What is Builderâ€™s Risk Insurance? How does it apply to residential property investors? When should you purchase a Builderâ€™s Risk policy? Do you have be a contractor to purchase a policy? If you are asking yourself these questions or your insurance agent mentioned Builderâ€™s Risk and did not explain what it is and why it was recommended, this article will help to answer your questions.
What is Builderâ€™s Risk insurance? As stated in the name, it is designed to protect builders from loss of their work before the project completion. As a structure is being built, it has certain characteristics and challenges which differ greatly from a completed building. For example, letâ€™s use a new track home subdivision being developed by a large national home builder. The lots have been prepared, streets cut and poured, utilities installed and the subdivision is ready for the first house to be constructed. The builder orders the foundation contractor to begin the first 10 houses. Materials are ordered and delivered throughout the week for the next phase, framing. The framing contractor arrives with his crew and begins framing the 10 houses. The next day the framing contractor notices all the new and unused 2x4â€™s were taken overnight. The builder now has to order materials again and stop work until the materials arrive. This creates a loss of profit and time for both the builder and the contractor. A Builderâ€™s Risk policy is designed to cover that loss with one deductible. Same as if one of the houses catches fire, wind blows materials away, lightning strikes the newly installed electrical utilities blowing out transformers, Builderâ€™s Risk will replace the lost material, labor to reinstall and profit lost due to repeating the work.
How does Builderâ€™s Risk apply to residential property investors? If a house is purchased that needs rehab work before selling or renting, it is prime for a builderâ€™s risk policy. Dwelling Fireproperty insurance policies do not cover losses incurred during rehabilitation of a house or building. The house under construction usually is not fully secured allowing easy access to thieves and burglars to take newly purchased building material and create extensive damage to existing structures i.e. sheetrock, plumbing fixtures, appliances, causing significant loss of material, money and time. Dwelling Firewill cover these losses IF the property is occupied by a tenant or if vacant due to â€œin-between-tenantsâ€, otherwise, Builderâ€™s Risk is the proper policy to have in place. Once the rehab of the property is completed, an adequate Dwelling Fire policy can be written on the property.
Do you need to be a contractor to purchase a Builderâ€™s Risk insurance policy? No. The individual or company that has insurable interest in the project is eligible to purchase a Builderâ€™s Risk policy. If an individual purchases a house with sole intent of rehabbing then renting the property, the individual has sole insurable interest in the property and the policy should be issued in the individualâ€™s name. Same as if the property owner is/will be a company (LLC, PC, Corporation, Partnership, Limited Partnership, etc.). The individual purchasing the property can also be the contractor and purchase the insurance in either name since both the owner and contractor are the same entity. If the contractor is not associated to the property owner, the contractor has insurable interest in the project. Traditionally, the contractor buys the required materials, pays for required permits, pays labor costs and allows for profit while billing the property owner the totals. So, any loss to the project will initially cost the contractor which is passed on to the property owner.
Builderâ€™s Risk Insurance is designed to mitigate losses and keep projects on target with little interruption. Builder's Risk Insurance DOES NOT cover Liability of the project. Commercial General Liabilityis purchased separatelyÂ by either the contractor or the project owner.