Buildings under construction face unique perils.
A building under construction is not a standard insurance risk. The value of the new structure begins at zero, increasing in value each day of construction until it is completed, making it difficult to determine what insurance limit is necessary. Buildings under construction are much more prone to fire, vandalism and water damage, due to their incomplete nature, non-inspected and temporary electrical service and attractive nuisance qualities. Builder's risk insurance policies are designed to protect these unique risks.
Personal Course of Construction
When an individual hires a contractor to build his own home, he must insure the property during the construction phase. Maintaining insurance coverage throughout the period is often required by financial institutions and city permit offices. These individual risks can often be insured by standard personal insurance companies, using a contract that provides limited coverage. As a matter of course, these course-of-construction policies feature high deductibles and limited protection against theft and vandalism. In most cases a "named-peril" policy is issued, covering only the most catastrophic of perils, such as fire, lightning and wind. The insured is responsible for maintaining adequate insurance limits throughout construction.
Professional Builder's Risk
Contractors, developers and professional builders require a more commercial approach to their various insurance needs. In many cases, they are the financial backers of the project and retain ownership until the building is completed. These builder's risk policies consider all the projects a company is working on at any single time, providing protection for building materials, invested labor, company equipment, tools and vehicles. Builder's risk insurance also provides protection against legal issues arising out of misinterpretation of zoning requirements and design errors.
Subcontractor Performance Bonds
When a builder hires a subcontractor or supplier on a project, she is expecting that company to render its products or services on time, and within specifications. If the partner defaults on that responsibility or experiences financial collapse, the builder faces delays and financial losses. Contractors and developers can protect themselves with performance bonds. These contracts pay any financial loss associated with the default, allowing the developer to hire a replacement to complete the work, and pay any contractual penalties or fines resulting from the delay.
