The builder’s risk market has softened. Rates in non-catastrophe-exposed zones are declining, capacity has returned, and contractors who shop their builder’s risk programs at renewal are seeing lower premiums than they did two or three years ago. This is genuinely good news and it is creating a dangerous blind spot. The softening rate environment is encouraging contractors to focus on what they pay rather than what they cover. Those two questions have diverged meaningfully since 2022.
Supply chain volatility and materials inflation have pushed average US project values approximately 14% higher since 2022, according to construction cost index data. A contractor whose builder’s risk program was structured around project values from two or three years ago likely carries limits that don’t reflect what a complete rebuild would cost today. The softening market means the premium for an underinsured limit may be lower than ever, making the gap between coverage and actual exposure easy to overlook until a total loss reveals it.
What Builder’s Risk Actually Covers and What It Does Not
Builder’s risk insurance is a course-of-construction policy that covers the structure under construction, materials intended to become part of the structure, and, in many cases, materials in transit to the site or stored temporarily off-site. It generally responds to physical loss or damage caused by covered perils, such as fire, windstorm, theft of materials incorporated or intended to be incorporated into the structure, and similar events.
What builder’s risk typically does not cover is where most contractor surprises originate at claim time. Contractor-owned tools and mobile equipment used on the job are almost universally excluded from builder’s risk policies. Those require separate inland marine or contractor’s equipment coverage. Design errors and faulty workmanship are generally excluded. Under some builder’s risk policies, coverage may apply to resulting damage to other parts of the structure, but not to the cost of correcting the original error or defective work. Earthquake and flood are standard exclusions in most markets, requiring separate endorsements or standalone policies. The collapse of an existing adjacent structure is frequently excluded unless the collapse is caused by a covered peril affecting the project itself.
The Three Coverage Elements Most Contractors Overlook
Ordinance or law coverage: When a partially completed or damaged structure must be brought into compliance with building codes in effect at the time of repair or reconstruction, the cost of that compliance is often not covered under a standard builder’s risk form. A contractor rebuilding a structure after a fire may be required to upgrade electrical systems, install sprinkler systems, or modify structural elements to meet current building codes. These upgrades can add costs equal to 10% to 25% of the rebuild value. Ordinance or law coverage, typically added by endorsement, can help address these additional expenses. Without it, the compliance cost falls to the project owner or the contractor, depending on the contract.
Soft costs coverage: A covered loss that interrupts construction generates costs beyond the physical damage: extended financing costs, additional architectural and engineering fees, permit re-application costs, and the carrying costs of a project that is not generating revenue while repairs are completed. These soft costs are not covered under a standard builder’s risk form. They are covered by a soft costs or delay in completion endorsement, which should be sized based on a realistic estimate of what a project interruption would actually cost the insured beyond the physical rebuild.
Completed value versus limit adequacy: Builder’s risk policies are typically written on a completed-value basis, meaning the insured limit should reflect the project’s total completed value at substantial completion rather than its value when coverage was originally bound. When material and construction costs increase significantly during the project, the completed value may exceed the original contract amount by a substantial margin. Reviewing the coverage limit against current project cost projections throughout construction, rather than only at policy inception, helps prevent a mid-project underinsurance gap from becoming a shortfall at claim time.
What Lenders Are Now Requiring
The underinsurance risk in the current market has not gone unnoticed by construction lenders. Lenders are now routinely requiring proof of adequate builder’s risk coverage as a condition of funding draws, and the definition of adequate has tightened to reflect current replacement costs rather than original contract amounts. A contractor whose builder’s risk limit was set at contract execution two years ago may be facing a draw funding delay if the lender’s current appraisal of replacement cost exceeds the covered limit.
Addressing this proactively by reviewing builder’s risk limits against current cost estimates before each draw request, rather than waiting for the lender to ask, can help prevent the project disruption that may result from a mid-construction coverage dispute.
Tooher-Ferraris helps contractors structure builder’s risk coverage around current project values, address common gaps with the right endorsements and coordinate protection with their broader commercial insurance program. Explore our specialty programs to learn more.
Ready to review your builder’s risk program against current project values? The team at Tooher-Ferraris has been helping contractors structure complete construction insurance programs since 1932. Contact us today to schedule a no-obligation consultation.
The Insurance Information Institute provides current builder’s risk market data and coverage guidance at iii.org. OSHA’s construction site safety resources, which affect claims frequency and loss control credit opportunities, are available at osha.gov.
Frequently Asked Questions
What does builder’s risk insurance cover?
Builder’s risk insurance covers physical loss or damage to a structure under construction, including materials intended to become part of that structure, from covered perils such as fire, windstorm, theft, and vandalism. It typically covers materials in transit to the site and in temporary off-site storage. It does not cover contractor-owned tools and equipment, design errors, faulty workmanship, or losses from earthquake and flood without specific endorsements.
Why do builder’s risk rates decrease while I should still review my limits?
Rate and limit are separate questions. A rate decrease means you are paying less per dollar of coverage. Limit adequacy is about whether your covered amount reflects what a complete rebuild would actually cost. If project values have increased because of materials inflation while the coverage limit remains unchanged, a rate decrease may simply reduce the premium on an underinsured limit. That creates savings on paper but can leave a significant coverage shortfall when a claim occurs.
What is soft costs coverage and do I need it?
Soft costs coverage, typically added by endorsement, helps cover additional expenses incurred by a project owner or contractor when a covered builder’s risk loss delays construction. These expenses may include extended financing costs, additional design fees, permit reapplication costs, and carrying costs during the repair period. Whether you need it depends on your contract structure and who bears the risk of these costs in the event of a project interruption. For larger projects with significant financing, soft costs coverage is almost always worth evaluating.
