Builders risk insurance is a little known form of property insurance to the general public but plays a very important function in our economy. Little to no new construction, remodeling, or renovation of real property would be done without this unique and often complicated insurance coverage. Banks and other lenders would not make construction loans unless there was some type of insurance to protect their interest.

Insurance companies selling standard property policies understandably do not want to insure properties under construction due in part to the additional risk involved in open and often hazardous construction sites. In addition, there are the value issues as the construction progresses as well as a whole host of other things that vary from one construction project to the next. A quote from an insurance company defense lawyer perhaps best sums up this area of insurance:  “Builders risk policies have been and will continue to be some of the most controversial and confusing policies to interpret and adjust.”

As in other property policies, there are choices that need to be made as to coverage before construction or for that matter before a construction loan is approved. Clearly the construction lenders as well as the developer and builder should do a lot of due diligence regarding the builders risk policy’s terms and conditions. For example, who will be listed as the named insured on the policy? Are all interests such as subcontractors and construction equipment covered? Other considerations involve the type of form. Is it an all risk policy (subject to exclusions) or a named peril form covering limited cause-of–loss? Questions about the unwritten limitations in an all risk policy also need to be discussed and understood. As an example, the loss and damages must not result from intentional misconduct or fraud and the risk that is insured must be a lawful project.