Builders Risk Insurance: Definition and How It Works

Builders risk insurance — also called course of construction insurance — is a specialized property policy that covers a building or structure while it is under construction against direct physical loss or damage. The policy attaches when construction begins and typically terminates at one of three triggering events: the structure reaches practical completion, the owner accepts or occupies the building, or a specified expiration date passes, whichever comes first. Because an unfinished structure is uniquely vulnerable — open to weather, filled with expensive materials, and not yet equipped with permanent fire suppression or security systems — standard commercial property forms generally exclude or severely restrict coverage for property under construction. Builders risk fills that gap.

What Builders Risk Covers

Most builders risk policies are written on an open-perils (all-risk) basis, covering direct physical loss from any cause not specifically excluded. Core covered property typically includes:

  • The structure itself — foundations, framing, walls, roofing, and all permanently incorporated building components
  • Materials and supplies on-site — lumber, mechanical equipment, fixtures, and other materials intended for installation
  • Materials in transit — property being transported from a supplier or fabricator to the job site, usually within a defined radius (often 100–500 miles)
  • Temporary structures — scaffolding, formwork, falsework, and construction trailers on-site
  • Equipment in the custody of the insured — sometimes included, sometimes covered separately under an inland marine equipment floater

The policy limit is typically set at the completed value of the project — the full replacement cost upon completion — because materials and partially completed work can be lost in ways that require rebuilding from the foundation up.

Soft Costs and Delay in Opening

The most significant coverage extensions beyond the physical structure are soft costs and delay in opening (also called loss of rental income during delay):

Soft costs are the non-construction expenses that mount when a covered loss forces the project to restart or be substantially rebuilt. These include architect and engineering re-design fees, permit re-filing costs, additional loan interest for an extended construction period, real estate taxes accruing during the delay, and advertising costs for a postponed opening. Soft costs endorsements are separately negotiated and are a critical gap in many builders risk programs — a large fire that delays a $20 million project by six months can generate $500,000 or more in soft costs that a basic builders risk form will not pay.

Delay in opening coverage (sometimes called rental value or loss of income during construction delay) compensates the property owner for revenue — rents, operating income — that cannot be earned because the project's completion is pushed back by a covered physical loss. This is the builders risk analog to the business income coverage in a standard commercial property policy.

Common Exclusions

Even on an open-perils form, builders risk policies carry important exclusions:

  • Faulty workmanship, design error, and defective materials — the policy covers the consequence of a collapse or fire caused by bad work, not the cost of fixing the defective work itself
  • Earthquake and flood — typically excluded and available only by endorsement or separate policy
  • Employee dishonesty and theft by employees — usually excluded; covered under a crime or fidelity bond
  • Mechanical breakdown — excluded on property forms; covered under equipment breakdown policies
  • Delay, loss of market, and consequential losses — excluded unless a delay in opening endorsement is purchased

Policy Structure: Completed Value vs. Reporting Form

Builders risk is placed under one of two rating structures:

Completed value form: The insured declares the total anticipated completed value at policy inception, and premium is charged on that amount for the full policy term. This is simpler to administer but creates a risk of underinsurance if scope changes cause the final value to exceed the declared limit. For commercial projects, the coinsurance clause may apply — or the policy may use an agreed value clause (see the agreed value clause glossary entry for details) that suspends the coinsurance penalty in exchange for a documented value agreement.

Reporting form: The insured reports values monthly or quarterly as the project progresses, and premium adjusts accordingly. This approach tracks actual at-risk values more precisely but requires administrative discipline. Large developers managing multiple simultaneous projects often use a master builders risk program with project-level reporting.

Who Needs Builders Risk — and Who Is Named

The named insured on a builders risk policy can be the property owner, the general contractor, or both — and lenders holding a deed of trust on the property are typically added as mortgagees or additional insureds. Determining who controls the policy is critical: the general contractor typically has the broader insurable interest during construction (all subcontractor work flows through the GC's responsibility), while the owner may be the appropriate policyholder for owner-supplied equipment and design costs.

On projects using a wrap-up insurance program — see OCIP vs. CCIP: How Wrap-Up Insurance Programs Work — builders risk is often either included in the wrap-up or explicitly carved out, with the contractor or owner maintaining a separate builders risk policy. Confirming the builders risk arrangement is a standard part of wrap-up program enrollment.

How Brokers Use This Term in Practice

Insurance brokers place builders risk as a standalone policy for individual projects or as part of a broader construction program that also includes commercial general liability, workers' compensation, and an equipment floater. Key broker tasks include: establishing the correct completed value (replacement cost, not market value or contract price), negotiating soft costs and delay in opening sublimits, confirming the policy's transit and off-site materials sublimits, and verifying the termination trigger to avoid coverage gaps between builders risk expiration and the inception of the permanent property policy.

Brokers advising clients on large commercial construction projects should also review how replacement cost is calculated — the distinction between actual cash value and replacement cost value applies here just as it does in permanent commercial property placements. For a deeper look at how underinsurance risk develops in construction projects, see Commercial Property Underinsurance.

Related Terms

  • Inland Marine Insurance — covers contractor's equipment, tools, and materials in transit separately from the structure under construction
  • Coinsurance Clause — applies to some builders risk completed value forms; requires the insured to carry limits equal to a required percentage of insurable value
  • Actual Cash Value — valuation method that deducts depreciation; rarely appropriate for builders risk, where replacement cost is standard
  • Replacement Cost Value — the standard valuation basis for builders risk; pays the cost to rebuild without a depreciation deduction
  • OCIP / CCIP (Wrap-Up Insurance) — owner- or contractor-controlled programs that may include or exclude builders risk
  • Soft costs — non-construction expenses (design fees, loan interest, permits) that accrue when a covered loss delays project completion; covered by endorsement
  • Course of construction — alternate term for builders risk; used interchangeably in policy forms and underwriting submissions
  • Delay in opening — endorsement covering loss of income during a construction delay caused by a covered physical loss

Arvori helps insurance brokers place and manage construction insurance programs, including builders risk, wrap-up programs, and contractor liability coverage. Learn more about Arvori's tools for insurance professionals.