What is builder's insurance?

Builder’s insurance (also called construction insurance) insures the builder against damage to your property while it is under construction. It covers losses from theft, vandalism, fire, storm damage, and more.

Make sure the policy limits adequately cover the value of your project.

When choosing a builder for your construction project, ask if they carry builder’s insurance. This protects you as the client.

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Should you ask builders to show proof of proper insurance before hiring?

Require your builder to have general liability insurance as well. This covers them if a third party is accidentally injured on the job site or your property is damaged. Verify policy limits are sufficient.

Also ask for proof of workers’ compensation insurance. This is required by law to cover job site injuries to employees. It protects you from liability if a worker gets hurt on your property.

Only hire a licensed, insured builder. Confirm they have up-to-date certificates for builder’s insurance, general liability, and workers’ compensation. This transfers risk away from you as the client.

A group of men are working on a house, and a client protected with construction insurance.
A group of men are working on a house, and a client protected with construction insurance.

Ask builders to show proof of proper insurance before hiring. Doing so protects your investment and limits your liability if something goes wrong during construction. Make sure policy details match the size and scope of your project.

Insurance definitions:

Below are concise definitions and terms used in construction insurance:

Builders insurance – Covers damage to a building while under construction. Protects against theft, vandalism, storms, etc.

Builders liability – The legal responsibility of a builder for injury or damage caused to clients or third parties.

Builders insurance policy – A packaged policy with property and liability coverages needed for construction contractors.

Builders public liability – Insurance protecting a builder from liability claims by members of the public who suffer injury or damage.

Builder indemnity insurance – Coverage to indemnify or reimburse a builder for certain legal liabilities arising from their work.

Builders trade insurance – Insurance package designed for specific construction trades like carpentry, plumbing, electrical, etc.

Construction public liability insurance – Covers a construction company’s legal liability for third-party injury or property damage.

Builders rights and obligations – The legal rights builders have to payment for work performed and obligations for quality workmanship.

What insurance does a builder need?

When hiring a builder, make sure they carry adequate insurance to protect your project, with the following coverages:

  • General Liability Insurance – Covers injuries/damages to third parties caused by the builder. Protects you from lawsuits, if an accident happens during construction.
  • Builders Risk Insurance – Covers losses if your property is damaged during construction. Provides protection from theft, storms, etc. if an incident occurs before completion.
  • Workers’ Compensation – Required by law in most states if the builder has employees. Covers any jobsite injuries. Protects you from liability, if a worker gets injured on your property.
  • Commercial Auto Insurance – Necessary if the builder has company vehicles. Provides coverage in case of an accident involving those vehicles during the project.
  • Umbrella Insurance – Provides additional liability coverage beyond the builder’s primary policies. Adds an extra layer of protection if a major claim exceeds other policy limits.
Illustration of men working in a room with construction insurance.
Illustration of men working in a room with construction insurance.

Be sure to verify the builder’s insurance details match the size and scope of your project. Request certificates showing active coverage and adequate limits.

Using an insured builder transfers risk away from you.

Is a quotation legally binding?

  • A quotation alone is typically not legally binding. It is considered an invitation to treat rather than a formal contract.
  • The client must accept the quotation terms for a legally enforceable contract to form. Simply receiving a quote does not obligate the client to proceed.
  • Quotations can be made binding by including language clearly stating the quote is firm for a defined timeframe or project scope. This prevents price changes after client acceptance.
  • A vendor can revoke or change a quotation at any time before the client’s acceptance. The vendor is not committed to the quoted terms.
  • Once the client accepts the quotation, either through a signature, deposit payment, or other consideration, a binding contract is created if specific terms are met.
  • Oral acceptance of a written quotation can form a binding contract in some cases. But written acceptance is always best for legal clarity.
  • The quotation and acceptance must include material terms like price, timeline, and scope of work to be enforceable. Vague quotes are not binding.
  • Consult an attorney if unsure whether a quotation and acceptance formed a binding legal contract. Laws vary among states/countries.

Do builders have to guarantee their work if they have insurance?

Builders do not have to guarantee their work just because they have insurance. Having insurance does not release a builder from responsibility for defects or poor workmanship.

To ensure quality work and establish recourse for faulty construction, clients should require a written warranty or guarantee from the builder. Key things to look for include:

  • Scope – What parts of the project are covered and for how long? Workmanship guarantees typically last 1-2 years.
  • Defects – Confirm the guarantee covers repairs and replacement if defects or material failures occur.
  • Exclusions – Watch for broad exclusions that limit coverage. Excessive exclusions render the guarantee meaningless.
  • Transferability – The guarantee should be transferable to future owners if you sell the property.
  • Builder reputation – Research builders thoroughly. Good guarantees backing shoddy work offer little value.
  • State laws – Some states prohibit broad construction defect waivers, even in written contracts. Know your rights.

Requiring an express construction guarantee, in addition to verifying proper insurance, provides important protections if issues arise with the builder’s workmanship down the road. The guarantee provides contractual recourse beyond just insurance claims.

Building or renovating your home with a home builder.
Building or renovating your home with a home builder.

what type of insurance protects the client in renovaiton?

  • Home Renovation Insurance – This insurance can help cover the costs to ensure your home remains compliant with local building codes during renovations​​. It’s also referred to as “dwelling under renovation insurance” or “builder’s risk insurance” and can cover your home during the renovation and remodeling process, going above the standard homeowners insurance policy​.
  • Builder’s Risk Insurance – Protects against property damage during construction. Covers perils like fire, theft, vandalism. Can be carried by contractor or client.
  • General Liability Insurance – Carried by the contractor to cover injury to third parties or damage to their property. Limits client liability.
  • Workers Compensation – Mandatory for contractors to carry in most states. Covers employee injuries so client avoids liability.
  • Surety Bonds – Performance and payment bonds guarantee the contractor will finish per contract. Provides financial recourse if contractor defaults.
  • Contingent Builders Risk – Additional policy carried by client as backstop in case the contractor’s policy has gaps.
  • Homeowners Insurance – Clients should notify insurer about renovations, as damages may not be covered otherwise. Insurance company may require photos, plans and invoices to make the necessary adjustments to the homeowner’s insurance policy.
  • E&O Insurance – Covers faulty workmanship and non-compliance with contract terms. Additional protection beyond liability coverage.
  • Ordinance or Law Coverage – This type of insurance can protect you from having to pay out of pocket to keep your home compliant with local building codes during renovations​

Requiring proof of contractor’s active insurance is essential. Clients may also need contingent coverage for large projects to fill potential gaps.

Types of Insurance for Builders for construction projects

A builders risk insurance illustration featuring a man standing in front of a building.
A builders risk insurance illustration featuring a man standing in front of a building.

General Liability Insurance:

  • Covers injuries or damages caused to third parties by the insured.
  • Protects the business from lawsuits, if injury or property damage occurs as a result of their operations. General liability policies pay for legal defense costs and covered judgements up to the policy limits.
  • Important coverage for builders because their work carries a high risk of third-party bodily injury or property damage. Lawsuits can be financially devastating without adequate general liability insurance.
  • Policy limits should match the size and scope of the builder’s projects. Higher liability limits are advisable for large construction jobs or projects involving more hazard exposures.
  • Subcontractors working under a builder should also carry their own general liability coverage. The builder’s policy does not extend protection to subcontractors in most cases.
  • Builders should discuss their liability risks with an insurance agent or broker to determine appropriate general liability policy limits, terms, and conditions. Proper coverage is crucial to managing risk.

Workers' Compensation Insurance:

  • Provides benefits for employees injured on the job, including medical treatment and lost wages.
  • Required by law for most builders to carry, if they have employees. This mandatory coverage protects employers from lawsuits filed by injured workers.
  • Covers job-related illnesses too. Employees can file claims if they develop work-related health conditions.
  • Rates are based on payroll and the inherent risks of the occupation. Premiums can be high for construction businesses due to the hazardous work.
  • Builders should carefully estimate payroll and job duties when obtaining quotes. This ensures proper classification and rates.
  • Proof of workers’ compensation coverage may be required when bidding on projects. Builders must remain in compliance with state regulations.
  • Lacking proper workers’ compensation insurance can result in fines or work stoppages. Builders should discuss requirements with an insurance professional.

Builders Risk Insurance:

  • Protects against losses if damage occurs to structures under construction before project completion. Covers damage from theft, storms, vandalism, and other causes.
  • Covers materials and equipment at the building site. Protects against loss even before installation.
  • Typically covers collapse during construction. Provides protection if a building framework or component fails.
  • Can cover soft costs like professional fees and equipment rental if there are delays due to a covered loss.
  • Does not cover contractor equipment or tools. The contractor insures these under their own property policy.
  • Helps cover rebuilding expenses if a loss occurs. Allows the project to be completed per original plans.
  • Should be in place for the entire construction period, usually until the building is completed and occupied.

Commercial Auto Insurance:

  • Covers vehicles used for business purposes by the builder. Provides liability and physical damage protection for company vehicles.
  • Necessary coverage for builders to carry in the United States, if they have company cars, trucks, or other vehicles. Most states require minimum auto insurance.
  • Protects the builder if their employees are in an at-fault accident while driving for work purposes. Pays for damages to other parties.
  • Typically covers medical payments for injured third parties and may include uninsured motorist coverage.
  • Should have adequate liability limits in case of a serious accident involving multiple claimants or expensive vehicles. Limits of $500,000 to $1 million are common.
  • May need to be endorsed to cover certain equipment like trailers. Standard policies may not include these.
  • Proof of insurance may be required when bidding contracts. Maintaining continuous auto coverage is essential.

Umbrella Insurance:

Provides additional liability coverage beyond other policies, acting as a safety net in the event of major claims or lawsuits. This insurance is a valuable addition to a builder’s insurance portfolio as it adds protection, if claims exceed the limits of other policies such as General Liability or Commercial Auto Insurance.

When researching a builder, it’s prudent to inquire about Umbrella Insurance, if you want to ensure a higher level of financial security for your project especially on luxury houses.

Having this insurance indicates the builder’s foresight in managing potential risks, ensuring that ample coverage is in place, if substantial claims arise. This added layer of protection exemplifies a builder’s commitment to safeguarding both their business and your project from unforeseen financial challenges.

Professional Liability Insurance:

Offers protection against claims of negligence or mistakes, which is pivotal in the construction industry where errors can lead to significant financial losses or safety hazards.

This insurance is crucial for safeguarding the business’s reputation and finances, if allegations of professional misconduct or errors are made. When researching a builder, it’s wise to ensure they carry Professional Liability Insurance, if you want to ensure a level of recourse in the event of professional errors or omissions.

This insurance underscores a builder’s dedication to professional conduct and quality assurance, providing a sense of trust and reliability as you embark on your construction project.

A diagram showing the process of repairing a house with builders insurance.
A diagram showing the process of repairing a house with builders insurance.

Builder's pollution liability:

Builder’s pollution liability insurance provides coverage for contractors in the event they release pollutants that cause bodily injury or property damage. Some key points:

  • Covers third-party liability claims if construction activities lead to chemical releases, mold growth, or other pollution incidents.
  • Can cover first-party remediation costs to clean up a job site after a pollution incident.
  • No damage threshold required – claims can arise even from low-level irritant releases.
  • Can apply to various pollution sources like asbestos, fuel spills, sediment runoff, hazardous materials.
  • Provides defense costs and settlements/judgements for covered claims.
  • Typically carried by general contractors, developers, and builders involved in subsurface activities.
  • Helps manage pollution exposures from old buildings, construction waste, and high-impact activities near waterways.
  • Separate from general liability insurance, which often excludes ongoing pollution events.
  • Premiums based on services provided and safety track record. Higher for those involved in demolition, excavation, site preparation, etc.

This coverage protects contractors who have a reasonable possibility of encountering pollutants in their work. 

What to do next?

  • Importance of consulting an insurance professional to determine adequate coverage limits and options. Insurance agents can advise on state requirements, liability exposures, policy terms, and appropriate limits to protect the builder’s business, if a loss occurs.
  • Verify the builder carries active insurance before starting a project. Being properly insured reduces risks for both the builder and client. Review policy details to ensure necessary coverages and sufficient limits are in place.
  • Require proof of insurance, including general liability, workers’ compensation, and builders risk at a minimum. Builders insurance transfers risk away from the client.

What is the difference between builders risk and liability insurance

The key differences between builders risk insurance and liability insurance for contractors are:

  • Builders risk insurance covers damage to the building itself while it is under construction. This includes losses from theft, vandalism, fire, storms, collapse, etc. It insures the physical structure.
  • Liability insurance covers the contractor’s legal liability if their work causes bodily injury or property damage to a third party. It protects against personal injury and damage claims.
  • Builders risk is first-party insurance, meaning payouts go to the policyholder for losses. Liability insurance is third-party, with payouts going to injured parties.
  • Builders risk has a defined policy period, usually from groundbreaking to completion. Liability insurance covers incidents that occur during the policy period, even if claims arise later.
  • Builders risk covers financial losses to repair/rebuild damaged projects. Liability covers settlements, judgments, and defense costs for claims.
  • Builders risk covers materials and equipment at the site. Liability doesn’t cover damage to the contractor’s own work/property.
  • Deductibles and limits differ. Builders risk has higher limits to replace structures. Liability limits depend on exposure.

what is the difference between builders risk and property insurance

Builders risk is designed for the unique risks inherent to construction projects before completion and occupancy.

The main differences between builders risk insurance and standard property insurance are:

  • Builders risk specifically covers buildings under construction, while property insurance covers completed structures.
  • Builders risk has broader coverage for materials and equipment on site before they are installed. Property insurance doesn’t cover materials/supplies.
  • Builders risk covers collapse during construction. Standard property insurance excludes collapse as it pertains to buildings under construction.
  • Builders risk covers soft costs like professional fees if there are project delays due to a covered incident. Property insurance does not.
  • Builders risk coverage term is limited – typically from groundbreaking to completion. Property insurance provides ongoing coverage.
  • Builders risk limits match reconstruction costs. Property insurance limits match replacement value at time of loss.
  • Builders risk premiums are higher due to increased risks during construction. Property insurance rates are lower for completed buildings.
  • Builders risk deductibles are typically higher than standard property deductibles.
  • Builders risk excludes contractor equipment. Property insurance covers equipment in or attached to the building.

Do you need builders risk insurance for renovations 

When hiring contractors for renovations, builders risk insurance may be needed depending on the scope of work:

  • Require builders risk coverage from the contractor if renovations involve structural changes or major systems. This covers collapses, storms, theft, etc. if damage occurs during the project.
  • For large additions or renovations that significantly increase property value, purchase a builder’s risk policy to protect your investment, if the contractor’s policy has insufficient limits.
  • For smaller remodeling or finish work within an existing structure, builders risk is often not necessary. But confirm the contractor has general liability coverage.
  • If renovations require completely vacating the building for a period, consider builders risk to cover losses if a fire or other incident occurs when unoccupied.
  • If renovating a rental property, evaluate vacancy rates/lost rent coverage under builders risk in case the project causes tenants to vacate temporarily.
  • For roof, siding, window replacements, or similar exterior renovations, builders risk provides protection if storms cause damage before completion.

The larger the project scope and risk, the more important builders risk becomes to fill coverage gaps left by standard property insurance during renovations.

who carries builders risk insurance

The responsible party for obtaining builders risk insurance depends on the project structure:

  • In most cases, the general contractor will carry the builders risk policy to cover the entire project. This is often a requirement in their contract.
  • On a design-build project, where the builder is responsible for both design and construction, the builder will carry the policy.
  • For a construction project headed by a developer, the developer will typically secure the builders risk policy since they spearhead the project.
  • On projects with multiple prime contractors, the property owner may need to purchase a builder’s risk policy to cover the entire job, since there is no overall general contractor.
  • If hiring contractors directly as a property owner, it is advisable for the owner to carry builders risk coverage during any additions, renovations or reconstruction projects.
  • Many institutional owners like corporations, schools, and government entities self-insure their construction risks rather than purchasing builders risk policies.
  • Subcontractors may carry their own builders risk policies on a project, but this only covers their own materials and does not replace an owner or GC-issued policy.

The builders risk policy holder is whoever is determined to be legally responsible for the project in the construction contract terms. This is typically outlined in the project specifications.

What is an example of a builder's risk policy

Here is an example of key coverages and terms for a standard builder’s risk insurance policy:

  • Insured Property: The building or structure under construction, including materials and supplies on or off the site.
  • Coverage: All risks of direct physical loss or damage unless specifically excluded. Perils covered include theft, vandalism, fire, hail, lightning, collapse, debris removal, etc.
  • Policy Term: From ground breaking to substantial completion and occupancy. Typically 12-24 months.
  • Limit: Equal to estimated completed value of the project. Limits for materials offsite, pollutant cleanup, professional fees also included.
  • Deductible: Typically $5,000 to $25,000 per occurrence. Higher for floods or windstorms.
  • Key Exclusions: Employee tools/equipment, water damage if site properly prepared, prior damage, wear & tear.
  • Valuation: Repair or replacement cost value. Accounts for increased building costs over the construction timeline.
  • Loss Payment Basis: Agreed value rather than a co-insurance penalty as with standard property policies.
  • Additional Insureds: Project owner, contractors, and subcontractors included as insureds.
  • Premium: Based on total completed value of the project. Typically 0.15% – 0.4% of limit.

The policy can be customized with endorsements for unique risk exposures like earthquake, cyber risks, offsite storage, etc.

Builders risk v commercial property insurance?

Builder’s risk (also called course of construction) and commercial property insurance have different purposes:

Builders Risk Insurance:

  • Specifically covers property damage exposures for buildings while under construction, renovation, or installation
  • Starts when construction begins and ends at substantial completion
  • Broader coverages for materials/equipment at job site before they are installed
  • Typically has higher limits matching reconstruction costs

Commercial Property Insurance:

  • Covers buildings and structures after construction is completed
  • Provided on an ongoing basis for the life of the building
  • Insures for damage to completed work and third party loss from property damage
  • Lower limits match replacement value at time of loss

Builder’s risk insurance provides specialized property coverages during the construction phase, which are excluded under standard property policies. Once construction ends, commercial property coverage applies for completed buildings and structures. Builders risk ensures protection throughout the unique risks and vulnerabilities present during construction projects.

Does public liability insurance cover poor workmanship?

Public liability insurance does not typically cover poor workmanship. The purpose of public liability insurance is to cover bodily injury or property damage caused to third parties – it does not cover damage to the contractor’s own work.

Poor workmanship, faulty materials, construction defects, or the failure of a contractor to complete a job properly would normally be excluded under a standard public liability policy.

To cover these risks, contractors should carry additional insurance such as:

  • Professional Indemnity Insurance – Covers financial loss arising from poor workmanship like design flaws, construction defects, non-compliance with regulations, etc. Provides coverage for negligent acts, errors or omissions.
  • Contractor’s All Risk Policy – First party coverage for damage to the contractor’s own equipment, tools, or work completed so far while on a client’s property. May cover situations like theft, storms, vandalism, etc.
  • Product Liability Insurance – For manufacturers/suppliers of construction products, covers injury or damage caused by faulty materials or components installed by the contractor.
  • Surety Bonds – Performance and warranty bonds guarantee the contractor will complete the project per contract terms and specifications. Provides a form of financial guarantee.

Requiring contractors carry additional coverage beyond basic public liability is wise to ensure poor workmanship risks are covered. Review policies closely and consult an insurer to understand what perils and losses are actually insured under each type.