What Is Builders Risk Insurance And How Does It Work?

​A building under construction faces risks that an ordinary property policy may not be designed to handle. For project owners and contractors in Albuquerque, NM, builders risk insurance can help protect the growing value of a structure while materials, equipment, and unfinished work remain exposed.

What Builders Risk Insurance Covers
Builders risk insurance, also called course of construction insurance, is temporary property coverage for a building while it is being constructed, renovated, or substantially remodeled. The National Association of Insurance Commissioners defines builders risk coverage as insurance for buildings in the course of construction, along with certain machinery, equipment, and materials used in the project.

A policy may cover:

• The structure under construction
• Building materials stored at the site
• Materials awaiting installation
• Fixtures and equipment becoming part of the building
• Temporary structures
• Foundations
• Scaffolding
• Debris removal after a covered loss

Coverage varies significantly among insurers. There is no single builders risk form that applies to every project, so the policy must be reviewed for the specific property, participants, and construction methods involved.

Which Projects May Need Coverage?
Builders risk insurance may be appropriate for:

• New residential construction
• Commercial building projects
• Major additions
• Structural renovations
• Tenant improvements
• Extensive remodeling
• Installation projects
• Property conversions

Minor cosmetic work may remain within an existing homeowners or commercial property policy, but major renovations can change the building’s occupancy, value, structural condition, and exposure to theft or weather.

Property owners should notify their current insurer before construction begins. The Insurance Information Institute advises homeowners planning significant remodeling to discuss builders risk or course of construction protection rather than assuming the existing homeowners policy will cover the project automatically.

Who Purchases the Policy?
The owner, general contractor, developer, or lender may purchase builders risk insurance. The construction contract should clearly state which party is responsible for arranging coverage and paying the deductible.

The policy may need to recognize the financial interests of:

• The property owner
• General contractor
• Subcontractors
• Lender
• Developer
• Architect or engineer
• Material suppliers

Listing the appropriate parties can reduce disputes after a loss. However, being named on the policy does not replace general liability, workers’ compensation, professional liability, or contractor equipment coverage.

Before work begins, confirm:

1. Who will be the named insured
2. Which parties require additional insured or loss-payee status
3. Who controls the claim
4. Who pays the deductible
5. How insurance proceeds will be used to continue construction

These details should align with the construction agreement and lender requirements.

What Causes of Loss May Be Covered?
Depending on the policy form, builders risk may cover direct physical damage caused by events such as:

• Fire
• Lightning
• Wind
• Hail
• Theft
• Vandalism
• Explosion
• Certain vehicle impacts
• Falling objects
• Limited water damage

For example, if a fire destroys framing, installed electrical materials, and lumber stored at the site, the policy may help pay the covered cost of replacing those items.

New Mexico projects should pay close attention to wind, hail, wildfire, and water-related limitations. The state’s Office of the Superintendent of Insurance notes that property policies can contain special wind and hail restrictions, including higher deductibles or cosmetic-damage limitations.

A project near the Sandia foothills may also require careful review of wildfire exposure, defensible space, site access, and available fire protection.

Flood and Earth Movement Usually Need Separate Attention
Builders risk coverage does not automatically include flooding, surface water, mudflow, or earth movement.

The New Mexico Office of the Superintendent of Insurance states that standard property insurance generally excludes flood damage and that separate protection may be available through the National Flood Insurance Program or private insurers.

A construction site may be especially vulnerable because grading, excavation, unfinished drainage, and exposed foundations can allow water to enter areas that will later be protected.

Ask whether the project needs:

• Flood insurance
• Earthquake coverage
• Earth movement protection
• Sewer or drain backup coverage
• Ordinance or law coverage
• Difference-in-conditions insurance

Do not assume a lender’s minimum insurance requirement accounts for every construction-site hazard.

Materials in Transit or Off-Site May Be Limited
Materials are not always delivered directly from a supplier to the construction site. Custom windows, cabinets, structural components, and mechanical equipment may be stored elsewhere or transported over long distances.

A standard builders risk policy may limit coverage for:

• Property in transit
• Materials at temporary storage locations
• Property more than a stated distance from the site
• Imported components
• Materials owned by subcontractors

An installation floater or broader inland marine endorsement may be needed. Inland marine insurance can cover construction materials, equipment, and valuable property while in transit, temporarily stored, or awaiting installation.

The policy should follow the materials through each stage of the project rather than protecting them only after they reach the site.

Soft Costs Can Be a Major Exposure
Physical repairs may represent only part of the financial loss after a fire, storm, or theft delays construction.

Soft costs may include:

• Additional loan interest
• Extended permit fees
• Architect and engineer expenses
• Real estate taxes
• Insurance premiums
• Legal and accounting costs
• Advertising expenses
• Lost rental income
• Delayed opening costs

These expenses are not always covered automatically. A soft-cost endorsement may provide protection when a covered physical loss delays project completion.

The policy may use a waiting period, separate limit, scheduled completion date, or maximum recovery period. Owners should estimate how a three-, six-, or twelve-month delay would affect financing and expected revenue.

What Builders Risk Usually Excludes
Common exclusions may include:

• Defective design
• Faulty workmanship
• Defective materials
• Ordinary wear and tear
• Corrosion or deterioration
• Mechanical breakdown
• Employee theft
• Contractor tools and equipment
• Vehicles
• War or nuclear hazards
• Flooding without endorsement
• Earth movement
• Voluntary abandonment of the project

Faulty workmanship exclusions require careful attention. The cost of correcting defective work may be excluded, while separate resulting damage caused by that work may receive different treatment.

For example, replacing improperly installed roofing may not be covered, but covered water damage to other completed portions of the project could be evaluated separately. The outcome depends on the exact policy language.

How the Coverage Limit Is Determined
The builders risk limit should generally reflect the project’s completed value, including labor, materials, fixtures, and other insured construction costs.

The value of the project rises as work progresses. Builders risk policies may therefore use a completed-value or reporting form designed to track the building’s increasing value during construction.

Do not base the limit only on:

• The land value
• The initial loan advance
• Materials currently at the site
• The contractor’s first estimate
• The unfinished building’s present value

Change orders, material inflation, upgraded finishes, and extended timelines can make the original limit inadequate. Review the policy whenever the project scope or budget changes substantially.

When Coverage Begins and Ends
Builders risk insurance commonly begins on the policy’s effective date or when construction starts, subject to the contract.

Coverage may end when:

• The policy expires
• The project is completed
• The owner accepts the work
• The building becomes occupied
• The property is put to its intended use
• The insured’s interest ends
• The property remains vacant beyond an allowed period

Occupancy is especially important. Moving tenants, employees, equipment, or household belongings into the building may terminate or restrict coverage even when minor work remains.

Arrange permanent homeowners or commercial property insurance before builders risk ends. A gap between the two policies can leave the completed building uninsured.

Questions to Ask Before Construction Begins
Project owners and contractors in Albuquerque, NM should ask:

• Is the limit based on completed replacement value?
• Are contractors and subcontractors properly recognized?
• Are theft and vandalism covered?
• Are materials protected in transit and storage?
• Does the policy include soft costs?
• What wind, hail, wildfire, and water restrictions apply?
• Is faulty workmanship excluded?
• What deductible applies?
• Is equipment breakdown coverage needed?
• Exactly when does coverage terminate?

Projects near Old Town or the Rio Grande may face different site-access, drainage, theft, and construction conditions, but every project benefits from matching the policy to the contract, schedule, and completed value.

Conclusion
Builders risk insurance protects a building and qualifying materials during construction, renovation, or major remodeling. It may cover fire, theft, vandalism, weather damage, materials in transit, and certain delay costs, but flood, earth movement, faulty work, contractor equipment, and soft costs may require additional protection. The policy should begin before exposure starts, reflect the project’s completed value, and remain coordinated with permanent property insurance.

At NM Family and Business Insurance, we believe in protecting what matters most to you. Our experienced team is here to help you find insurance coverage that’s both affordable and customized to your unique needs. Contact us today at (505) 257-9595​ or CLICK HERE to request your free quote.

Disclaimer: The content of this blog is intended solely for general informational use. For advice tailored to your situation, consult a licensed insurance professional who can offer expert recommendations.

NM Family and Business Insurance
Albuquerque, NM
(505) 257-9595
[email protected]
https://www.nmfbi.com/