The cost of builder’s risk insurance policies has risen dramatically over the last decade due to climate, economic, and supply chain risks looming over construction projects worldwide.
Still, builder’s risk construction insurance is necessary for any professional construction or renovation project. With 7.8 million people working in the construction industry, many work on commissioned projects daily.
How can you get the most coverage for the lowest premiums? And what can you do about aspects like water damage – today’s #1 cause for most loss occurrences on builder’s risk policies?
What is Builder’s Risk Insurance?
Builder’s risk insurance, also called course of construction (CoC) insurance, is a type of property insurance policy that provides coverage for construction projects in progress. The builder’s risk insurance policy’s coverage ends on the designated date of project completion.
One of the primary goals of a builder’s risk insurance policy is to reduce the policyholder’s out-of-pocket expenses when faced with unexpected incidents and circumstances that may affect the construction or renovation project.
The policy is traditionally carried out by the developer, the property owner, or the general contractor – depending on the terms of the construction project’s contract – and is budgeted as a project expense at the planning stage.
Builder’s risk policies usually include a core set of “perils” that protect the policy owner from common construction risks. It is one of the most basic construction insurance types offered by leading insurance providers. It is usually purchased along with complimentary policies such as general and professional liability insurance.
[Workmen on suspended platform hanging against the exterior of a high-rise building]
What does Builder’s Risk Insurance cover?
Builder’s risk insurance policies are typically tailored per project and are not a one-size-fits-all program, as each construction project has unique assets, risks, and potential liabilities. The most bare-bones policy will commonly provide property coverage for:
- Fire damage
- Weather damage (caused by wind, lightning, and hail)
- Structural collapse
Depending on the specifics of your policy, it may also cover materials, supplies, and equipment from the perils listed. It can also be specific to assets stored onsite, offsite, or in transit.
Water damage insurance is one critical type of peril often excluded from builder’s risk insurance policies. Water damage accounts for more than 30% of the loss ratio in builder’s risk policies and is recognized as the second most frequent cause of loss during construction.
However, most carriers offer water damage insurance as a premium extension of the policy if you take the necessary measures to manage water risks in your projects or incorporate technology solutions such as WINT’s AI-driven leak detection and mitigation system.
Who needs Builder’s Risk Insurance?
Most construction or renovation projects should have some form of builder’s risk insurance to protect the project and its stakeholders from the financial aspects of construction and business risks.
The property owner or the general contractor usually purchases a builder’s risk policy. However, coverage can be extended to other stakeholders with a financial stake in the project. You can include them as additional insureds in the policy agreement with your insurer.
The most common parties included in extensions of a builder’s risk policy are:
- General contractors (if the property owner holds the policy)
- Specialty contractors
- Financers (investors and lenders)
How much does Builder’s Risk Insurance cost?
In 2024, the cost of builder’s risk insurance can range from 1 to 5 percent of the total cost of the projects, with small businesses paying an average premium of $105 per month (or about $1,259 a year) for builder’s risk insurance.
For large-scale and commercial construction projects, the cost can be significantly higher, and the more complex and lengthy the project – the harder it is to find suitable coverage. This is especially true in high-risk areas like Florida, where the cost of builder’s risk insurance rose by 30 percent in just two years (2021-2022). According to local developers, the insurance costs for some high-rise projects in South Florida can exceed 8 percent of the project’s total cost.
A wide range of global and regional factors influence a construction project’s specific premiums and insurance costs.
Before we discuss strategies to reduce builder’s risk insurance costs, it’s important to understand how insurers set the premiums and what variables they consider.
[Broker holding a building model and offering a property insurance policy contract]
Setting the Price Tag: How Builder’s Risk Insurance rates are calculated
Due to the immense variance in the unique properties of every construction project, there’s no single formula for calculating the premiums, and different carriers package their builder’s risk coverage differently from financial insurance risk management as well as business model aspects. That said, several variables will influence your monthly or annual builder’s risk insurance premiums.
Your project’s timeframe is a key factor in the builder’s risk insurance premium calculations. The longer the estimated time to project completion, the higher the premiums you will have to pay. Typically, projects that last longer have more downtime, thus accumulating the length of time during which the project and site are exposed to various risks.
Your project’s geographic location may impact your builder’s risk insurance rates and increase with the local likelihood of perils (such as adverse weather events and crime rates). For example, construction in an area with close proximity to coastal waters will have higher premium rates than projects in safer areas.
Type of construction work performed
The type and scope of the project are perhaps the most important considerations in determining your builder’s risk policy costs. A residential home renovation will generally incur lower insurance expenses than a commercial construction project. Not to mention industrial and high complexity multi-family structures.
In addition, the risk involved in the work performed is also considered, so you can expect higher premiums in projects that involve higher-risk work (like demolition or roofing).
Limits and deductibles
Like most insurance policies, the premium rates for builder’s risk insurance depend on the deductible limits you choose. The lower the premiums, the higher the deductibles you will have to pay out-of-pocket in the case of a claim.
With non-weather water damage accounting for nearly a third of insurance claims in construction projects, insurers are looking to protect themselves by limiting their risk. In the US, builder’s risk insurance costs are increasing, with median spending for water damage claims up 21 percent year-over-year.
In some cases, the increase is so high that the accumulated costs for replacement and repair along with delays in the project schedule don’t fall under the deductible. In other words, you may find yourself with a significant gap in coverage for non – weather water damage, forcing you to pay out of pocket and landing a heavy blow to your cash-flow.
Past claims history
If your business, industry, or other builders in the region have a history of making insurance claims, you can expect higher premiums. In addition to claims, having previously purchased builder’s risk insurance and not making claims will play in your favor.
Last but not least are the market conditions that impact the construction industry and the construction insurance industry alike. Among the key drivers impacting the rate of builder’s risk are challenges in capacity and terms, transitions in the residential construction market, catastrophe (CAT) exposures, supply chain, and inflation, as well as innovative technological solutions that can mitigate risks and lower potential exposure may impact your rates. For example, water damage risk mitigation can be done by leveraging IoT and AI-powered technology like WINT’s leak detection solution for builders.
[AI technology and data analytics in favor of insurance services supporting digital transformation]
Reducing Builder’s Risk Insurance premiums: 6 actionable tips
Getting more coverage while paying lower builder’s risk insurance premiums isn’t only about comparing the policies offered by insurers and negotiating terms and conditions. There are several things you can do to lower your construction insurance expenses without compromising on high deductibles:
1. Assess and manage your risks
One of the main goals of a builder’s risk insurance policy is to offset the financial risks entailed in a construction project. By creating a construction risk management plan before approaching potential insurance providers, you can get a much fuller picture of what insurance coverage you need and what you can do to mitigate risks without adding to the insurance expenses of the project.
2. Leverage technology to lower risk
To lower the risk of theft or vandalism, builders have been erecting fences and walls around worksites since the dawn of construction. Today, there are cost-effective solutions to increase site security and reduce risks. Examples include:
- Online cameras and smart sensors on the job site can enable continuous monitoring for unauthorized access, unlawful activities, CO2 levels, and real-time water leak detection systems like WINT’s water intelligence platform.
- Adequate lighting is much cheaper to procure, and built-in motion sensors can help save energy (while deterring potential trespassers to the site).
- GPS tracking tags on vehicles, equipment, and even valuable materials can make it easier to recover them if they are stolen.
- Mobile applications for your workforce management can be a helpful tool in creating ongoing and interactive safety training and risk reporting programs to reduce the risks of human error and negligence.
3. Synchronize contracts and insurance policies
To avoid gaps in coverage and overpaying for unnecessary coverage, it’s vital to keep project contracts and insurance policies aligned from the planning phase and throughout the project up until the finish line.
For instance, if the contract specifies the storage of materials at a third-party warehouse, but your builder’s risk insurance policy only covers them when they are at the worksite – you may be exposed to uncovered risk.
4. Work with an experienced agent or broker
Crafting a builder’s risk insurance submission that will ensure you get accurate and cost-effective coverage is no easy task. Builder’s risk premium calculations can be complex and unfamiliar to insurance agents who don’t specialize in construction insurance.
Consulting with an insurance professional specializing in construction insurance is vital. Brokers won’t only provide you with invaluable insights early in your project planning phase but can also help you get the most competitive offers from carriers with whom they have good relationships.
[Agent sends pen to the client’s team after inspection prior to signing the agreement]
5. Discover and meet discount requirements
Most insurers will offer a discount when you purchase other construction insurance policies in addition to a builder’s risk policy, while several insurance carriers would even provide financial benefits to properties and facilities that have installed water risk mitigation solutions through reduced deductibles and premiums. You should certainly inquire about various partnerships or markdown endorsements that your agency or broker can offer.
6. Source your builder’s risk coverage from multiple insurers
In some cases, and especially with massive and complex construction projects, an effective tactic to reduce builder’s risk insurance can be splitting the insurance coverage program into a number of policies that provide the complete builder’s risk coverage that you need. A few leading insurers these days offer specialized “warranty” packages to complement builder’s risk policies and address specific pain points in the industry, such as water damage.
For example, Munich Re group’s reinsurance leader, HSB, partnered with WINT to offer an innovative water damage warranty program specifically drafted for building projects. With this warranty, builders, and construction companies can get financial relief to cover deductibles of up to $250,000 in the unlikely event that a WINT system fails to protect your worksite from water damage.
WINT: AI-powered water damage risk mitigation for reducing builder’s risk insurance fees
Working with an experienced construction insurance carrier, broker, or agency and reducing risk are two vital components of a cost-effective builder’s risk insurance policy.
When it comes to the most common type of claims – associated with water damage – technological solutions like WINT’s Water Intelligence can stop water leaks at their source, long before they result in rising premiums and costly deductibles.
WINT Water Intelligence is a unique AI-powered leak detection and mitigation solution that analyzes water consumption in real-time across your construction site and allows you to take immediate action onsite or remotely. This means any abnormal water patterns can be identified and alerted, and water flow can be automatically shut off to prevent the leak from spreading and causing further water damage.
With WINT’s technologies showing a dramatic decrease in water damage related claims among users, we’ve partnered with some of the world’s leading insurance providers to offer builders a wide range of insurance products and programs to complement their builder’s risk insurance policies with innovation-powered water damage risk mitigation.