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When it comes to building a new custom home, there are so many things to think about. The fun ones include designing your home, picking colors, and watching the actual construction begin. However, there are many things that don’t readily come to mind. Some of the typical ones are zoning and building permits. However, one that most people don’t think about is Builder’s Risk Insurance.
What is Builder’s Risk Insurance?
Most people know about homeowners insurance. Homeowners insurance is there to protect you against loss should your home catch on fire, be destroyed through most disasters, or even for theft or other events. A homeowner’s policy can be written to offer numerous coverages to protect against loss. A Builders Risk policy does essentially the same thing but offers coverage for your home under construction before you move in.
Do I Need Builders Risk Insurance?
If you have a construction loan for your new custom home, your lender will require that have builders risk insurance. In most cases, it is one of the items that you fund at the closing of your construction loan. Think about it just like your typical home mortgage where each month the lender withholds an amount to pay your taxes and insurance on your home. They require you to have insurance to protect their interest. They will actually pay it for you to make sure it is done. If you move into a new home and it burns down, you don’t have the money to pay them back. The insurance guarantees that they will be paid back in the event of the loss of the home.
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What if you don’t have a construction loan? If you don’t have a construction loan, there is no lender requiring you to get Builder’s Risk insurance. However, it is still a good idea to get it! You won’t have a lender to pay back in the event of a loss but you would lose all the money you have spent during the construction to date. Depending on your contract with your builder, there are a few instances where they may carry it. However, in most instances, the homeowner is responsible for it. You will be paying for it either way. With everything going on during the construction of your new home, this is one detail that is easy to forget… Don’t!
Where do I get Builders Risk Insurance?
Most people only build a new home one to three times in their life. Because of this, getting Builders Risk insurance isn’t something most people are familiar with. Not every insurance agent or office offers Builders Risk insurance. However, a good place to start is to ask the current agent for your homeowner’s policy if they offer it. Most likely they will.
If not, call around to other local agents that offer homeowners insurance policies. You can always Google the term Builders Risk for your area to see if other options are available. In any case, if you have a construction loan you lender will make sure you have a policy in place before they will close and start disbursing funds for your new home.
What does a Builders Risk Policy Cover?
The builder’s risk policy will provide coverage for damage done to the insured structure from a wide variety of events. Damage from the following events will be covered by most policies:
- Wind (may be limited in coastal areas)
Standard exclusions can include:
- Employee theft
- Water damage
- Weather damage to property in the open
- Government action
You should read your builder’s risk insurance policy to be familiar with its limitations and exclusions.
How Much Does Builders Risk Insurance Cost?
There are many things that go into calculating your policy costs. Some of the more common items include:
Timeframe: How long will the policy be in effect? While most homes are constructed in less than 12 months, policies can be issued for longer periods. If construction on your home has already started before you obtain a policy that can impact its cost.
Geographic Location: The specific location in which you are building can impact the cost of your policy. Each area can have specific risks associated with that area. For example, construction within range of wildfires, in a flood zone, along the coast, or in Tornado Alley could significantly increase your coverage costs. Your rates can even vary depending on the state in which you are building.
Deductibles: Just like with other insurance policies, the amount that you pay can be impacted by the deductibles you choose. Choose a higher deductible and the rate can go down.
In general, builders risk insurance will cost about the same as you would expect to pay for a homeowner’s policy.
Protect Yourself from Risk When Building Your New Custom Home
Your new custom home is one of the biggest investments you will ever make. It’s easy to overlook the need for insurance if a lender isn’t reinforcing the need to have it. Construction can be risky. Using modular construction to build your new custom can lower risk when building your new custom home. However, for the cost of Builders Risk insurance, saving a few dollars by refusing to get it can expose you to a huge financial loss. Have the insurance you need to make sure you can focus on the fun parts of building your new home!
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