home that is not built yet? Should we insure something that is in pieces, and how do we do that? The answer is Builder’s Risk Insurance.
What is Builder’s Risk Insurance?
According to insurance and risk management professional Donald Malecki, Builder’s Risk Insurance is “… coverage that protects a person’s or organization’s insurable interest in materials, fixtures and/ or equipment being used in the construction or renovation of a building or structure should those items sustain physical loss or damage from a covered cause.” (Malecki, 2009)
Though Builder’s Risk Insurance policies are designed to cover all items used to construct the home, it is important to ensure the coverage terms and perils covered are consistent with your site’s issues. It is also important to consider the deductible amount and the party responsible for its cost upfront. (Austin, 2012) Finally, it is important to understand what are the policy’s exclusions. (Malecki, 2009)
Who should have Builder’s Risk Insurance?
Builder’s risk insurance covers owners, contractors, lending institutions, and others in the event of theft, vandalism, or naturally occurring disasters like fire, wind, or lightning. (Malecki, 2009) As a result, anyone who has a financial interest in the construction project can obtain the Builder’s Risk Insurance policy. (Austin, 2012) If you have a construction loan, your bank will require this type of insurance to protect their investment.
When should I get Builder’s Risk Insurance?
The National Association of Home Builders’ Log and Timber Council recommends obtaining Builder’s Risk Insurance before you start construction of your custom home. (NAHB Log and Timber Homes Council, n.d.) Once your home’s construction is complete, your Homeowner’s Insurance policy will replace the Builder’s Risk policy. However, it is important to understand the coverage termination date of the Builder’s Risk insurance policy as well as the details of your construction contract to ensure you have continuous coverage with the right type of policy. (Malecki, 2009)
How much Builder’s Risk Insurance should I get?
There are a couple ways to determine how much insurance to purchase. The Completed Value Form is the most common way. Using the completed value form, “… the insurance limit is set at the expected completed value of the project …” (Malecki, 2009) Malecki notes that there are some common errors when determining how much insurance to purchase:
- Using the amount of the construction loan as the limit of insurance without taking into consideration change orders.
- Failing to determine whether overhead and profit — commonly figured at 10 percent each — have been included in the completed value.
- Leaving out other insurable values, resulting in inadequate insurance.
- Including items excluded from coverage such as land value.
A final note to remember during construction is to increase the amount of insurance in the event that your home’s build costs exceed the initial estimate. (Malecki, 2009)
Why should I get Builder’s Risk Insurance?
In summary, Builder’s Risk Insurance offers financial protection to you during the construction of your custom log and timber home. This invaluable peace of mind is well worth the investment.
Austin, W. A. (2012, November). Builders Risk Inusrance: Is it Always Necessary? Retrieved from IRMI: https://www.irmi.com/articles/expert-commentary/is-builders-risk-insurance-necessary/
Malecki, D. S. (2009). Builder’s Risk Insurance: Specialized Coverage for Construction Projects. Retrieved from Adjusting Today: https://adjustersinternational.com/wp-content/uploads/sites/2/2015/05/3037_BuildersRiskInsurance.pdf
NAHB Log and Timber Homes Council. (n.d.). Best Time to Buy Insurance? Before You Build. Retrieved from NAHB Log and Timber Homes Council: http://loghomes.org/best-time-to-buy-insurance-before-you-build/